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Sunday, January 11, 2015

Best buy based on price or value?

When you are standing in that long isle looking at all the shampoos available to you on the five shelves of product (as I experienced this last weekend), what moves you to choose one of them? (In my case, I just moved on, overwhelmed, deferring to whatever my wife decides to buy.)

Presumably, if you are a rational, frugal, person, you would choose the one that you needed, at the lowest cost. That requires filtering all the brand and other marketing temptations, of course, and knowing if you have oily hair, itchy scalp, or other conditions you are trying to address (adding color, conditioning, or ego boosting marketing imagery). Thus, you really do need to know what you need if you are going to be a smart shopper, before you go to the store.

But when your requirements are novel, either because you are going where no man has gone before, or whether the vehicle by which you want to get there is in the flux of major technological changes, you need to do more homework, have an open mind about what you do in fact need, and be prepared to pay more than one particular product costs in order to get what you think will better suit your anticipated but unarticulated circumstances.

That is the main reason for a variety of government contracting procurement methods: one size does not fit all.

But, it is important to understand why one method is superior to another, and, critically, to understand the role price pays in each different method. The article below is about what the US federal contractors call the low-price/technically acceptable source selection technique, known as LP/TA. Those of us more closely aligned to the ABA Model Procurement Code refer to it as the "multi-step" bid process. 

Don't be confused by the terminology. Under an Invitation for Bid and under the LP/TA price is the ultimate determiner for award: low price wins. The difference is that in the plain vanilla IFB, the final specifications are in the bid package (subject to minor changes along the way), whereas under the multi-step bid process, the government first solicits "unpriced technical offers" and the means is established whereby both the technical offers and specifications can be fine-tuned (within the scope of the original solicitation) before a call for final prices.

This is why it is absolutely essential in every method of source selection, especially low-price bids, to carefully identify the absolute minimal needs requirements and clearly communicate that to vendors by translating that into specifications that can be understood by the lowest common denominator of experienced reader -- the judge.

The low price scheme differs from the negotiated contract/"best value" procurement method, where low price is not determinative, with price being only one of several factors in determination of award. To the extent that the non-price factors are more subjective than objective, fairness and accountability for award determinations are more problematic than with low-price bids.

The risk factor must also be considered in making the choice of procurement method. Under the low-price method, the government bears the risk of identifying its need and translating that into specifications. Under the "best value" method, the government bears the risk of paying too much for something it doesn't understand, ending up with something it may not need. 

(It's having that kind of risk that led me to walk out of the store and "let" my wife select the shampoo.)

With that backgound, read the following articles in point and counter-point; don't just take my rendition of it, though -- read the articles for stuff I leave out, rearrange and paraphrase, etc.

Finding a Bargain for Government Buyers Shouldn’t Be a Crime, by J. David Cox J. David Cox Sr. is national president of the American Federation of Government Employees.
Contractors, who bill taxpayers a whopping $500 billion annually for goods and services, hope to use the “acquisition reform” moniker to minimize the importance of cost-efficiency in the federal acquisition process.

The No. 1 objective of contractors is to demonize the low-price/technically acceptable source selection technique, known as LP/TA, so that its use is greatly limited if not proscribed.

Contractors would prefer that DOD use a more expensive process called “best value,” which allows them to charge more for features that warfighters usually don’t need. A contractor who believes DOD should be asking for more can suggest additional features to the contracting officer, who can then include them in a new or revised solicitation, if necessary, so the most cost-efficient qualified contractor can then be identified.

The Government Accountability Office reports that DOD is using LP/TA more frequently to generate savings. GAO, however, dismisses contractor allegations that such savings come at the expense of quality: “Best value processes continued to underlie the vast majority of DOD’s new, competitively awarded contracts. DOD has increased its use of the LP/TA process in recent years for higher value contracts, and its decision-making regarding which source selection process to use did not appear to be ill-advised.”

Solicitous lawmakers profess fear that LP/TA’s emphasis on costs will erode contractor confidence and undermine the industrial base. Think tanks produce paid-to-order research that purports to demonstrate a link between LP/TA and poor goods and services. Helpful trade publications breathlessly report every contractor complaint about LP/TA, however unfounded. The goal of this public relations campaign is to enact prohibitions on the use of LP/TA or to at least make the technique so controversial that acquisition personnel will use the best-value technique instead.

There is a consensus in the so-called “acquisition reform” debate that the Pentagon needs to issue better and more detailed solicitations, which is another argument for preserving the LP/TA technique because it requires discipline and knowledge to write quality specifications and/or statements of work. In contrast, “best value” is often used as a crutch by agencies to allow contractors to tell DOD what to buy.

The key to successful use of LP/TA is for contracting officers to specify the critical acceptability criteria, which can often be easily accomplished with military equipment and services. Best value may be the appropriate technique when DOD doesn’t know precisely what it is seeking to purchase, or when the work is inherently difficult to describe. Acquisition personnel represented by the American Federation of Government Employees believe that the LP/TA technique provides the necessary level of performance at a lower cost to the government.
Acquisition 101: When a Bargain Isn’t a Bargain by Eric S. Crusius, a partner with Fed Nexus Law, who focuses on government contracts, cybersecurity, employment law and complex litigation.
LPTA certainly has its admirers, but even the most ardent supporters in the contracting community recognize its severe limitations. Nevertheless, J. David Cox, national president of the American Federation of Government Employees, offered a full-throated endorsement of LPTA in a recent column in Government Executive. Mr. Cox stated the reasons why LPTA is preferred to the “best-value premium” approach to acquisition.

LPTA is simply a road leading to mediocrity.

Here are several reasons he is wrong:

“Best-value premium” is a misnomer because these procurements still allow agencies to choose the lowest cost option. With any best-value procurement, the agency always has the discretion to choose the lowest bid unless something compelling exists that is worth a premium. This approach allows agencies the flexibility to pick the option that best suits their needs.

LPTA is often used where it should not be used. “Lowest price/technically acceptable” can be an appropriate mechanism in highly regulated or commoditized industries, where there is little differentiation between minimally acceptable products [such as the vacuum cleaners he mentions in the article??]. The approach, however, is popping up in situations where marginal product quality is a differentiator (such as medical products used to care for soldiers) and in the outcome-based services industry. A long dissertation is not necessary to explain why that approach is highly problematic. Would you like it if your children’s school hired its teachers on an LPTA basis?

LPTA often ends up costing more. This contracting method frequently attracts contractors who are unable to fulfill the requirements or complete the work without great assistance from the government customer. (This can be the case especially when past performance is not evaluated.) Eventually, drives up costs. It has held true through time with products that are minimally acceptable—the example of the vacuum cleaner is illustrative. In addition, this contracting method is driving responsible contractors away from doing business with the federal government, resulting in less competition. In fact, the number of small businesses participating in the federal marketplace has declined over the past few years.

There are also social reasons to shy away from using LPTA, such as lower wages and benefits for contractor employees and the exclusion of small businesses from government contracting, all of which drives down the overall economy.

While LPTA certainly has its place in federal contracting, that place is a small defined box with highly commoditized requirements. Anything larger robs agencies of much needed discretion, drives valuable contractors away from the federal marketplace, and enriches lawyers like me with more potential clients seeking assistance in filing bid protests.

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