Competition among contractors is one of the most commonly cited ways by which privatization leads to an improvement in service quality, a reduction in costs, or both. Yet competition is not automatic. In some study sites, competition for contracts was quite fierce; in others, it was limited.
The extent of competition can be significantly affected by contract size, scope, and payment structure. Large contracts limit the pool of potential prime bidders to agencies with the necessary capacity. Splitting the work among multiple contractors can significantly increase competition. Likewise, if only one contract is issued covering TANF case management in an entire state or locality, the incumbent contractor has a considerable advantage. This advantage may discourage others from bidding. As described in Lesson 5, contract payment structures that impose considerable financial risk on contractors may also deter some organizations from bidding.