In this article, Peter Nichols discusses the contracting-out of municipal services.

Contracting-out is emerging as an increasingly common approach to the delivery of municipal services. Under a contracting-out agreement, the local government pays a private firm or non-profit organization a fee to provide specific services. Most municipalities now contract-out at least some services and a recent survey conducted by the Alberta Urban Municipalities Association and Nichols Applied Management confirmed that there has been a considerable increase in contracting activity within Alberta as assessment, planning, inspection and other responsibilities have been transferred to municipalities from the provincial government and from regional planning commissions.

What Has the Experience Been?

The experience with contracting-out has been generally positive. A key motivation to contracting is cost reduction, and across North America government units have reported cost savings generally of between 10% and 40%. Many municipalities report improved service quality and it has been found as well that contracting-out has encouraged an increased efficiency in related service functions that have remained in-house.

Notwithstanding the generally positive experience, contracting-out has also gone awry in some instances, involving, for example, the excessive escalation of municipal supervisory and administrative costs, service deterioration through the use of incompetent contractors or inadequacies in contract compliance mechanisms, non-competitive contractor selection processes, increased costs through the specification of new and higher standards, and even corruption through bribery and kickbacks from contractors.

The services most commonly contracted to date have been those of a repetitive nature which draw on relatively unskilled or semi-skilled labour (e.g., solid waste collection and custodial services) or highly specialized services such as architectural, engineering, legal, and equipment maintenance services. Contracting-out can also be cost-effective in respect to those services required only on a periodic or seasonal basis. However, there are no universal guidelines or norms as to what municipal services should or should not be contracted.

How Are Private Contractors Able to Compete Effectively?

A view commonly held is that government should be able to provide services at lower cost than private suppliers because the latter must "build in" profit margins. The reality is that even with profits included contractors often are able to deliver services at lower cost by virtue of better management techniques, better utilization of personnel and equipment, more rapid and flexible decision-making, a greater adoption of incentives for performance and innovation, and the absence of bureaucratic and political constraints.

Why Haven't Municipalities Made Greater Use of Contracting-Out?

The adoption of contracting-out by municipalities has been restrained by a number of factors. In some cases, the attitudes of administrative and elected officials and the public toward contracting-out have been negative, particularly in respect to more visible, more sensitive and more traditional services. These attitudes change over time, but the levels of support for contracting-out can vary significantly from community to community.

Resistance from affected personnel who might be displaced by contracting -- particularly in unionized environments -- is also a factor that discourages service contracting.

Some municipalities fear a loss of control in respect to services that are contracted, although the municipality is the service client and can normally safeguard service performance through adequate contract management and monitoring. However, contracting-out does imply the need for new skill sets -- less operational expertise and more expertise in contract specification, selection, administration, and supervision -- and this has ramifications to the municipalities in terms of in-house staffing and staff training.

Perhaps the biggest constraint to the adoption of contracting-out, however, may be the lack of internal time, staff, or resources necessary to adequately analyze and evaluate the merits of contracting. For those municipalities that are strapped in terms of evaluation capability, there is a strong inertia against changing the status quo.

What Can Municipalities Do to Realize the Full Benefits of Contracting-Out?

Some basic guidelines in contracting-out that may be helpful to municipalities are the following:

• structure the contracted activities with sufficient size and scope to enable contractors to achieve adequate management and utilization economies. Often, small, piece-meal, or component activities are contracted and these provide an inadequate opportunity to achieve full efficiency and low costs. In a specific case in which our consulting firm is familiar, the contracting-out evaluation was confined to a particular service crew and the analysis showed costs to be lower by continuing to deliver the service in-house. However, had the evaluation examined a broader range of services, the results might have been quite different.

• provide a sufficiently long contracting period to enable suppliers to amortize investments, introduce and de-bug required systems, and achieve adequate operational experience.
  competitive contracting processes in place.

• ensure that performance standards are defined and that a management and monitoring system is in place to oversee contractor compliance and performance.

What are the Basic Steps Toward Contracting-Out?

A decision to investigate the feasibility of contracting-out is often taken as an outcome of a service evaluation or a business planning process that has identified concerns with the way a municipal service is currently provided. The basic steps to be followed in contracting-out are these:

• first, define the service or services to be examined, including the quantities provided and the specifications or standards desired.

• second, carry out a "do or buy" analysis, comparing the costs of those delivery alternatives, and their relative implications in terms of service impacts, personnel, transition, and other factors. Often, the most difficult challenge is one of comparing costs, because municipalities generally do not have sufficient cost accounting data to ascertain activity-based or unit costs. The costs of in-house versus contracted delivery should be compared on a fully costed basis. Municipal costs should include both direct and indirect costs, including overheads, costs of capital, provision for staff and equipment downtime, etc. It has been shown that the true costs (i.e., the full costs) of public service provision are often underestimated by as much as 30%.

• third, if the evaluation supports a decision to contract-out, prepare solicitation packages, defining at the same time the supplier selection criteria and the required performance standards.
  
• fourth, select the contractor and undertake the ongoing administration and monitoring of the contract.

The circumstances in every municipality are different and contracting-out may be appropriate in some situations and not others. However, cheaper and better municipal services should be as important to households as cheaper and better consumer goods and services -- and contracting-out is an alternative form of service delivery that should be considered by municipalities in their quest for greater efficiency.