In early 2006, California chose a contractor for its 21st Century Project, a massive initiative to replace the state's 1970s vintage payroll system. The deal, among the largest state government IT projects ever attempted, was awarded to the team of BearingPoint and SAP Public Service -- the only bidder remaining at the end of the competition.

Several months prior, San Diego County became the first county government to switch IT outsourcing partners, replacing Computer Sciences Corp. (CSC) to run the county's enormous IT shop. But ultimately just one bidder, Northrop Grumman, would accept the new contract terms.

Vendors who retreated from these deals -- giants like IBM, Accenture and CSC -- contended they couldn't justify the risk. Industry insiders say the small number of bidders reflects a problem occurring throughout state and local government IT.

Some contend that government executives -- stung by high-profile project failures -- are pushing more responsibility onto vendors to avoid future debacles. As onerous terms and conditions make government contracts riskier and less profitable for contractors, vendors are quitting midway through negotiations or sitting out government procurements altogether. Critics argue this will hurt governments by limiting the number of companies competing for government contracting business.

But others counter that current public-sector contract provisions are consistent with those accepted in the private sector, and that there's nothing wrong with a contract being highly risky for a vendor because allocating that risk is a primary reason for outsourcing in the first place. They say there are still plenty of vendors willing to accept the risks attached to today's contract provisions.

But most agree that bidders willing to accept tough contract terms simply price in the added risk, raising the question of whether governments are signing more expensive contracts than necessary.

Time to Change

California CIO J. Clark Kelso couldn't say definitively that he sees less competition for government contracts, but he is concerned about the threat. He said vendors routinely complain to him about the issue.

Relaxing some provisions may be advisable in light of the massive integration projects California plans to roll out in the next four years, Kelso said. Those projects will require vendors to make large investments in addition to accepting risky terms and conditions.

"It does create a concern that our terms and conditions may need to be adjusted in certain cases so that the risk profile of a particular project looks more attractive to the vendor community," said Kelso.

IT officials, he said, must bring lawmakers onboard with contract relaxations before adjusting provisions, however. "Onerous" contract provisions typically stem from legislative reaction to past project failures, said Kelso. Given that legislators view the provisions in that light, government executives are unlikely to soften contract provisions without the legislature endorsing a new philosophy for terms and conditions.

"If every time you have an IT project difficulty, somebody calls hearings, and as part of the hearings [they] take a look at the contract and say, 'Well, where was this term? Why didn't you have this? Where was the performance bond?' you tend to become fairly defensive about keeping your terms strict," Kelso said.

The California Manufacturers and Technology Association (CMTA) hosted workshops in late 2005 and early 2006 that were led by IBM, BearingPoint, EDS and several other companies, arguing for various relaxations in California government contract provisions.

Wanting It All

Accenture was one of three companies that pulled out of negotiations for California's 21st Century Project. The giant IT-services firm bowed out two days before the deadline when the state refused to budge on its warranty requirements, leaving BearingPoint teamed with SAP Public Service as the sole remaining bidder.

Kelso defended the California 21st Century Project, saying the remaining bidder didn't

Andy Opsahl  |  Staff Writer