Managing by Contract 121
Second, contracts for large-scale weapons systems, for airplanes, for space proj-
ects, and for research and development are another matter. Ordinarily, only a few
qualifi ed bidders are available, and it is in the government’s interest to underwrite in
some form the capabilities of the limited number of potential contractors. Th e idea
of a market, therefore, is less applicable in this form of contracting because there is
little competition. It is oft en diffi cult to know in advance the fi nal cost of a contract.
Th e government may specify a preferred result or outcome in a given period but
fail to know precisely how that outcome will be achieved. It is possible to know in
advance how to build a building or a bridge. It is possible to “know” that ways can be
found to cure diseases, clean up toxic dumps, and destroy incoming missiles; but be-
cause we do not know how to do these things, governments contract with technically
qualifi ed organizations to attempt to fi nd answers. Th is form of contracting is riskier
and the results less predictable than contracting for capital projects.
Th e project management approach is the most commonly used theory of man-
agement for contracts of this sort (Cleary and Henry 1989). But as Donald F. Kettl
(1993b) puts it, very oft en the government is not a “smart buyer.” Th e capacity to
be a smart buyer depends on the quality of the market. If the market has genuine
competition, as happens when construction companies bid for capital projects, the
government may have the capacity to be a smart buyer. When it is clear what the
government wants and can easily determine the quality of those goods or services,
the government can be a smart buyer. But when these conditions fail to material-
ize, as oft en happens, the government is faced with so-called market imperfections.
Kettl, who bases his results on his splendid study of government contracting, sets out
the following hypotheses about what happens when market imperfections increase:
- Interdependence among buyers (government) and sellers (contractors)
increases. - Boundaries between public and private are blurred, making it diffi cult
to know what functions or activities are governmental or public. - Th e problem of absorbing uncertainties increases.
- Buyers and sellers become more highly coupled, making their interests
indistinguishable. - Confl icts of interest on the part of contractors reduce the quality and
quantity of information they supply government. - Internal organizational cultures become more important than market
incentives. - Organizational capacity for learning declines and the likelihood of in-
stability increases. (1993b, 179–197)
For management theory, it appears that by contracting out, governments
export some management issues, such as the day-to-day direction of activities,
contacts with clients or customers, the organization of work, and the supervi-
sion and motivation of workers. Contracting redefi nes administrative discretion