GAO Revises Guidance on Best Practices for Agencies Using Cost Estimates

Bob Zwirb Commentary by Bob Zwirb

The U.S. Government Accountability Office ("GAO") revised its guidance on best practices for developing and managing program costs.

According to the GAO, the guide is intended to address gaps within government agencies' procedures and practices for estimating future costs of programs effectively. The new guidance is intended to (i) help agencies implement generally accepted best practices that produce reliable cost estimates, and (ii) provide agencies with information on the link between cost estimates and earned value management ("EVM"), which is used for measuring work performed on a project against an approved baseline.

The report describes how such estimates are used to predict, analyze, and evaluate a program's cost and schedule, and serve as a critical program control planning tool. Among other things, the GAO added that the guides provide insight for agencies regarding (i) the technicalities of conducting a cost estimate, (ii) information on EVM, (iii) auditing and validating cost estimates, and (iv) delivering the proper amount of funds to the right projects. The guide also advises agencies on addressing potential errors when using cost estimating and EVM, and making budget requests.

Commentary

Bob Zwirb
Bob Zwirb

Notwithstanding the length of the report, GAO's analysis is limited in at least two important respects. First, the focus of the report is solely on costs. This is seen in the limited and circular way GAO frames the goal here: "Cost analysis is a discipline used to gain knowledge about costs and is used to develop cost estimates." (GAO report at p. 17, emphasis added). It is also seen in the dearth of references to the term "benefits," which is mentioned only twelve times in the 462-page report.

Second, the report is limited primarily to measuring costs for the purpose of administering government programs and establishing agency budgets. That is, it is intended as a managerial tool to support the budgetary process. It is not intended to measure costs for the purpose of evaluating performance of government or regulatory programs based on policy objectives or determining their effects.

This exercise, therefore, should not be confused with that of cost-benefit analysis, which measures the effects of government actions in order to determine both their anticipated costs and benefits. While both tasks are aimed at avoiding a misallocation of resources, the GAO approach is analytically more narrow. It is also less useful, since misallocation can occur not because costs are not properly accounted for, but because regulators often do not examine or question the policy assumptions, or take into account the expected effects of their actions. (A good example, is the CFTC's position limits proposal, which is aimed at placing limits on two commodities in addition to agricultural ones already covered — energy and metals — neither of which had anything to do with the financial crisis of 2008 that gave rise to Dodd-Frank, which created the mandate for new limits in the first place, and which can more efficiently be set and implemented by the exchanges themselves).

Too often problems associated with public sector programs are seen primarily as one of management rather than their underlying purpose and objective. While it is important to accurately measure and allocate costs of such programs, which helps policymakers to determine the means by which we attempt to accomplish our goals, it is equally important — and perhaps more important — to measure the effects of policies. As the late Nobel laureate economist George Stigler explained: "means [for determining rational public policy] cannot be appropriate if their effects are unknown." George J. Stigler, The Law and Economics of Public Policy: A Plea to the Scholars, 1 J. Legal Stud. 1, 7 (1972).

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