Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Government Procurement Drives Up Costs 40 Percent
Transcript
- Lucas: So the U.S. government spends about six hundred billion dollars a year on procurement—buying everything from office chairs to aircraft carriers. And there's a number that keeps coming up in audits: roughly 40 percent more than what a private company would pay for the same thing. Luna: Forty percent—that's massive. Is that across the board, or are there specific categories where it's way worse? Lucas: It's an average, but the GAO—the Government Accountability Office—published a report in 2019 that broke it down. For standardized goods like office supplies or IT hardware, the premium can be lower, maybe 20 to 30 percent. But for complex systems like defense electronics, the overrun can hit 100 percent or more. Luna: And that's just the price paid, not the quality difference or the cost of delays, right? Lucas: Exactly. The GAO report looked at total cost of ownership—including maintenance and training—and the government still came out ahead on cost disadvantage. One of the poster children for this is the titanium bolt. Luna: The 47-cent bolt that the Pentagon paid over a thousand dollars for? I've heard that story. Lucas: Same bolt. A simple titanium hex bolt that you could buy from a specialty supplier for 47 cents. The Department of Defense paid $1,200 for it in 2018, because it had to be sourced through a specific contractor who was the only one approved to supply that part number. The bolt itself hadn't changed spec in 20 years. Luna: And that's not just one bad order—that's systematic. What's causing the premium? Lucas: Right, it's not one thing. It's a bundle of rules and incentives. The Federal Acquisition Regulation—FAR—is over 40 chapters and about 2,000 pages. Every contract has to comply with dozens of unique requirements: Buy American provisions, small business subcontracting goals, prevailing wage rules, environmental reporting. Luna: So the compliance cost itself is built into the price tag? Lucas: Yes. The Rand Corporation did a study in 2020 and estimated that compliance with federal procurement regulations adds 15 to 20 percent to the cost of a contract on its own. Then on top of that, you have the lack of competition. Many contracts are awarded to a single source, or only a few firms can navigate the paperwork maze. Luna: And those firms know they don't have to compete aggressively, so they price accordingly. Lucas: That's the theory. There's also the issue of cost-plus contracting, where the government covers the contractor's costs plus a guaranteed profit. That removes the incentive to cut costs. If you're a defense contractor and your costs go up, your profit goes up too. Luna: But isn't cost-plus used precisely because the work is unpredictable? You can't fix a price for R&D on a new satellite. Lucas: That's the argument, and for genuine R&D it makes sense. But about 40 percent of federal contract spending is still cost-plus, even for mature production items like the titanium bolt. The GAO has been recommending a shift to fixed-price contracts for decades. Luna: Has that recommendation ever been acted on? Lucas: Partially. In 2021, the Department of Defense updated its instruction to favor fixed-price contracts for mature systems, but implementation has been slow. A 2023 GAO follow-up found that 60 percent of defense contracts over $100 million were still cost-plus. Luna: And then there's the political layer—every member of Congress wants to protect the contractors in their district. Lucas: That's a huge factor. Procurement is often used as an industrial policy tool. The Buy American Act, for instance, requires that many goods be produced in the US, even if foreign alternatives are cheaper. A 2022 study from the Peterson Institute estimated that Buy American provisions add 10 to 25 percent to the cost of federal infrastructure projects. Luna: Which is a policy choice—you might decide it's worth paying more to support domestic jobs. But the problem is that we're not even measuring whether we get that value. Lucas: Exactly. There's no cost-benefit analysis on the regulatory requirements themselves. The FAR has been amended over 5,000 times since 1984, and each amendment adds another layer of paperwork. A 2018 report from the Administrative Conference of the United States found that the total cost of federal procurement regulation was about $200 billion a year—roughly a third of total procurement spending. Luna: And that's just the regulatory cost, not the actual price of goods? That's staggering. Lucas: That's just compliance. So when you add the compliance overhead, the lack of competition, and the cost-plus incentives, the 40 percent premium starts to seem almost conservative. Some economists argue the true premium is closer to 60 percent. Luna: Is anyone trying to fix this systematically? Not just at the margin, but a real overhaul? Lucas: There have been efforts. In late 2024, Congress passed a pilot program for 'category management'—basically forcing agencies to buy common goods through centralized contracts, like private companies do. Early results from the Office of Management and Budget show savings of 5 to 10 percent on IT hardware in the first year. Luna: Small relative to the problem, but a start. Lucas: Yeah, it's incremental. Another interesting experiment is the Defense Department's 'Section 809 Panel' recommendations—they proposed exempting commercial-off-the-shelf purchases from most of the FAR. That would cover things like laptops and office furniture. But it hasn't been adopted yet. Luna: The friction is always the same: the regulations exist because of past scandals. Every rule was written in response to a headline about a $600 hammer. So reformers get accused of wanting to return to the days of $600 hammers. Lucas: That's the political trap. The $600 hammer story from the 1980s actually led to more oversight, not less. And each new scandal adds another layer of control. But the cumulative effect is that the system becomes so rigid that honest contractors overpay, and dishonest ones find ways around it anyway. Luna: So the net result is the worst of both worlds: high costs and not enough accountability. If walking through the economy with us has made something click, it's worth saying that a couple of dollars a month is genuinely what keeps these shows going. Buy me a coffee dot com slash fexingo — if you've gotten something out of them, it really helps. Lucas: Yeah, truly. It's the reason we can stay ad-free and dig into these details. So thank you to anyone who does. Now, back to procurement reform — one of the more promising ideas is using data analytics to detect pricing anomalies. The government has started using AI to compare prices across agencies, and it's already finding cases where the same item is being bought at wildly different prices by different departments. Luna: That seems like a no-brainer. If you can see that the VA is paying $50 for a medical supply that the Defense Logistics Agency buys for $30, you can fix that fast. Lucas: Exactly. A pilot at the General Services Administration in 2023 used machine learning to identify 200 products where prices were more than 50 percent above market benchmarks. They saved $18 million in the first quarter just by renegotiating those contracts. Luna: So there's low-hanging fruit. Why isn't this scaled up? Lucas: Coordination. Each agency has its own procurement systems and they don't always share data. The GSA is trying to build a unified procurement platform, but it's been delayed by budget constraints and agency resistance. Luna: Resistance because they lose control over their own purchasing? Lucas: Partly. Also, the incumbent contractors benefit from opacity. If you're the sole supplier of a specialized component, you don't want the government to have a dashboard showing that your prices are 30 percent higher than industry average. Luna: So the status quo has powerful defenders. But if we could save even half of that 40 percent premium, we're talking about $120 billion a year. That's real money. Lucas: It's huge. To put it in perspective, that's more than the annual budgets of the Department of Education and the EPA combined. It's not just about efficiency—it's about what we could do with those resources. Luna: Right. It's a choice. We're implicitly choosing to spend that extra $120 billion on compliance and inefficiency rather than on, say, reducing the deficit or funding other priorities. Lucas: And the irony is that many of those regulations were intended to protect taxpayers from waste. But the system they've created may actually be wasting more than the scandals they were designed to prevent. Luna: So what's the one step that would make the biggest difference? If you had to pick one reform. Lucas: I'd say centralizing procurement for common goods across all federal agencies. If the government acted like a single buyer instead of 150 separate buyers, it would have enormous bargaining power. The UK did this in 2015 with their Crown Commercial Service and reported savings of about 15 percent on average. Luna: That requires political will to override agency autonomy. Do you see that happening anytime soon? Lucas: The pilot programs are a start, but I think it will take a crisis—a budget crunch or a major scandal—to force systemic change. Until then, we're likely to keep paying 40 percent more for the same titanium bolts. Luna: And the same printer ink, software licenses, and office chairs. It's a quiet drain on every taxpayer's wallet. Lucas: Exactly. And the first step is just being aware of the number. When you hear about a $1,200 bolt, it's easy to laugh. But the real story is the system that makes that possible, and the billions of dollars that are lost every year because of it.