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Friday, December 30, 2011

The limits of procurement law

"If you only have a hammer, you tend to see every problem as a nail."
Abraham Maslow


This post concerns a controversy over the allocation of Low Income Housing Tax Credits ("LIHTCs"), specifically whether that controversy is cognizable under the procurement law. The basics of the story are reported in this online news item:

VIDEO: OPA Confirms Protest Halts GHURA Tax Credit Award; Cruz Concerned About Conflict of Interest.

The same news source, Pacificnewscenter.com, has a copy of the protest filed at http://www.pacificnewscenter.com/images/pdf/medallionprotestletter.pdf.

The article quotes the Guam Public Auditor as saying, "The form of tax credits is really a form of payment which is after the fact after a procurement has been made so the process is still a procurement issue”. As a consequence of the procurement characterization, she indicated that an automatic stay has been placed on the allocation of tax credits.

I want to speak to one element of the controversy, the procurement angle.

First, my disclosure. I am General Counsel for Jones & Guerrero Co., Inc., which is one of the principles behind the GREAT Homes, LLC, LIHTC application. I have not had much to do with this project, however, since specialized and experienced consultants and advisors have been retained to assist the application package. I am aware that the applicant has spent considerable time and money in the application process, however, my knowledge of the LIHTC program in general is rudimentary and I have had no direct participation in the planning or completion of this particular project application.

As reported in the media, Medallion Guam, LLC, has “protested” GHURA’s allocation of LIHTCs. Its attorneys, and others who should know better, have made the unsubstantiated claim that the allocation process is subject to the Procurement Act. I disagree, but, unlike the persons claiming such coverage, I will specifically detail why.

The Federal government has seen fit to grant federal income tax concessions to developers of certain low income housing developments to encourage such developments when profit is insufficient to the task. In no way does the procurement law apply to the process of qualifying for income tax breaks. That is a matter of tax law, US tax law.

If there is a dispute over the amount, timing or eligibility of the use of a tax credit, is that determined under the procurement code (see, 5 GCA § 5427 re contract controversies), or is it determined by the taxing authorities under the tax laws? It is a tax matter, not a procurement matter.

The procurement act applies to “procurement”, defined as “buying, purchasing, renting, leasing or otherwise acquiring any supplies, services or construction” (5 GCA § 5030(o)). The Government of Guam does not “acquire” anything under the LIHTC program. The project is designed, built, owned and managed by the developer. It is never bought, purchased, rented, leased or acquired by GovGuam.

The protest letter claims the procurement act is applicable because “[t]he Guam Procurement Code is meant to be construed broadly and cover territorial acts that include "federal assistance." 5 GCA §5004(b ).” This is not quite even half a truth. Yes, the procurement code is meant to be construed broadly, but only “to promote its underlying purposes and policies” (5 GCA § 5001(a)), and low income housing policy is not one of its purposes or policies. Yes, the procurement code does “cover” certain federal assistance, but it does not cover all “territorial acts”; it only covers certain local government “contracts”.

And it is at this point that the protest artfully fails to describe the whole truth, which contracts are covered by the procurement law? The unmentioned part of 5 GCA 5004(b) states, the procurement law “shall apply to every expenditure of public funds ... under any contract....” The scope of the procurement law is limited to expenditures of public funds under contract.

The award of tax credits is not an “expenditure”, and tax credits are not “public funds” (and it can be noted, the Public Auditor’s duty and authority extends to settling “the accounts of Disbursing Officers and Certifying Officers”, but “[t]his authority shall not extend to the collection of income taxes....” (1 GCA § 1909(b)).

Procurement law does not define what is meant by the term “expenditure” (in the phrase “expenditure of public funds”), but the funds management provisions of Guam law do. “Expenditures means all amounts of money, other than refunds authorized by law, paid out or encumbered for payment by a Territorial agency other than for investment securities or as agent or trustee for other governmental entities or private persons.” (5 GCA § 4117(g).)

Tax credits are not money. They are not the functional equivalent of money; you cannot pay your dinner tab with a tax credit. Tax credits are not money paid out by the government. They are conditional offsets of tax liabilities owed by a taxpayer to the government.

Likewise, the term “public funds” (in the phrase “expenditure of public funds”) is not defined in the procurement law, but it is a term used in the fiscal management provisions of Guam law.

14 GCA 14104(c) says, “ 'Fund' shall mean as used in this Chapter the General Fund and all special and trust funds. This includes impress fund cash held at personal risk.” Fund would not include tax credits.

14 GCA § 14105 says of “public funds”, “All public funds of the government of Guam shall not be disbursed, except ... by the persons designated or delegated....” This again speaks to the notion that public funds are amounts paid out by the Government. Tax credits are not public funds to be disbursed, paid or expended by the persons charged with the care and accounting of government money, as more fully detailed in Chapter 14, Title 4, GCA.

The expenditure of public funds must begin with budgets and approvals. The Governor must prepare “a financial plan which shall cover estimated receipts ... and expenditures of the government of Guam for the General Fund and all special funds....” (5 GCA § 4103.) 5 GCA § 4107(b)(4) requires the Governor to annually “present the proposed comprehensive program and financial plan “, to include a “summary of expenditures during the last fiscal year, those estimated for the current fiscal year and those recommended by the Governor for the succeeding fiscal year....”

Neither these plans nor reports discuss tax credits allowed under the tax laws, even though such credits do impact monies received. Why? Because tax credits are not “expenditures”.

How much does the Guam Legislature budget for these LIHTCs? Zero.

Why? Two reasons. First, the tax credits are discounted and syndicated to investors in the US and applied to tax liabilities to the US Treasury, not to the Government of Guam. Second, Gov
Guam does not "spend" any money on the LIHTCs. In the highly unlikely case that any of the credits are ever applied to a GovGuam tax liability, the credits act just like any other tax credit and simply reduce the liability; it does not require GovGuam to pay anything.

GHURA has never certified funds for these LIHTC allocations, because there are no funds to be spent. The Department of Administration has never certified funds for these allocations, because there are no funds to be spent. The Government of Guam has never cut a check for these allocations, because there are no funds to be spent.

The leading case to analyze whether the allocation of LIHTCs constitutes an “expenditure of public funds” is the California Court of Appeals case, State Building and Construction Trades Council of California v. Duncan (2008) 76 Cal.Rptr.3d 507, 162 Cal.App.4th 289.

Under California and federal Prevailing Wage Law, the prevailing wage must be paid to workers if the project on which they are employed is ‘paid for in whole or in part out of public funds’." The developer in that case argued the project was a private project, thus payment of prevailing wage was not required.

The issue in that case was whether the award of tax credits under a LIHTC program constituted an “expenditure of public funds”. The trial court ruled it did; the Court of Appeals reversed and ruled it did not. The Court held,
“Tax credits are, at best, intangible inducements offered from government, but they are not actual or de facto expenditures by government.” [Emphasis added.]
The Court of Appeals looked, in part, to tax decisions to describe the nature of LIHTCs.
“There is, moreover, an impressive body of authority, much of which was cited by the Director in his coverage decision, that excludes tax credits from the category of goods and services that amount to public assets or are treated as the equivalent of money. For example, within the context of California's personal income tax system, a credit is treated as something that "involves no expenditure of public moneys received or held ... but merely reduces the taxpayer's liability" at a future point in time. (Center for Public Interest Law v. Fair Political Practices Com, supra, 210 Cal.App.3d 1476, 1486, 259 Ca.Rptr. 21.) Federal tax law is to the same effect: it likewise does not recognize receipt of a tax credit as a taxable event, on the theory that the taxpayer "has received no money or other `income' within the meaning of the Internal Revenue Code." (Randall v. Loftsgaarden (1986),478 U.S. 647, 106 S.Ct. 3143, 92 L.Ed.2d 525 (Randall).) [Footnote omitted; emphasis added.] The credits "have no value in themselves," only the contingent benefit "to reduce the taxes otherwise payable." (Id. at pp. 656-657, 106 S.Ct. 3143; see also id., at pp. 657-659, 106 S.Ct. 3143 [credits have "economic value" only indirectly to extent they reduce tax liability].)”
The Court rejected the claim that convertibility of credits to cash made them an “equivalent of money”.
“The fact that LIHTCs may indeed be marketable by others, after they have been allocated by the state, does not establish that they have a realizable monetary worth to the state before they are allocated. (See Griffin, supra, 324 F.3d 330, 355 ["the only property interest the State has in the tax credits is purely abstract or theoretical, even after ... [the project] is completed"].)”
The Court rejected the argument that the State acquired or exchanged anything of value as a result of the tax allocation.
“[T]the operative point is that the purchase price is not paid to the state. The value for which would-be buyers pay accrues when the LIHTCs come within the disposition of the developer for the project, not the state. It is from the developer, not the state, that "persons or entities with tax liabilities" purchase an ownership interest in the underlying project. The buyer realizes the value of the tax credit only when – and if – the project is completed in a timely fashion, becomes operational, and remains so for a number of years.”
The Court acknowledged, as being beside the point, “that tax credits are an important mechanism for achieving objectives the Legislature deems in the public interest.” It said,
“But their undoubted importance and utility is not at issue here. Tax credits operate to reduce future tax liability, and cannot be used until the low-income project is built and operating. (26 U.S.C. § 42, subd. (f)(1); Cal.Code Regs., tit. 4, § 10328, subd. (a).) Further, any worth the credits may have is obviously predicated on the taxpayer having tax liabilities to offset. In other words, the worth of LIHTCS is, at the time they are allocated by the CTCAC, speculative and contingent upon future conditions. [Footnote omitted.]

“The United States Supreme Court has held that the mere receipt of a tax credit confers no economic benefit because the credits "have no value in themselves." (Randall, supra, 478 U.S. 647, 656-657, 106 S.Ct. 3143, 92 L.Ed.2d 525.)”
It concluded,
“LIHTCs are not property. Allocated LIHTCs represent only the possibility of future benefit that may be realized after construction or rehabilitation of the proposed project. (See Randall, supra, 478 U.S. 647, 656-657, 106 S.Ct. 3143, 92 L.Ed.2d 525; Griffin, supra, 324 F.3d 330, 355.) We therefore hold that they do not amount to either the "payment of money or the equivalent of money" within the scope of subdivision (b)(1) or the transfer of "an asset of value for less than fair market value" within the scope of subdivision (b)(3).” [Code references are to California Prevailing wage law; footnote omitted.]
The LIHTC program is part of the US Internal Tax Code, and is described by the US Department of Housing and Urban as an "an indirect Federal subsidy" underwritten by tax credits.

HUD further explains, "Each year, the IRS allocates housing tax credits to designated state agencies - typically state housing finance agencies - which in turn award the credits to developers of qualified projects. ... The state allocating agency must develop a plan for allocating the credits [a "QAP"] consistent with the state's Consolidated Plan. Federal law requires that the allocation plan give priority to projects that (a) serve the lowest income families; and (b) are structured to remain affordable for the longest period of time." (http://www.hud.gov/offices/cpd/affordablehousing/training/web/lihtc/basics/ )

One thing that stands out in the implementation of the LIHTC program is the lack of uniformity of application and implementation among and within the states and territories, due entirely to the broad discretion allowed to the administering agencies to tailor housing programs to address particular circumstances and answer different policies and needs.

The Guam QAP underscores that discretion:
• "The executive director shall have the right to defer the consideration of any application if, in his sole discretion, such deferral is deemed in the best interests of meeting housing needs."

• "The amount of tax credits reserved or allocated to a particular project will be limited to the amount GHURA, in its sole discretion, deems necessary to make the project feasible."

• "GHURA reserves the right to disapprove any application or project for any tax credit reservation or allocation, regardless of ranking under the criteria and point system as contained in section III of this allocation plan."

• "GHURA reserves the right, in its sole discretion, to (i) hold back a portion of the annual state and federal housing credit ceiling for use during later reservation cycles, (ii) carryover a portion of the current year's housing credit ceiling for allocation to a project which has not yet been placed in service, and (iii) under certain conditions, issue a reservation for the next year's housing credit ceiling."
I have to admit that these broad discretions do not sit comfortably with my sense of order under the procurement law. But the LIHTC program is not a procurement program, and we cannot judge it as such. It is simply a tax incentive, offered under limited conditions, to achieve a socially desired policy objective, like so many other tax credits, deductions and allowances.

The procurement law is not some over-arching paradigm against which other government activity must be governed. As broad as is its relevance in day-to-day government operation, it is nevertheless proscribed by application solely to contracts made by the government, involving the expenditure of public funds, to acquire for itself supplies, services and construction. It is to tax law, and here specifically US tax law, that parties must look to their rights and remedies as regards LIHTCs, not the procurement process.

Sunday, December 25, 2011

Putting "potent" back in "potential"

Government contractors beware: 2012 may be the year of the government audit.
Government contractors have always faced an abundance of potential audits.

Financial scrutiny of contractors is expected to rise as the government expands its auditing workforce and the contracting pie shrinks. Agencies are coming under greater congressional scrutiny, and public pressure is mounting to ensure the taxpayer is getting the best deal.

One indicator came in a Nov.15 directive from Office of Management and Budget Director Jacob J. Lew, who ordered federal agencies to put more resources and emphasis into their suspension and disbarment programs.

Lew referenced a recent Government Accountability Office study which, he said, found that “more than half of the 10 agencies it [GAO] reviewed lacked the characteristics common among active and effective suspension and debarment programs: dedicated staff resources, well-developed internal guidance and processes for referring cases to officials for action.”

While no two audits are the same, government auditors are likely to place a greater emphasis on internal controls during 2012.

They will review your stated policies and procedures to determine the strength of your control environment, then typically make a random selection of transactions (for example, vendor invoices, employee time cards, travel vouchers) and scrutinize supporting documentation.

The auditors are looking to determine if the contractor’s policies and procedures were followed, approvals documented and internal controls enforced.

In addition, there are now many prospective government contracts that will be awarded only after rigorous assessments of the adequacy of the contractor’s business systems and internal controls. Contractors now will simply pass or fail, rather than possibly passing with certain deficiencies. All deficiencies must be addressed successfully before the contractor’s system is deemed adequate, and the contract awarded.
As always, read the linked articles for more.

PIGGYBACKING: Rather than a new post, below is another article, from Bloomberg, in the same vein, albeit noticed a couple of days later.

Fraud Fight Has U.S. Seeking to Ban Record Number of Suppliers
Federal agencies have proposed blocking 1,006 companies and individuals from contracting so far this year, as well as asking a judge to ban a unit of food-processing giant Cargill Inc. of Minneapolis, in a process known as debarment.

U.S. agencies are under pressure after a series of congressional hearings and reports from inspectors general and the Government Accountability Office faulted procurement officials for failing to keep unqualified or ineligible vendors out of the $500 billion-a-year federal market.

Contractors can be proposed for debarment for poor performance as well as a variety of ethical issues, including overbilling or falsely claiming a company is owned by a disabled veteran in order to win special awards. In some cases, debarment is automatic, such as when a contractor is convicted of violating the Clean Air Act or Clean Water Act. Debarment typically lasts three years.

The number of contractors suspended from winning work has also surged, to 1,044 so far this year, up 40 percent from last year’s 747 and the most of any year since at least 2000, according to the GSA data. Suspensions are typically for short periods and can be initiated with less evidence than proposed debarments because they are designed to protect the government while investigations are occurring.

The Small Business Administration has expanded its efforts to ban contractors by looking across agencies for companies that misrepresent their size or ownership status to win work reserved for small vendors or companies owned by disadvantaged groups, said John Klein, the agency’s acting director for government contracting and associate general counsel for procurement law. “The mission is to make sure that legitimate small businesses benefit from our program,” Klein said.

Some contractor advocates say the government may be too aggressive in pursuing debarment in some cases, since even proposing a company for debarment means it won’t be able to win new contracts until the situation is resolved.

After a company has been proposed for debarment, it can take a year or more before a final decision is made, said Robert Burton, a former acting administrator of the Office of Federal Procurement Policy during the Bush administration who is now a partner at Venable LLP in Washington.

Moira Mack, a White House Office of Management and Budget spokeswoman, said the agency provides due process to all contractors facing suspension or debarment.

“For too long, the government failed to use suspension and debarment, even in the face of egregious conduct by contractors,” Mack said in an e-mailed statement. “That’s why this administration has been pushing for tougher oversight of contractors, and we’ve seen results.”

Read more: Fraud Fight Has U.S. Seeking to Ban Record Number of Suppliers
Important: Can you afford to Retire? Shocking Poll Results





Friday, December 23, 2011

Keep your specs on

If your vacation was ever taken in the manner that many solicitations are processed, you'd never get there, or get where you intended, or get back again.

When planning a vacation, you very carefully (unless on a free-abandon adventure) decide where you want to go, when and where to stay, what to do, etc.; and if you can book the time and place. You also want to shop around for best prices, appropriate accommodations, class of travel, etc.

Then, absent misadventure, you stick to the plan and have the photos to prove it. Even if, along the way, you realize you could have done things a bit differently and saved yourself a little money or convenience.

Once everything is planned and booked, changing plans becomes expensive and often impossible. You have, after all, caused airlines, hotels, tour companies, etc., to modify their plans to accommodate yours. Upsetting you plans causes them inconvenience and often costs and damages.

Procurement should be approached with the same understanding.

First, determine what it is you need. Then find out if it is available in the market. Write the specifications you need to get that. Then get quotes, and go and have fun.

What we too often find with procurement, though, is that people want to change their plans after the bookings have been made and deposits paid. The following article from Suffolk, Virginia, USA, illustrates this common occurrence.

Contract lawsuit dismissed
A lawsuit against the city of Suffolk was dismissed this week after the city canceled a contract it had signed to purchase a mobile command bus for the police department.

The lawsuit involved a mobile command vehicle the Suffolk Police Department planned to purchase with a Port Security Grant of more than $600,000.

The bus, according to a presentation to City Council by Police Chief Thomas Bennett earlier this year, would help the department improve its response to natural disasters, hostage situations and other incidents.

Matthews Specialty Vehicles Inc., submitted a bid of $655,292 for the vehicle. Farber Specialty Vehicles submitted a lower bid of $589,000 and was given the contract.

Matthews promptly cried foul, saying that Farber’s bid did not follow the specifications listed in the bid invitation, including for such things as the width and weight of the bus, dimensions of the radiator, construction and flooring materials, the style of cabinets and ceilings and more.

After the lawsuit was filed, Suffolk Circuit Court granted an injunction that prevented the city from proceeding with the purchase until the trial was concluded. Matthews alleged that Suffolk had violated the Virginia Public Procurement Act.

Thursday, December 22, 2011

Trading on inside information unfair to competition

The Office of Inspector General of the US Dept. of Veterans Affairs has determined that it was unfair to award a contract to an incumbent based on an evaluation that gave the incumbent points for its knowledge of the existing system and reduced points for bidders who lacked that knowledge. File this under leveling the playing field.

Final Report: Review of Secure VA-Chief Information Security Officer Support Services Acquisition Process
The technical evaluation process favored awarding the contract to the incumbent, Booz-Allen Hamilton, based on its performance as VA’s Information Assurance and Information Technology Security Services contractor for the past two years.

Documentation shows that the panel considered knowledge or unfamiliarity of VA procedures and practices as “strengths” or “weaknesses” in assessing the “understanding of the problem” requirement in the RFQ. As a result, the panel assigned nine “significant strengths” to the Booz-Allen Hamilton proposal; six of those “strengths” made specific references to knowledge of VA procedures and practices.

However, the lack of knowledge of VA procedures and practices was identified as a weakness in the evaluation of other offerors. The strengths and weaknesses associated with knowledge of VA procedures and practices were key factors in the decision to award the contract to Booz-Allen Hamilton.

VA traded off lower cost in favor of vendors’ technical knowledge of VA procedures and practices in evaluating the offers. If knowledge of VA procedures and practices had not been used as a key evaluation factor, another vendor might have won the contract at lower cost to the Government.

Booz-Allen Hamilton’s proposal was the highest cost option; however, the weighting of its knowledge and experience with VA procedures and practices was a key factor in Booz-Allen Hamilton winning the technical evaluation and ultimately the contract award decision.

We disagree with Management’s contention that Booz-Allen Hamilton’s nine significant strengths justified selecting it for contract award despite the fact that it was the highest bidder. As noted in the Source Selection Decision Document, Booz-Allen Hamilton’s cost of approximately $133 million reflected a premium of 16 percent ($18 million) and 22 percent ($24 million) over the two other offerors.

VA justified this premium because of the perceived significant strength and low technical risk from Booz-Allen Hamilton’s extensive knowledge, understanding, experience, and expertise in support of VA’s enterprise-wide information security and risk management program.

Further, although it would have been helpful to substantiate the selection decision, Management did not provide a labor-rate cost analysis justifying the premium price paid for the contract award. Such an analysis would have compared the labor rates of all proposals and determined whether Booz-Allen Hamilton’s labor rates were reasonable.

While the award decision may have resulted in a low risk to the Government and a decreased learning curve as Management asserted, VA should not have paid a premium price for the incumbent’s knowledge.

In our opinion, favoring the incumbent during the selection process did not promote full and open competition in accordance with the Federal Acquisition Regulation.

This practice puts VA at risk of awarding future “de-facto” sole source contracts at greater expense to the Government because of reduced competition.

Management based its assertion on a GAO ruling that “It is common for an incumbent to possess and receive evaluation credit for unique advantages which the government is not required to neutralize, and this advantage does not constitute an unfair competitive advantage or represent preferential treatment by the agency.”

We agree that organizational knowledge can be a key consideration in evaluating offers and a deciding factor when multiple bids are indistinguishable.
[Subtext: Here, bids were distinguishable by significant price differentials, without justification the price paid was reasonable.]
However, this ruling as well as another GAO decision cited by Management further emphasized the importance of disclosing in the RFQ how relative experience will be evaluated during the selection process and when giving credit to the incumbent. As such, VA should have identified such knowledge as a significant evaluation factor in the RFQ before using it as criteria for rating purposes. We maintain that the Department’s failure to disclose knowledge of VA practices as a significant evaluation factor prevented all vendors from submitting comparable proposals to emphasize their specific VA experience, placing potential contractors at a disadvantage in the bidding process.

Therefore, we will evaluate VA’s contract award decisions in future audits to determine if evaluation panels assess vendor proposals based solely on evaluation factors stated in the solicitations.

Friday, December 9, 2011

Red tape or red herring?

It is a perennial ruse of political detractors and government agencies to blame the procurement process for the failure of politicians to appropriate and government to properly spend. Here's a current example.

MPs brand MoD’s procurement ‘extraordinary failure’
In a report published today, the PAC[Public Accounts Committee] found that, since the 1998 Strategic Defence Review, there had been an ‘extraordinary failure’ to produce necessary principal armoured vehicles. These include tanks and other reconnaissance and personnel-carrying vehicles.

The PAC blamed budget cuts, an overly complex procurement process and an ‘unrealistic culture’ where the MoD was demanding cutting edge technology it could not afford.

As a result, the armed forces will not have enough vehicles until at least 2025, making it more difficult to undertake essential tasks such as battlefield reconnaissance.

The reasons for this were ‘all too clear’, committee chair Margaret Hodge said, because £10.8bn had been taken from the armoured vehicles plans in the last six years as the department sought to balance its budget.

She added: ‘The MoD seems as far away as ever from establishing a clear set of affordable defence priorities. The problem for the armoured vehicle programme is that the department has yet to say how it is going to find the money to buy the vehicles it needs in future to carry out the full range of military tasks.’

Around £5.5bn will be spent on new armoured vehicles in the next ten years, but the report also warns this may be insufficient. It calls on the MoD to set out clearer procurement priorities, and to stop ‘raiding’ the armoured vehicles funding every time it needs to make savings.

As a result of the failure to produce vehicles through its core procurement programme, the department needed to be given £2.8bn by the Treasury to buy vehicles for the separate Urgent Operational Requirements programme.

The faster UOR process has been used to deliver mine-resistant vehicles for operations in Iraq and Afghanistan, but these are more expensive, the MPs said.

Responding to the report, defence minister Peter Luff said that ‘the armoured vehicle programme was left in a mess by the previous government’.

He added: ‘We are now sorting out their unrealistic and unaffordable plans by balancing the budget, investing real money in equipment and reforming outdated procurement practices.’
However, the minister said that the PAC was ‘misrepresenting the facts’ of some procurement deals.

‘It is not true to say the £1.1bnspent on armoured vehicles has not delivered any equipment. It has delivered Titan, Trojan and Viking vehicles, with Trojan and Viking used on operations in Afghanistan.’

He also said that the UOR process has been used correctly to ‘swiftly deliver world-class equipment to the frontline’.

While there may indeed be some problem with the procurement process, it was not detailed in this article. What was detailed is a failure of government to live within its means and aims. It then must resort to less competitive emergency procedures to compensate for its failure to properly plan and manage its acquisition needs, and, as this again reflects, emergency acquisitions tend to be more costly, if more expeditious, than competitive ones.

(For those unfamiliar with the term, "red hearing" refers to a
deliberate attempt to divert attention. See, Wikipedia here and here.)

Procurement controversies -- Hungary

Some of the story reported below is lost in translation to English, but the gist is clear.

Public procurement council contracts for spiffy new office – without public procurement tender!
In an almost comic display of the weak state of public procurement safeguards in Hungary, the country’s Public Procurement Council (KT) awarded a contract worth hundreds of millions of forints for the fit-out of its new offices without ever announcing an open bid tender for the job.

Transparency International said it asked the Competition Office and the State Audit Office to instruct the Public Procurement Arbitration Committee (KDB) to launch an investigation of the deal. But the KT said the technical specifications of the project excluded all other procurement options and that the KDB had approved its choice.

Monday, December 5, 2011

The difference between government acquisition and procurement

(Note:  Given I get a lot of hits to this article, let me clarify that procurement and acquisition are each defined in terms of the other.  The ABA Model Procurement Code defines the term "procurement" in terms of the "acquisition" of something (see, e.g., Guam's Model Code enactment at 5 GCA § 5030(o)). The FAR defines the term "acquisition" (see Subpart 2.101 (b), "Acquisition") and then discusses acquisition in terms of a procurement; it's definition of "procurement" in that same subpart says simply,  “Procurement” (see “acquisition)"

Without being pedantic about it, I use the terms with a nuanced difference detected in the common parlance:  acquisition is purchasing something without the trappings beyond mere contract law, but procurement is a formalized process, typically infused with a regime of accountability, transparency, due process, financial controls, and other trappings associated with bureaucratic, if not necessarily governmental, purchasing.  My use of the two terms here is more of the common connotations, not the technical.)

Government can acquire its needed construction services or it can procure them. This is an example of how a government simply acquires them:

Auditors Find Rampant Problems In Highway Construction Inspections
This report is a follow-up to a July audit that detailed potentially criminal, ethical and contracting violations in the [Maryland] State Highway Administration's Office of Construction.

auditors uncovered a contracting system that had few rules of its own and skirted existing law.

Contractors often used creative accounting to transfer unspent funds between different projects. Meanwhile, the construction inspection office did not maintain any documentation of what contractors were supposed to do, and had no standard method of estimating how much different projects should cost.

Contracts were often extended and modified without the required step of getting Board of Public Works approval, and new contracts were often awarded when there were still contractors doing work.

Maryland is broken up into several regions by the State Highway Administration, and construction services inspection contracts are given to people and agencies who will do inspections in a region for a fixed amount of time. State procurement law states that money can only be spent on the contract for which it was approved.

Auditors found that contractor were often involved in performing inspections in several areas, and tended to move the money they received between areas to cover for funds that ran out. For 10 contracts auditors looked at, nearly a fourth of all funds - about $11 million - were spent on different projects.

Contracting staff told auditors that this kind of borrowing funds was an accepted practice in their office. Myers said that this procedure is not accepted anywhere else, and he cannot recall finding another department doing this in other audits.

Auditors also found that administration staff also unilaterally extended contract times, never bringing any of the contracts to the Board of Public Works. The reason that contracts would be extended, the report states, is so unspent money in the contracts could get spent. About $26 million spent through unauthorized contract extensions should have been returned to the state for other needs, auditors wrote.

Construction inspection services contracts were often missing several critical pieces of information that could be used to ensure the state was getting its money's worth. Auditors found that contracts had no scopes of work - detailed lists of tasks that must be done under the contract.

Office of Construction personnel told auditors that the contracts were detailed enough, and putting together a scope of work for each one would be cumbersome. Auditors disagreed on both counts.

Auditors also found that there was no single way to determine the maximum amount that a contract could be worth. Auditors examined four contracts worth $34 million, and asked the office for documentation backing up the money spent on each. No sensible documentation was provided, and different employees gave completely different methods of trying to estimate the costs.

The office sometimes gave inspection contracts for an area to multiple contractors. Auditors found that far too many contracts were given for no reason. One area had $15.4 million unspent on inspection contracts, and received Board of Public Works approval for another $16 million. Another area had $36.5 million in unspent contracts floating around, and received Board of Public Works approval for another $10 million.

Auditors received no justification for these initial contracts, and reported that the office never reported the amounts of other pending contracts to the Board of Public Works.

This is quite remarkable -- and ironic -- since Maryland was an early adopter of the ABA Model Procurement Code and seemingly had implemented it statewide. It just goes to underline the importance of properly implementing the system that is actually adopted.