But accurate accounts will not guarantee efficiency. Even if — as is unlikely to be the case [Sourwine 1993; 1994]– the service supplier’s financial and operational accounts completely and accurately present every relevant fact about the operating decisions made by its managers, they will not provide a basis for evaluating the soundness of those decisions. This is because cost accounts can show only what happened, not what might have happened. They cannot show the range of asset acquisition choices and tradeoffs the supplier considered, let alone those that should have been considered but were not [Cohen & Loeb, 1990, 1989].
Hence, the federal acquisition regulations state: “Although the government does not expect to participate in every management decision, it may reserve the right to review the contractor’s management efforts.” In fact, where government decides which costs are allowable under the terms of a contract and which are not, it has the power to determine which activities and what items of expenditure the source will undertake. Furthermore, federal contracts typically assign to government the right to review make-or-buy decisions, to approve subcontractors and suppliers, to specify internal financial reporting, operational, cost accounting, and planning systems, wage rates, etc. A fundamental question is how far should this participation go. To what extent should the government replace or duplicate the supplier’s managerial efforts?
Controls contribute nothing of positive value; their singular purpose lies in helping us to avoid waste.
That was from an excellent Fred Thompson paper, Public Economics and Public Administration. The role of market competition, of course, is to regulate product specifications and pricing. Unique cost accounting requirements are one representation of contractors being administrative extensions of the government. Unfortunately, many other controls are needed because cost accounting says nothing about opportunity cost.
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