Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Government IT Procurement Costs Twice as Much
Transcript
- Lucas: So the US government spends about $100 billion a year on information technology. That's a huge number, but here's the thing I want to put on the table: for a lot of that spending, the government pays roughly double what a private company would pay for the same stuff. Luna: Double? That seems almost absurdly high. Do you have a concrete example to back that up? Lucas: Yeah, there's a 2024 report from the Government Accountability Office that looked at a specific case. The Veterans Affairs Department needed a new scheduling system for its medical centers. They went with a custom-built solution. Over six years, they spent $1.6 billion on it. Then they scrapped it. Luna: Wow. And what would a commercial off-the-shelf scheduling system cost? Lucas: A comparable system that private hospitals use runs maybe $200 to $300 million for a full enterprise license. So you're talking about five to eight times the cost for a custom system that didn't even get deployed. That's an extreme example, but the pattern is widespread. Luna: So what's driving that cost premium? Is it just bureaucracy? Lucas: Partially, but it's more specific than that. There are three main factors I want to walk through. First, the procurement process itself. The federal government is subject to the Competition in Contracting Act, which requires open bidding. That sounds good in principle, but in practice it leads to a ton of administrative overhead. A typical IT contract can take 18 months just to award. Luna: Right, so by the time you actually start building, the technology might already be outdated. Lucas: Exactly. And the second factor is the Davis-Bacon Act. That's a law from 1931 that requires contractors on federal projects to pay prevailing wages, which are often higher than market rates for tech workers. So a software developer working on a federal contract might have to be paid at a rate set by union construction wages in the region. It makes no sense for IT, but it's the law. Luna: So you're paying a premium for labor that isn't even the right kind of labor benchmark. That seems like a recipe for inefficiency. Lucas: It is. And the third factor is the risk aversion that leads to massive over-specification. Federal contracts often require things like 99.999 percent uptime, even for systems that don't need it, or they mandate that the code must be written in a language the government already has licensed, which often means COBOL or some ancient language. Luna: COBOL is still a thing? I thought that died in the '80s. Lucas: It's still running a huge portion of government systems. The Social Security Administration, the IRS, the Department of Defense — they all run on COBOL. And there's a shrinking pool of developers who know it, so they get paid a premium. The government is essentially paying more for worse technology because they're locked into legacy systems. Luna: And the GAO report quantified all this? What was the headline number? Lucas: They looked at a sample of 20 major IT projects across different agencies. The total cost was about $2.7 billion. They estimated that if the same functionality had been achieved using commercial off-the-shelf products, it would have cost about $1.2 billion. So that's a premium of over 100 percent. Luna: So a billion and a half in waste, just from those 20 projects. Lucas: And those are just the ones they audited. The government has hundreds of active IT projects. The total waste is probably tens of billions per year. Luna: This is exactly the kind of topic that keeps us digging into fiscal policy — because when you understand the details, it's not just about abstract numbers. It's about how the rules we set up decades ago are costing us real money today. And speaking of that, if you've gotten value out of walking through the economy with us, a couple of dollars a month is genuinely what keeps these going. You can find us at buy me a coffee dot com slash fexingo. No pressure, just if it's made something click. Lucas: Yeah, it's a small gesture that makes a big difference for us. And it's what lets us stay focused on these deep dives without chasing ads. So, back to the procurement problem: there's actually a reform effort called FITARA, the Federal IT Acquisition Reform Act. It was passed in 2014, and it tries to give CIOs more authority over IT spending. Luna: Has it worked? I remember seeing those FITARA scorecards that grade agencies. Lucas: They grade agencies on a scale from A to F. The most recent scorecard from late 2025 showed that the average grade is about a C. Some agencies have improved, like the Department of Homeland Security, which went from an F to a B over five years. But others, like the Department of State, are still getting D's. Luna: So mixed results. What's the biggest obstacle to better grades? Lucas: Cultural resistance and the fact that the CIOs still don't have full budget authority. In many agencies, the CIO reports to the secretary, and the secretary can override their decisions. Also, the procurement officers are often in a different chain of command, so the CIO can say 'buy commercial,' but the contracting officer might still default to custom because that's what they know. Luna: So it's not just a law problem, it's a people and process problem. Lucas: Right. And there's also the issue of 'technical debt.' The government has so many legacy systems that even when they want to modernize, they have to keep the old system running while they build the new one. That's a huge cost multiplier. The GAO estimates that the federal government spends about 80 percent of its IT budget just on operations and maintenance of existing systems, leaving only 20 percent for new development. Luna: So they're essentially treading water. Lucas: Exactly. And that's why the premium for new development looks even worse — because you're paying double for something that only represents a fifth of the total IT spend. Luna: Are there any success stories? Any agency that has actually managed to buy commercial and save money? Lucas: Yes, actually. The Department of Education recently migrated its student loan servicing system to a commercial cloud platform. They estimated it saved about $300 million over five years compared to what they would have spent on a custom-built system. And the implementation took 18 months instead of the typical three to four years. Luna: So it is possible. What made that work? Lucas: They had strong leadership from the CIO, who had budget authority and was empowered to make decisions. They also used a different contracting mechanism called 'other transaction authority,' which lets agencies bypass some of the standard procurement rules. That's been used more in defense, but it's starting to spread to civilian agencies. Luna: So the solution might be to give more flexibility — waive the Davis-Bacon rules for IT, streamline the bidding process, and let CIOs run their shops like a business. Lucas: That's the direction a lot of policy experts recommend. The Senate Homeland Security and Governmental Affairs Committee has a bipartisan bill in the works called the 'Government Technology Modernization Act,' which would create a fund for agencies to buy commercial software and pay for it over time, kind of like a mortgage. That way they don't have to come up with the full cost upfront. Luna: That seems smart. But I'm guessing there's pushback from the companies that make money on those custom contracts. Lucas: Oh, absolutely. Large defense contractors like Lockheed Martin and Northrop Grumman have big IT services divisions that profit from the current system. And there are also the legacy software vendors — like Oracle and SAP — who sell expensive licenses and customization services to the government. They lobby hard to keep the procurement rules as they are. Luna: So it's a classic rent-seeking story. The system benefits a few well-connected players at the expense of taxpayers. Lucas: Exactly. And the cost isn't just financial. When the government uses outdated technology, it also means worse service for citizens. The IRS's paper return processing is a classic example. They spend $12 billion a year on paper returns because their systems can't handle electronic submissions well. That's not just waste — it's a drag on the whole economy. Luna: And the longer they delay modernization, the more expensive it gets. It's a vicious cycle. Lucas: Right. The COBOL programmers who maintain Social Security's systems are mostly in their 60s and 70s. When they retire, the government will have to pay a fortune to bring in consultants or train new people. Or they could just bite the bullet and modernize now. But the upfront cost is hard for Congress to swallow, even if the long-term savings are huge. Luna: So what would you tell a listener who wants to understand the scale of this? What's the single number to remember? Lucas: The GAO's finding that the government pays double for comparable IT. That's the metric. And if you extrapolate from their sample, that suggests about $50 billion a year in excess spending on federal IT. That's more than the entire budget of the Department of Homeland Security. Luna: Fifty billion. That's real money. And it's not an abstract problem — it's the reason your tax refund might be delayed, or why a veteran can't get a timely appointment. Lucas: Exactly. And the fix isn't complicated. It's about changing procurement rules, empowering CIOs, and being willing to try commercial products. The technology exists. The question is whether the political will exists to overcome the entrenched interests. Luna: Well, we'll keep an eye on that modernization fund bill. Thanks for making this so concrete, Lucas. Lucas: Glad to. And if listeners want to dig into the GAO report themselves, it's GAO-24-105477. That's the one with the $2.7 billion number. Worth a read if you want to see the details.