Government Start-Ups Should Have Different Procurement Rules

Government Start-Ups Should Have Different Procurement Rules

We should give new programs an 18-month runway before the normal procurement rules kick in

Mike Schmidt

Nov 3

I believe that the government should rely less on contractors and build more capacity of its own. At the same time, contracting will always be part of a high-functioning state: some expertise is too specialized to hold in-house, some needs are short-lived enough that hiring doesn’t make sense, and new initiatives, like the CHIPS program, need surge capacity long before permanent staff are in place. This is why the rules governing how the government buys that expertise matter enormously.

Government procurement rules seek to safeguard against waste and corruption. They do this by dictating the procedures that public employees must follow when contracting with private parties for goods and services. These are worthwhile aims, but they must be balanced with the fact that ex ante constraints on the government inherently hinder nimble and efficient execution.

There’s a growing recognition that we aren’t getting this balance right; to protect against any and all abuse, we are making it very difficult for the government to operate effectively. As a result, a bipartisan consensus has emerged on the need for procurement reform. Within several months of taking office, the Trump administration launched its own efforts to overhaul procurement regulations with the goal of creating “the most agile, effective, and efficient procurement system possible.”

I’ve supported procurement reform since serving as New York’s tax commissioner, when I saw how much these rules can get in the way of effective government. A systematic overhaul could reset not just the rules themselves but the culture and norms that govern how federal employees navigate them. Beyond these broader reforms, I believe that one specific intervention in the statutory framework may prove especially effective: Congress should give start-up programs — new government initiatives that must build an operation from scratch — dramatically more flexibility than typical procurement rules can reasonably allow, even after meaningful streamlining. It’s commonly accepted that such flexibility is warranted in a crisis context, and similar affordances for government start-ups could meaningfully improve the chances that implementation of new programs is successful.

A brief history of government procurement rules

Federal contracting today is governed by the Federal Acquisition Regulation (FAR). First promulgated in the mid-1980s, the FAR was itself an effort to streamline federal procurement. In 1972, a Commission on Government Procurement produced a report decrying “a burdensome mass and maze of procurement and procurement-related regulations” with “no effective overall system for coordinating, controlling, and standardizing regulations.” The FAR attempted to consolidate scattered agency-specific procurement rules into a uniform process.

Today, however, the FAR has become its own “burdensome mass,” running more than 2,000 pages. It’s also fallen short of its promise of uniformity, as dozens of agencies have issued their own supplements to accommodate their particular operational needs. To award a competitive contract through the standard FAR-mandated process, agencies must wade through a morass of requirements that governs what happens before a solicitation is posted, during the selection process, and after an award is made.¹ While many of the individual requirements may seem reasonable, even the most operationally obvious ones, like conducting market research, often become rote exercises in documentation. And cumulatively, they make it nearly impossible for the government to operate with commercial efficiency.²

The same architecture governs procurement below the federal level. The American Bar Association drew on the federal rules to publish the Model Procurement Code in 1979 for state and local governments. It has since been adopted in full by 16 states, in part by several more, and by thousands of local jurisdictions. States layer on their own additional controls as well: in New York, where I served, contracts above $50,000 generally require pre-approval from the State Comptroller before they are binding.

My experience working on COVID response in New York State showed how the government can operate nimbly and efficiently when procurement rules are waived in a crisis. At CHIPS, the typical procurement paths significantly hamstrung government effectiveness and wasted taxpayer dollars.

(To be clear, the fault lay with the rules themselves and not with the people operationalizing them. We had an extraordinary team of professionals managing the CHIPS Program Office’s procurements who were viewed as heroes navigating a byzantine system to get the program the resources needed. It’s notable, then, that we ran into all these constraints even with a best-in-class team helping us navigate the rules.)

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Case study #1: Pandemic crisis response

The rules governing procurement are self-evidently ill-suited for a crisis, when rapid response is essential. It has therefore become commonplace to waive or circumvent these rules in crisis scenarios. During the COVID pandemic, Operation Warp Speed didn’t promulgate a typical competitive bid for federal resources — it used “other transaction authority” to bypass the FAR and rapidly enter into agreements with potential vaccine providers. As a result, millions of doses were already manufactured and ready to ship the day the FDA authorized them, saving countless lives. In 2023, a bridge collapse on I-95 threatened to shut down commerce across the Northeast; Pennsylvania Governor Josh Shapiro waived procurement rules to allow the state to hire a contractor already working at the site, rather than run a competition. The waiver was essential to his effective response.

I’ve seen firsthand how crisis-motivated waivers of procurement rules enhance the government’s effectiveness. Before I joined the Biden administration, I served as the commissioner of the New York Department of Taxation and Finance — basically the IRS of New York State. When the pandemic struck New York in March of 2020, Governor Cuomo asked many members of his cabinet to join the central response operation in addition to our standard duties. My assignment was to oversee the modeling of disease progression, which we then mapped against the capacity of the health care system. Cases were surging and we had no idea whether the state’s lockdown measures would control the spread; the government needed clear models for statewide caseloads and corresponding targets for its efforts to acquire medical supplies and equipment.

New York had a mature public health operation, but this kind of modeling was beyond the state’s baseline capacity. There were a handful of external epidemiologists at universities and NGOs who volunteered to help out, but that deep epidemiological expertise did not always translate into day-to-day and week-to-week projection modeling with the ability to produce findings that were operationally useful. In a matter of days, the state engaged a top-tier consulting firm with a mix of public health expertise and number-crunching chops to provide analytical support.

This accelerated procurement timeline was made possible by the fact that earlier that month, Governor Cuomo had issued an emergency declaration that allowed him to unilaterally suspend certain laws to assist the disaster response. In an executive order, the governor suspended procurement rules “to allow the purchase of necessary commodities, services, technology, and materials without following the standard notice and procurement processes.”

Allowing the state to expeditiously secure expertise meant that its response could be informed by real data and analysis. At one point in early April, New York City presented the state with an analysis calling for a large allocation of medical equipment from the state’s reserve to meet its needs for the following week. I remember a tense Saturday afternoon phone call I spent walking the mayor’s senior staff through some numbers to explain why we were confident that an allocation of roughly half their request would in fact be sufficient. The city’s projection had relied on a complex epidemiological model from an academic researcher; such models were essential for understanding long-term disease progression and its sensitivity to various interventions, but their reliance on dozens of assumptions made them fickle inputs for day-to-day or week-to-week planning. Our figure had been derived from bottom-up, hospital-by-hospital trend analysis and projections — the kind of number-crunching that analysts at consulting firms are trained for.

At a time of great uncertainty, it took discipline to maintain resources for other parts of the state that might need them — but given the life-or-death consequences for city residents, we needed to be absolutely confident in our analysis. Our analysis proved correct. But absent the ability to efficiently contract for analytical support, we would have been flying blind.

Even with procurement rules waived, we still had to justify the scope and cost of our consulting contract. When the contract with the consultants was up for renewal, a member of the governor’s senior staff (who had negotiated the initial contract) directed me to renegotiate the fee and ensure that I was only contracting for the minimum amount of services I needed, both of which I did. Though we were in the middle of a crisis, he knew scrutiny and oversight were coming on the other side.

Case study #2: The sad saga of CHIPS’s investment banking contract

At CHIPS, we had no blanket exemption from the federal procurement rules. This throttled our implementation efforts and meant that the dollars we did spend on contracting were less efficiently deployed. The sad saga of our investment banking contract exemplifies why the typical contracting rules simply don’t work in a start-up government context.

Over Thanksgiving weekend of 2023, we made our first incentive offer to one of our major applicants. The following Monday, I sat in a meeting with Todd Fisher and the deal team across the table from the company’s executives. The CEO railed against the offer: it was simply insufficient to make the economics of his project work. To buttress his case, he had retained a major investment bank to conduct an “independent” evaluation of the proposal. At the meeting, he presented slides prepared by the investment bank arguing that, as CEO, he had an obligation to shareholders to consider building his factories abroad, given the paucity of incentives the US government was offering him.

In theory, it would have been easy for us to counter with an analysis from our own investment bank explaining why our offer should have been sufficient to secure their investment; after all, our underwriting process had been designed to award the minimal subsidy needed to secure domestic investment. In fact, in the fall of 2022, we had kicked off a procurement process for a capital markets advisor who would help us underwrite and negotiate our major deals. But a full 14 months into the program, this advisor had not yet been onboarded.

The capital markets advisor was meant to help us answer questions that required genuine financial sophistication: What cost of capital should we assume in underwriting each deal? What mix of grants and loans would make sense for each company? What were the downside risks — both macroeconomic and company-specific — and how should they affect award sizing and milestone structuring? What were the upside scenarios, and how should those shape upside-sharing? We had made do without the contract — and, given the quality of the team we built, I think we did a pretty great job of it. But the delay in awarding the contract meant that we had underwritten our most significant, multibillion-dollar investments without the full set of resources and analytical inputs we had planned for. And tactically, it meant that in this negotiation, we could only respond to the applicant with, more or less: “We’re the government and we disagree.” I expect that the company didn’t find this response particularly compelling.

To write this piece, I reached out to a senior member of the CHIPS team who worked on procuring the capital markets advisor. He likened that procurement experience to a “triple bypass surgery.” At each stage of the process, he explained, “what would have taken a week in the private sector took months.” It took three months to get the original solicitation out the door, delayed by back-and-forth with the procurement officer and internal approvals. Nine proposals came in, ranging from credible firms to wacky one-person overtures. Three senior members of the team were designated as the panel of experts to review the technical merits of the proposals. They had to review each proposal, most of which were lengthy, and draft multi-page write-ups with narrative findings on specific issues. They then had two or three multi-hour meetings with the contracting officer to go through each evaluation and compare.

According to my colleague, as they waded through the process and paperwork, the rules prohibited the members of the panel from doing what he considered to be “the most relevant and informative parts of a consultant selection process.” They were only allowed to look within the four corners of a proposal. They couldn’t ask questions of the respondents. They couldn’t create a shortlist of viable candidates from the pool of respondents and invite them in for discussions. For such critical contracts, the key factor is not the quality of the firm, but of the partners running the engagement — but the reviewers couldn’t pick up the phone to diligence the specific individuals on the proposals they received.

The CHIPS Program Office did ultimately bring a high-quality firm on board, and it provided some helpful support on issues of second-tier importance. But the delay resulted in waste: we had crafted the solicitation as a fixed-price award to provide capital markets support for $20+ billion in incentives — that was a big piece of business that justified a meaty contract. But by the time the firm was on board, the work was largely complete. It’s hard to know the counterfactual, since we did get the big deals done. But the extra analytical support unquestionably would have helped us to negotiate the strongest deals possible for taxpayers — not just the funding levels but also the milestones, upside sharing, and other parts of the deal structure.

Not every contracting experience at CHIPS was this bad. But the more successful contracts were often secured through administrative pathways that allowed us to avoid the full burdens of a typical competitive award process. For example, as we ramped up our internal staffing, we secured short-term semiconductor expertise through a program that allows for direct awards to small businesses. But under the rules of the program, its dollar value was capped at a pretty low level. And the contract still took two months to award, which was way too long in those early days of implementation.

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We should exempt start-up government programs from procurement rules

In retrospect, part of me regrets that we didn’t just use our other transaction authority (OTA) to quickly enter into our key consulting arrangements, which would have excused us from the procurement rules. At the time, that approach felt implausible — Congress had given us OTA to provide flexibility in our awards, not to circumvent procedure, so we dismissed the idea of using OTA for our major procurements as inconsistent with the will of Congress and creating too much oversight risk. But if we had just used OTA, I have no doubt that the result would have been better for the program and better for taxpayers.

From a system-wide perspective, however, a Wild West of OTAs for procurement is not the right policy outcome. We should regulate government procurement. The risk of corruption is real, and businesses have a legitimate interest in having a fair shake at working with the federal government. But we need the right balance. The Trump administration has launched a “Revolutionary FAR Overhaul” to take this on, directing that the FAR be reduced to “only provisions required by statute or essential to sound procurement.” I would encourage future administrations to also advance procurement reform.

But regardless of how effective we are at reforming the broader system, start-up programs need to be given special consideration. We understand this intuitively in a crisis context: it’s simply not tenable for the government to wait months to get the resources it needs to address a crisis.

The same dynamics apply for new government initiatives. To implement new programs rapidly, the government needs talent at its disposal. Even in the best of circumstances, hiring into the government takes time — temporary contracts can bring in resources quickly. And even as hiring ramps, it seldom makes sense to internalize every form of specialized expertise, making contracting key.

My specific proposal is that when Congress establishes new programs, it should allow the implementing agency to enter into contracts without having to follow typical procurement rules for a period of 18 months. The agency can be required to report to Congress on all the contracts it enters into using this statutory flexibility, as well as how it selected the contractors — but a statutory intent of expeditious contracting should be made clear. The contracts entered into using this provision would only be good for a period of 18 months from the date of enactment, after which all contracts should be required to go through the normal process. This would give the program a reasonable window to secure long-term support and the flexibility to get up and running the right way.

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