A simulation approach to in-house versus contracted out cost comparisons
| DOI | https://doi.org/10.1108/JOPP-04-01-2004-B003 |
| Published date | 01 March 2004 |
| Date | 01 March 2004 |
| Pages | 43-66 |
| Author | Donald R. Deis,Helmut Schneider,Chester G. Wilmot,Charles H. Coates |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 4, ISSUE 1, 43-66 2004
A SIMULATION APPROACH TO IN-HOUSE VERSUS
CONTRACTED OUT COST COMPARISONS
Donald R. Deis, Helmut Schneider, Chester G. Wilmot, and Charles H.
Coates, Jr.
ABSTRACT. The purpose of this project was to compare the cost of
transportation engineering design services provided by private contractors
versus services provided by state transportation agency staff for the Louisiana
Department of Transportation and Development (LaDOTD). Due to shrinking
budgets, staff cuts, and a trend toward privatization, state transportation agencies
now outsource the majority of the services they provide. The merits of doing so,
however, have been difficult to discern for lack of “apples-to-apples”
comparisons. For engineering design services, this problem is particularly acute
due to the uniqueness of many projects (e.g., a bridge over the Mississippi
river). A simulation approach was used in this study to make “apples-to-apples”
comparisons for 39 design projects, 22 in-house projects and 17 consultant
projects. For each in-house design project, the cost was estimated had the work
been done by a consulting firm. Similarly, for each consultant design project, the
cost was estimated had the work been done by in-house staff. The result of the
study was that in-house design costs were cheaper by an average of 17 to 19
percent.
INTRODUCTION
Turning to private sector companies to provide goods and services to
the public is commonplace. Although, a wide variety of services are
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* Donald R. Deis, Ph.D., Professor and Director, School of Accountancy,
University of Missouri—Columbia. His research interest is in governmental
accounting and privatization. Helmut Schneider, Ph.D, is Professor and
Chairman, Department of Accounting and Department of Information Systems
and Decision Sciences, Louisiana State University. His research interest is in
statistics and government efficiency. Chester G. Wilmot, Ph.D., Associate
Professor, Louisiana Transportation Research Center and Department of Civil
and Environmental Engineering, Louisiana State University. Dr. Wilmot’s
research interest is in transportation financing and planning. Mr. Coates is a
consultant and his research interest is in engineering forensics and financing.
Copyright © 2004 by PrAcademics Press
44 DEIS, SCHNEIDER, WILMOT & COATES, JR.
contracted out, or privatized, the merits of doing so remains in dispute. In
general, contracting out by governments generates interest in how the
quality and the cost of the service or product are affected. While quality
is understandably difficult to measure and compare, cost analysis is
usually considered to be a straightforward process. The costs are what
they are, it would seem. For a variety of reasons, however, that is not the
case either. Certainly the price paid to contractors is known; but the costs
to contract and to monitor the contractor are hidden. Moreover, most
government accounting systems are not designed to provide product or
service costs. Rather, the accounting system’s main purpose is to keep
track of line item budgets to ensure that the government stays within
budget. So neither the full cost of public sector or private sector
provision is readily known. If a government stops providing the service
when it contracts out, the situation is complicated further. That is the
case for State transportation agencies that commonly use consultant
firms for a majority of the services and products they provide. The
Louisiana Department of Transportation and Development (hereafter
referred to as the "department" or "LaDOTD"), like many state
Departments of Transportation (DOT), currently uses both consultants
and in-house staff in designing state transportation facilities. The relative
cost of doing so, however, is unknown. Is it less or more expensive to
use consultants rather than in-house staff to provide these services? The
answer to this question is the prime objective of this study.
Past studies in other states strongly suggest that consultants are more
expensive than in-house staff in providing the design services needed by
the DOTs (Wilmot, 1995). These studies also reveal the difficulty in
comparing public sector costs to those in the private sector. This is
particularly true for indirect costs. The public sector, for example, incurs
costs of advertising for contract bids, consultant supervision, and general
administration. Meanwhile, the private sector has taxation, marketing,
and compliance costs. Moreover, costs incurred for office rental,
utilities, senior administrative staff, and insurance are incurred
differentially across private and public organizations. Moreover, as stated
before, contracting out sometimes means that the government no longer
performs that service, which complicates cost comparisons.
In this study, three simulation approaches were used to compare
consultant and government agency costs. Given the real-world problems
just identified, simulation approaches such as the one used here appear to
be a fruitful methodology to conduct cost comparisons. The remainder of
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