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Tuesday, April 1, 2014

Bundle bungle leads to huge up front cost savings

Being an incumbent can have its advantages, amongst them knowledge of how the contract administration process runs after the contract performance begins. This knowledge can at times give the incumbent a price advantage at bid opening, but the onus then is great on the government to contain performance cost increases.

On Guam, the government had lapsed into the habit of awarding, often without any competition, and usually with unduly specifications, copier contracts to one of a couple of competitors. 

When after at least a decade of such behavior, one large agency was forced to open the work to competitive bids, the incumbent shocked the competition with a bid roughly 50% lower than it had been getting under prior contracts.  But, in a review of the contract performance under the new award, the OPA found that the running costs under the new contract had shot up so much that those costs dwarfed the bid price.

This case concerns the competition, if it can be called that, between Motorola and Raytheon for emergency communications equipment. Read the whole article at the link, as usual, because I truncate and often rearrange the excerpts, and leave out some really good stuff; the related and linked stories mentioned in the article add valuable context, too.

How Motorola bested Raytheon and captured L.A. County’s emergency radio contract
Rather than signaling a new burst of competition in a taxpayer-financed market, the outcome is another reminder of how difficult it’s been for competitors to overcome Motorola’s dominance.

It looked in the summer of 2011 as if electronics giant Raytheon Corp. had gained a major foothold in the U.S. emergency communications market long dominated by one company: Motorola. Raytheon had been selected as the prime contractor for a sprawling, $600 million communications system connecting Los Angeles County’s public safety agencies with those of Los Angeles and more than 80 other cities in the county, two school districts and UCLA via the latest in two-way radio and high-speed broadband technology.

Like large urban areas across the country, Los Angeles County spent years working to meet a drumbeat of interoperability edicts from Washington. The goal was to unite local first responders in a seamless communication system that could withstand a terrorist strike, an earthquake, a wildfire or some other disaster.

In 2010, the newly formed Los Angeles Regional Interoperable Communications System, or LA-RICS, solicited bid proposals for a two-way radio system and a new broadband network. Raytheon’s negotiating team only needed to work out the design details with a joint government authority. Raytheon and the joint powers authority were in a final exclusive bargaining period when things got tangled.

A Los Angeles County attorney declared that the procurement violated an arcane state law because it bundled the radio and broadband systems with the construction of towers in a single “turn-key” contract. Under the law, construction projects had to be bid separately, the attorney reported. Motorola, however, had for years built turn-key projects in California that mingled tower construction and radio electronics.

Patrick Mallon, the executive director of LA-RICS, said in a phone interview that if the authority had proceeded, construction bids would have had to have been taken for each of 300 towers, posing “astronomical risks” if anything went wrong. The state legislature rushed a legislative fix into law, but LA-RICS started the process anew anyway, breaking the radio and broadband networks into separate contracts.

In the final round, the radio system was revised to end Los Angeles’ use of a commercial television band width and shift to a 700-megahertz band set aside for emergency communications. Motorola’s winning bid was a jaw-dropper: $280 million, or about half of its first-round bid and $135 million below Raytheon’s price of $415 million.

The question is, will contract modifications raise Motorola’s price?

For example, public records show that LA-RICS’ subject matter experts concluded that many of Motorola’s towers exceeded government height limits, a characterization that Mallon disputed. If shorter towers must be built, more towers costing up to $1 million each will be required, because their signals don’t extend as far. The authority has agreed to hold Motorola responsible for no more than $2 million of any additional tower costs.

Raytheon also announced that it was dropping out of the broadband competition and left empty handed.

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