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Tuesday, July 30, 2013

The price factor

Public funds are meant to be spent prudently and wisely. Not for the government purchaser is the joy of buying on whim, impulse and sheer abandon and show.

So, price is a factor, and a central factor, in any decision to dip into the public purse.

But how much of a factor? It, of course, depends. Getting something that is needed is always a balance of knowing fairly precisely what it is that you need, and how much do you need it compared to all the other things that are needed. It boils down to getting bang for buck: how much bang do you need and how many bucks can you justifiably spare to get it.

The need question typically precedes the buck question. If you need something desperately, you will pay dearly; if you don't, you won't. Just search for "price elasticity" to overwhelm yourself with reading and technical analysis of that simple commonsense equation.  Professional services, especially health care services, tend to be inelastic.

Guam provides a request for proposal process to acquire professional services. It is based on the model the ABA Model Procurement Code incorporated in its original 1979 form, but which has been since set aside. In this particular RFP process, the procedure first ranks responsive and responsible offers in terms of quality of service, and price pays no part in the evaluation or ranking. It is only after all offers are ranked that price becomes a factor. The process requires that the government negotiate with the highest ranked offeror first, to negotiate a "fair and reasonable" compensation. If it is unable to come to terms on fair and reasonable compensation with the highest ranked offeror, then it proceeds to negotiate with the next highest offeror for fair and reasonable compensation, and on down the list as necessary.

Thus, when obtaining professional services under that RFP process, price is a secondary factor, but ultimately determinative.

For the most part, government, and especially state, shire or municipal governments, do not acquire supplies and services that are unique. They tend to buy the same thing cyclically, or the same things that other organizations acquire; that is, they acquire standard commercially available supplies and services. If you think of these standard products as commodities, it typically hardly matters which one you select (discounting the personal taste or other ego factors). In that case, price matters first and foremost. It is essentially an auction process.

Thus, in the language of the ABA Model Code, the acquisition process for such supplies and services (and routine construction) is conducted by "bid": an Invitation for Bids. Just like at an auction, people bid the price they are willing to pay or accept, and the fine points of product or service differentiation are ignored (to the chagrin of marketing and brand managers). It is a simple equation: low bid wins. Price is the only factor.

And to digress a moment. First, there is a variation on the bid process for non-standard supplies or services whereby bidders first offer supplies or services to be evaluated for acceptability to meet the described government need, but they are not ranked. All acceptable products are then determined and bids are then opened, with the lowest bid price taken. Second, it is worth pointing out that in the Model code, absent competition (such as when only one bid is received), as with the acquisition of professional services, the government must be assured that the price it pays is "fair and reasonable", otherwise it does not make that acquisition.

Then there is a middle ground, and it is murky, but only in the sense that objectivity is blurred, and subjective discretion is given greater weight than price. This comes in a variety of forms and nomenclature, such as "best value". It typically arises from an offer process, where proposals are submitted and negotiations take place before the government accepts a contractor. 

This process generally places a great deal of trust in the integrity, skill and market knowledge of the government purchasing team -- in a word, in their professionalism.   In this process, price is a component of the offer, and is negotiable along with other specifications, within the scope of the solicitation.  The price component is usually weighted by some specified proportion against other critical components, thus it is neither the first nor the last factor considered, but one that is blended with and weighted against other desirable, or nondesirable, factors.

Getting the ingredient mix, and especially the price ingredient, is a difficult task, as is any recipe. The choice of ingredients, and the proportions, can make a great souffle or a sorry one.

The difficulty in getting the recipe made in the first case is illustrated in the following story.

Jefferson Parish restores price as factor in evaluating service contractors
A new procurement reform that the Jefferson Parish Council has adopted restores price as a factor in awarding some service contracts. The council had removed price from the scoring in 2011. The ordinance says the price proposed by vendors will count for 20 percent of their overall grade by technical committees that score proposals. The law applies to non-professional services, such as landfill operation and catering, for which the government is not required to accept the cheapest proposal.

The non-profit Bureau of Governmental Research criticized that move as a precursor to favoritism. Most concerning to the organization was the council's broad authority to pick most types of service contractors, essentially relegating the evaluation committees to toothless advisory bodies.

That the legislative branch chooses contractors is "abnormal" on its face, the report stated, and the council's "nearly unfettered discretion" to disregard the committee recommendations creates "a fundamental conflict of interest." A better method, BGR said, is to uphold the evaluation committee recommendations, or at least to choose from one of the committee's top-ranking firms. The council has resisted the push for more executive control in choosing contractors.

Councilwoman Cynthia Lee-Sheng said a certain degree of council discretion is necessary. Evaluation committees might not know of vendor problems that rigid scoring criteria do not factor, such as recent mistakes with continuing projects. "Sometimes the technical evaluation committee might not have the newer information I might have," Lee-Sheng said. "I'm not going to blindly select the top ranked firm."

The new ordinance fixes price as a 20 percent weight. BGR CEO Janet Howard stated that a chief procurement officer should determine the importance of price in any given procurement. "If you are a hiring a consultant where you are really hiring their judgment and expertise, price would generally be a much lower factor, versus something that maybe is more of a service provider in which case the scope of work is well defined or routine," Purdy said.

Lee-Sheng agreed, stating that price should be a stronger consideration in grass cutting, for example, because the end result isn't likely to vary much. "I don't think it's ever really a great system," Lee-Sheng said. "At least if you set it at the beginning, no one can accuse anyone of messing with the formula."

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