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Tuesday, September 25, 2012

Oligopoly in competition's clothing?

Competition is the cornerstone of most procurement regimes, but doesn't always yield lowest price, as anecdotally seen in a recent post. I would also want to have more information about the anomalous result indicated in the following story. (It would help to read the whole story to understand the context of this extract, as is usually the case in items reported here.)

Health insurance costs grew slowly for two years. Now, they’re speeding up.


Anderson argues that stronger government intervention is necessary to slow price growth in the health-care market. He points to the example of Maryland, the only state where the government sets the rates that hospitals can charge insurance companies.

The program began in 1976, when Maryland’s per-admission hospital spending was 26 percent higher than in the rest of the country. Between 1977 and 2009, the state’s hospitals “experienced the lowest cumulative increase in cost per adjusted admission of any state in the nation,” researchers in the Journal of American Medical Association concluded.

“Hospital prices have been held down substantially,” Gerard said of the Maryland experience. “And private insurers pay the same rates as public insurers.”

Such efforts, however, have fallen out of favor in other states. Congress gave states the authority to set payments in the early 1970s. About 30 states went on to do so. All states except Maryland gravitated away from those models, as states have looked for more competition and less regulation in health-care markets.

Monday, September 17, 2012

Beauty contest or drawing straws?

This article is about the debate over negotiated best value versus lowest price technically acceptable ("multi-step") competitive bidding. The subplot is whether one source selection method necessarily determines a more optimal outcome. If all facts, past, present and future, were known, best value would be a no-brainer, but best value has not insulated government from cost overruns or less than optimal contractor performance.

OFPP lets DOD deal with pricing complexities first
the Office of Federal Procurement Policy looks to DOD's experience for guidance on the balance of price against value in contract awards, [as revealed by] Joe Jordan, OFPP administrator, at a recent breakfast hosted by the Coalition for Government Procurement. “The bottom line is it’s just a tough area, because you’ve got tricky incentives,” Jordan said.

Generally speaking, he said industry likes best-value procurements. They allow companies to propose higher prices, since officials will consider other evaluation criteria beyond price. On the other hand, the government is pushing low price and not always fully analyzing the entire lifecycle of a project, Jordan said. Both sides have good arguments, so the contracting officer's judgment is the final arbiter.

“It’s always a challenge with the overburdened acquisition workforce, but I think we’re at a place where we need to do some more analysis, having some more conversations with industry and agencies, especially the Department of Defense, to figure out exactly where equilibrium lies,” Jordan said.

Industry experts have been increasingly concerned that federal officials have developed a lowest price technically acceptable attitude for their procurements.

Larry Allen, president of Allen Federal Business Partners, said “They [DOD] seem happy with the drive to low price and uninterested in whether it may be misapplied in some circumstances.”

In his speech, Jordan said both the lowest price technically acceptable and the best value procurements have their place. He emphasized that he isn’t choosing one over the other.

“Do both, but do them at the right time,” he said.

Read more at the link to the article above.
The problem is that no one can predict the future. One method gives the procurement officer a warm fuzzy feeling at the time the bid is awarded, in the belief that "best value" has been achieved. The other gives the procurement officer cover from second-guessing score keepers of her career. But either method can, and too often does, yield to buyer's remorse when the winning bidder hits the road.

Buyers like to find comfort in dealing with proven bidders with known track records, thus tend to favor "best value" and its "old boy" network of quantifiable "past performance". But multi-step must also be made only after the responsibility of the bidder is determined, so I tend to suspect that the presumed reliability of "past performance" is a red herring, deflecting the process away from competition from newcomers, erecting unnecessary obstacles to market entry.

It's a case of choosing a winner by beauty contest (best value) or drawing straws (lowest price technically acceptable). Only time will tell which method truly gives the government what it actually seeks at the most optimal cost over the life cycle, through an efficient source selection process.

And there is no "right time" to make that choice before the ultimate facts are known.




Friday, September 14, 2012

Competition does not always assure fair and reasonable price

In going through my woodpile, I came across this old Comptroller General opinion that I hope you find as instructive as I do.

The protest concerned an award to provide paint and was made by an incumbent. The award was made when three bids were submitted, but the incumbent was not advised to bid (the protest timing issue is interesting, but not the point of this post; read the Decision if you're interested in that aspect).

Excerpts follow.

Matter of: Crawford Laboratories File: B-277069 Date: August 29, 1997
We sustain the protest because the agency has provided no rational basis for its price reasonableness determination.

Prior to the awards, the contracting officer determined that Hanley's and Durant's
prices were reasonable. The contracting officer's price analysis recognized that the
prices bid on the two subitems of item 3 were "substantially higher" than the prices
that the agency had paid for those items on the prior contract. In fact, the bids
were more than double the prices that the agency had paid previously. The record
shows that the award prices for item 2 and item 4 also were more than double the
prices for those items on the prior contract.

To support the determination of price reasonableness, the contracting officer noted that there had been competition, with three bids "within a competitive range of each other" and that the Price Producers Index (PPI) for 1994-1997 showed the cost of the ingredients used to manufacture the primers had increased by 13.5 percent during that period.

While comparison of prices obtained competitively ordinarily may provide a basis for determining the reasonableness of prices, here, where all prices are significantly higher (at least double) than the prior contract prices, we think without some analysis or explanation for the higher current prices, the comparison of the bids alone is insufficient to support the determination.
For example, FAR § 15.805-2 identifies a number of price analysis techniques--such as comparison of the prices received with the published price lists or market prices, an independent government estimate, or prices obtained through market research--which a contracting officer may use to ensure a fair and reasonable price.
In spite of the agency's after-the-fact explanation, other than the comparison of prices received under the current solicitation, the contracting officer apparently did not use any of the other price analysis techniques identified under FAR § 15.805-2. In short, the record lacks any meaningful support for the price reasonableness decision, and we conclude that the contracting officer failed to satisfy her obligation under FAR § 14.408-2 to determine that the award prices were reasonable.

Unless the contracting officer can adequately justify the reasonableness of those prices in accordance with FAR §§ 14.408-2 and 15.805-2, we recommend that the contracts on items 2 through 4 be terminated for the convenience of the government and be recompeted. Further, we recommend that Crawford be reimbursed its costs of filing and pursuing the protest, including reasonable attorneys' fees. 4 C.F.R. § 21.8(d)(1).

Thursday, September 13, 2012

Virgin Islands Governor draws the blinds

Virgin Islands governor vetoes transparency bill
The governor of the U.S. Virgin Islands has vetoed a bill that would have made it easier to track spending by the Caribbean territory’s government.

The bill would require officials to create publicly searchable online databases detailing grants, contracts and other government expenditures. It would have included spending on salaries, travel and office supplies down to $100.

The legislation passed 14-0 in the Senate in August. It was introduced by Sen. Nellie O'Reilly, who argued it would allow taxpayers to track spending and give the government more legitimacy.

A statement released Wednesday by Gov. John de Jongh says that he endorses the bill’s objectives, but that he has vetoed it because there wasn’t any funding designated and it didn’t apply to all branches of government.

Even an incomplete transparency law would seem to me to be a good start. Now it will not even be possible to see if the glass is half empty or half full.

Monday, September 10, 2012

Singapore sceptical of one bid received

Procurement controls tightened after investigation into foldable bikes: Khaw
"Whenever a quotation or a tender attracts a single bidder, my instinct is to ask 'why'. There must be many bicycle dealers out there.

"Although a single bid can be accepted under the public service procurement rules, I thought NParks could have recalled the quotation with a longer opening period to try and get more bids. With greater competition, I felt that NParks might have gotten a better deal."

Mr Khaw Boon Wan said in Parliament today that the Ministry of National Development has tightened its procurement controls and introduced new measures to enhance oversight, following the investigation into the purchase of 26 Brompton foldable bicycles - each costing S$2,200 - by NParks.

Among the changes announced last month is an extension to seven working days, instead of four, as the minimum opening period for quotations called by statutory boards to encourage participation from more suppliers, said Mr Khaw. Departments can also recall the quotations with a longer opening period if they feel it would help secure more competitive bids.

And the MND now requires any quotations resulting in single bids to be cleared in person by the CEO or Deputy CEOs. The Ministry has also updated its internal procurement guide to sensitise and guide all our officers in their purchases, said Mr Khaw.

I have discussed The dilemma of "only one bid received" in a prior post, and I encourage you to jump to that post for an expansive look at that issue. The lodestone for procurement is achieving fair and reasonable pricing through competitive sourcing, and when it is not obtained, effort must be made "to foster" it, in the words of the ABA Model Procurement Code, adopted on Guam.

And WIFCON.com provides a digest of US GAO cases decided by the Comptroller General shedding further light on the topic, such as the following:


Pegasus Global Strategic Solutions, LLC
If noncompetitive procedures are used pursuant to 10 U.S.C. sect. 2304(c)(2), such as here, the agency is required to execute a written J&A with sufficient facts and rationale to support the use of the specific authority. Our review of the agency's decision to conduct a noncompetitive procurement focuses on the adequacy of the rationale and conclusions set forth in the J&A. However, noncompetitive procedures may not properly be used where the agency created the urgent need through a lack of advanced planning. In addition, the urgency justification cannot support the procurement of more than the minimum quantity needed to satisfy the immediate urgent requirement.

Although the cases digested at the referenced site go to the justification requirement for conducting a non-competitive source selection process, they are useful to illustrate the counter-balancing actions needed to be undertaken to assure fair value when utilizing efficiency shortcuts by design or default.