Good IT firms are busy working on free-market projects where they have to deal with 10% of the bureaucracy. It's not worth competing against established players who know how to play the government contractor game much better than you, especially if bidding rules may force the government to pick a contractor that they know will deliver a subpar product because it's cheaper/because their bid is written by someone who knows exactly how to write them.
I suspect that if you want to compete in the market, you need to have a "bureaucracy" team that's at least as big, if not significantly bigger than, your actual software development team. Even in an ideal market that's going to drive prices up.
Edit: It seems like in this case, this quagmire was avoided by having the government build a skilled team in-house, avoiding all the overhead of an army of government bureaucrats interfacing with an army of contractor bureaucrats (which is necessary due to the processes that ensure fair contract awards).
Oh, this has been my feeling of how to solve the issue as well. Government in-house projects seems to have better quality overall in Sweden too.
It's not just US that fails with these kind of projects. In Sweden we have seen many expensive government IT infrastructure projects that effectively flush tax money down the drain. The users find them horrible to work with and they are riddled with security issues.
As a developer in Sweden I feel very frustrated about this. If I knew of a similar company in Sweden I would seriously consider joining it.
It could be done so much better. But how did you do it?
Edit: And I'm thinking not so much about the technology part of the problem but everything else, since finding competent developers that can solve the problem once you have a clear direction and decent financing seems like the easier part?
Edit 2: It feels like one of those things that could make a really eye opening documentary given the right direction.