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Friday, April 21, 2017

The anti-competitive multiplier effect of having no effective scope of contract change limitations

Canberra outsourcing deal quadruples to $390 million
The Australian Department of Agriculture signed a technology support deal with EDS in 2009 for $96 million. Since then, EDS has been acquired by HP Australia, and HP has twisted and turned and split and merged to become HPE , HP Inc, or DXC Australia.

The comprehensive managed services arrangement runs the gamut of IT services. When Agriculture took the work to market back in August 2008, it envisioned the contract would cover managed desktop, desktop LAN, midrange, storage area networks, helpdesk, Macs, and project services.

Work orders signed in December last year have now taken the value of the deal to over $390 million, more than four times its original value. And this figure is likely to keep growing until 2022 when the present iteration of the deal expires, at which point it will be 13 years old.

Despite a recent clause added to the deal which allows the department to take it back to market at any time it wants “if the performance of the services does not meet clearly defined and agreed requirements or if the value for money requirement is no longer being met”, a spokesperson for the department told iTnews there were no foreseeable plans to market-test the nearly $400 million deal.

The Department of Finance confirmed that the Commonwealth procurement rules don’t place any cap on the number or value of amendments that can be applied to a federal government contract.

"In order to ensure transparency in government procurement activities, entities are required to report contract amendments and variations on AusTender, including any increases to the total contract value," Finance said. Since 2009, Agriculture has published 227 such variations on the procurement website.

The rules also dictate “any variation to a procurement contract should not significantly change the scope of the contract”.

The procurement rules do, further, insist that “officials must achieve value for money in procurement”.

Agriculture insists it is doing so - even in the absence of any real competition. It called in procurement consultants, who calculated it would cost the agency more to run a new approach to market than it stood to save.

“The review found that the third party service provider was delivering the services to the expected level for a price that was market competitive at that time," a spokesperson said.

IT outsourcing has long been a point of controversy in Canberra, where the cost of running complex and highly regulated multi-year procurement programs often convinces agencies to stay with the same supplier for many years.

In 2015 the Department of Health switched to Datacom after 15 years with IBM.

And the Department of Defence continues to insist it is too busy to refresh its paired distributed computing deals with Unisys and Fujitsu, which are nearing the 20-year mark.
In the US, the concept of scope of the contract is taken a bit more strictly. While not necessarily determinate, a "large" price increase raises the suspicion of a change beyond the scope of the contract.

Plus, the scope of the contract is examined in the context of the contract's intent as the time it was solicited, not during some evolutionary period of the services actually performed. A comparison of the actual services presently being rendered in comparison to those actually solicited in the original contract may reveal a change in the nature, scope and character of the service of such magnitude that the government, and taxpayers, would be better served if it went back out to bid.

Also, in a rapidly changing time of technology, when the field of competition could be expected to provide newer technology at more competitive rates, the change in the field of competition can also influence what is meant by a "significant" change in the scope of the contract.

Too often, the cozy arrangements with an incumbent and a procurement staff not wanting to be bothered to "foster effective competition", as the American Bar Association Model Procurement Code mandates, results in situations like this, where there is rampant contract price inflation. No appraisal (which is what the third party review was in reality) is as tell-worthy as good old-fashioned competition. A dozen expert opinions of a horse will not tell a winner from a loser better than the race.

Contract administrators must not only monitor the services rendered and paid for, they must also monitor the services contracted.

Wednesday, April 19, 2017

The lowest what?

Bid awards are meant to go to the lowest responsive bid from a responsible bidder, right?

Lowest what?

Too often, the assumption, therefore the focus, is on price: the sticker price. Lowest price wins, right?

But from the phrase "sticker price", we also get the phrase "sticker shock".

Sticker shock is what County Officials are coming to terms with as they near completion of a new 22-story Superior Courts building in downtown San Diego, California. Here's the story from the San Diego Union Tribune:

COSTLY ADD-ON AT NEW COURTHOUSE
The new building downtown county courthouse, designed with 71 courtrooms, will consolidate operations at the 1960s-era downtown criminal courthouse on Broadway, Family Court on Cedar Street and the Madge Bradley Building on Ash Street. The 110 deputies and community services officers working at those three locations will be transferred to the new courthouse.

It will cost an extra $3.3 million a year in staffing to resolve security risks caused by the design of the $555 million downtown county courthouse set to open this summer, county officials say.

They point, in part, to a cost-cutting decision not to build a $25 million tunnel under Union Street that would have allowed deputies to escort inmates directly from the Central Jail to the new Superior Courts building.

“This design difference imposes a measurable and higher level of security costs,” said a 2016 report by Sheriff Bill Gore and Helen Robbins-Meyer, the county’s chief administrative officer.

The San Diego County Sheriff’s Department provides deputies and community services officers as security at the region’s courthouses. The department said it needed 33 more positions on top of the 110 originally planned in order to safely move prisoners in and out of the new 22-story building, and to respond to any courtroom emergencies.

The tunnel from Central Jail to the new courthouse was part of the original construction plan, and Keim said the sheriff continues working with state and local leaders to get it built.

Without the tunnel, the plan is to bus jail inmates two blocks to a controlled entryway at the courthouse called a sally-port. Gore says the buses require extra supervision, as do extra holding cells added to the courthouse design.

Gore’s report, submitted to the state Department of Finance, said the new courthouse’s high-rise configuration “significantly affects the ability of deputies to respond to security issues, dangerous incidents or emergencies.”

He noted that a 2015 study showed an average of 16 such incidents per week at the current courthouse.

There will be up to four criminal trial courtrooms on each of 11 floors in the new building. The sheriff wants roving deputies available to run up or down stairwells to assist courtroom bailiffs in any emergencies. Using an elevator might actually be slower if deputies on multiple floors stop it to get on board, the report says.

Other “rovers” would keep an eye on large public spaces, including the lobby and food court. More deputies also are needed to run the five weapons-screening stations at the entrance.

Two felony arraignment courtrooms pose added concerns: They are on the first floor near the exit doors. That proximity, the sheriff’s report says, “presents an increased security risk for a successful escape of in-custody prisoners charged with serious felony crimes.”

The sheriff has asked the state to cover the $3.3 million estimated annual cost of hiring 30 more deputies and community service officers, and three sergeants.

San Diego County spokesman Michael Workman said, “We need $3 million. If that doesn’t happen, we’ll have to determine what to do. It would probably have to come out of (the sheriff’s) budget.”
So, to save the upfront price to construct the tunnel by $25 million in fixed today's dollars, the taxpayers (of either the State of the County) will have to shell out over $3 million a year in servicing expenses, which tend to escalate over time -- for the lifetime of the complex.

Such a deal to get a lower bid price! In just eight years that $25 Million up front price will look a bargain, but the court will be doing 8 years to life (cycle).

This is an example of contemplating bid prices on sticker prices. That is not the model used, however, in the ABA Model Procurement Code, nor the Guam procurement law and regulations, which are founded on the ABA Model Code.

Whatever the colloquial use of "lowest price" may describe the Model law and regulation require a more holistic analysis. It requires "bids will be evaluated to determine which bidder offers the lowest cost". Moreover, "Only objectively measurable criteria which are set forth in the Invitation for Bids shall be applied in determining the lowest bidder. Examples of such criteria include, but are not limited to, transportation cost, and ownership or life cycle cost formulas." (See, Guam regulation 2 GAR 3109(n)(4))

Nobody likes sticker shock. In a $555 million procurement, that is a rookie mistake.

Tuesday, April 11, 2017

When cooperating isn't as good as competing

An Editorial from the Pennsylvania TribLive:


Tribune-Review | Monday, April 10, 2017, 11:00 p.m.
Costs through the roof: Require competitive bidding
Closer scrutiny of how tax dollars are spent on school roofing jobs could well help taxpayers keep roofs over their own heads.

Pennsylvania is among 23 states participating in the Association of Educational Purchasing Agencies, “which funnels roofing projects through” national contractor Tremco, writes Robert Dziuban, Coalition for Procurement Reform executive director, in a PennLive column. He notes a survey that found Pennsylvania school districts buying roofs through the AEPA “spent $100 million more on the projects from 2005 to 2010 than they would have through public competitive bidding” — and that other studies have shown “the process of overcharging continues.”

Tremco corporate parent RPM International in 2013 paid $65 million to settle a whistleblower lawsuit filed by the U.S. Justice Department. The lawsuit alleged RPM “defrauded the General Services Administration and other government entities by overcharging on roofing contracts as far back as 2002,” according to Mr. Dziuban.

Cooperative group purchasing works for pencils and computers. “(B)ut construction projects are not commodities,” Dziuban reminds. State Rep. Kerry A. Benninghoff, R-Centre/Mifflin counties, agrees, saying “each school building is unique.”

Mr. Benninghoff is drafting legislation to require competitive, local-level bidding for roofing projects. Enacting such a law is a no-brainer. The sooner that happens, the better for Pennsylvania taxpayers.

Tuesday, April 4, 2017

Procurement controversies series: Ohio. Time after time...

Ohio awards millions in unbid IT contracts, sidestepping state policy, analysts’ protests
Time after time, state purchasing analysts warned that the pricey pending contracts were improper. “This position was unbid” ... ”No competitive procurement was issued” ... “The rates seem to be excessive” ... “The agency did not complete any competitive process” ... ”This position could have been filled ... with rates at least $63 less per hour.” The supervisors also repeatedly disregarded the agency’s own purchasing policy and sidestepped approval of the bipartisan state Controlling Board that serves as a check on spending on non-competitive contracts.

And, time after time, their superiors at the Ohio Department of Administrative Services overrode those concerns to award millions of dollars in no-bid, information-technology contracts, frequently paying more than $200 an hour — often to a company employing one-time Administrative Services executives, a Dispatch investigation found. As a result, Ohioans likely have paid much more than if routine competitive purchasing procedures had been used by the agency with the responsibility to “guide the use of resources on behalf of the public trust.”

Revolving door in reverse:

The high cost of contracting consultants' employees is underscored by a pair of instances in which the consultants later were hired by the state to perform similar duties — but at a sharply lower cost to taxpayers.

Gregory Jackson, one of Davis’ predecessors as the state’s chief information officer for five years (Davis was a 20-year agency employee who was named chief information officer in 2009 and became a deputy director two years later), left his state job in 2005. He was employed by Advocate beginning in September 2012, and through an unbid contract approved by Administrative Services, immediately became interim chief information officer at the Ohio Department of Medicaid. The company received more than $913,000, charging $218 an hour for Jackson’s full-time services until May 2015, when he departed both Advocate and the Medicaid department.

Jackson then returned to the state 10 months later as a full-time state employee in a similar job as head of information services at the Department of Job and Family Services. His hourly state salary of $67.31 — which yields $140,000 a year — represents less than a third of what Advocate was paid for his services. Advocate was paid $453,400 in its last contract for the services of Jackson, who listed a salary of $180,000 a year at Advocate on his state employment application. Jackson declined a request for an interview.

Peter McGeoch, Administrative Services’ IT director in the 1990s and an Advocate employee, worked at the Ohio Department of Higher Education through an unbid contract. His duties included advising Chancellor John Carey on IT issues. Records show McGeoch was hired for $150 an hour, for a total of $77,400, to work for three months ending in September 2016. A spokesman for Carey said McGeoch continued his work at $150 an hour under an extension with Advocate before departing in January. Advocate also was paid $456,000 in 2014 and 2015 for general consulting services provided by McGeoch.

A spokesman for the agency said that it did nothing wrong because its awarding of no-bid contracts is lawful under a waiver of competitive selection granted by the Controlling Board for the past 45 years. But the spokesman could not point to any law or another written policy permitting the awarding of contracts, even with the waiver, without first obtaining at least three price quotes from competing suppliers, as required by the department’s own policy.

The Department of Administrative Services oversees or handles most state purchasing. It also serves as the state property manager and human-resources and payroll office. Its Office of Information Technology handles most software and computer-system contracts for state agencies. The state spends more than $930 million a year on those agencies’ computer and information-technology needs. State agencies generally are required to obtain Controlling Board approval of no-bid or single-source contracts in excess of $50,000 per vendor per year. Last year, a department purchasing analyst pointed out a need to “help reduce the $75 million spent on consultants ... who have since 2006 received several million dollars in unbid work,” writing that some tasks could have been done at lower cost by other companies.

Administrative Services has not submitted any no-bid information-technology contracts for board approval during the past four years, records show. Top agency officials, such as Director Robert Blair and Chief Information Officer Stuart Davis, were not made available for interviews requested by The Dispatch. “The complexity of this subject matter does not lend itself to an interview,” wrote department spokesman Tom Hoyt.

“The majority of the identified (no-bid) contracts are for managing large-scale, complex IT projects and programs that span several years,” Hoyt said. “Items such as a pen or pencil can be compared or purchased in a like manner, apples-to-apples, while IT consulting involving specialized skills, knowledge and experience is difficult to compare in the same way.”

Among the findings from The Dispatch’s seven-month investigation:
‒ Advocate, a Columbus family of companies that has received in excess of $14 million in multiple unbid contracts since mid-2011, employs several former Department of Administrative Services IT executives who once worked closely with the state’s current highest-ranking IT officials.

‒ Stonyhurst Consulting, based in the Washington, D.C., exurb of Middleburg, Virginia, was handed more than $3 million in unbid IT contracts — again, many over the protest of Administrative Service analysts — that included pay rates of up to $250 an hour.

‒ Advocate also charged hourly rates exceeding $200 an hour. In fact, when a couple of its employees transferred to the state payroll, their wages were less than a third of what Advocate had charged the state for similar services.

‒ Despite insisting the no-bid contracts were proper, agency officials canceled some and sought price quotes following the protests of purchasing analysts. However, department leaders gave some contracts to Advocate and Stonyhurst anyway — even though they were the highest-priced.
The unbid contracts uncovered by The Dispatch were awarded without complying with an Administrative Services policy that since 2008 has required the agency to obtain at least three price quotes from competing suppliers, a process intended to save tax dollars by yielding lower prices through competition. The quotes are to come from pre-negotiated and pre-approved “state term schedules” that would-be contractors file with the state.

Hoyt said that policy is overridden by the agency’s receipt of a waiver of competitive selection each biennium from the Controlling Board, which consists of six legislators and a Kasich appointee. The waiver permits the granting of unbid contracts for specialized work and “to provide continuity of services,” Hoyt said. “It allows for a judgment call to be made by DAS.”

Addressing the purchasing analysts’ objections to sole-source contracts, Hoyt said they did not understand that the work was so specialized that it could not be obtained through the so-called staff augmentation contract at lower hourly rates. Analysts periodically have questioned supervisor justifications for some no-bid contracts, disagreeing that the work called for specialized expertise.

On June 4, 2015, acquisition analyst Andrew Miller flagged a $56,250 contract for Stonyhurst. “No competitive process has been completed,” he wrote. “I would recommend that the requester seek Controlling Board approval.” Davis responded that it was “not realistic” to seek the Controlling Board’s OK because the state fiscal year was ending June 30. Davis noted that the contract request was submitted in late April, but documents show the contract did not enter the state-vetting system until June 3. The contract called for one consultant to work 250 hours, at $225 an hour, during June, an average of 62.5 hours a week.

The Controlling Board waiver contains no language overriding Administrative Services’ three-price-quotes policy, which its own employees have written must be followed. The agency’s 127-page state procurement manual does not list any process for directly hiring “specialized” consultants through no-bid contracts. An internal department document also states that sole-source and no-quote contracts cannot be awarded in the manner used by the agency.

Opaque "transparency"

Most of the documents about the transactions are not easily accessible by the public. Administrative Services officials took more than four months to fulfill much of The Dispatch’s request for public records concerning vendors’ contracts. Some records still were being turned over last week — after nearly seven months.

A spokesperson for Kasich, who appoints the head of the Department of Administrative Services, referred questions to the agency.

The husband-and-wife team of Steven Zielenski and Jonelle St. John worked for a state IT contractor called Top5 before forming their own company, Stonyhurst Consulting. State purchasing analysts complained that the company’s first contract in 2015 for $128,100 to help with IT optimization efforts was unbid. Most of the company’s subsequent contracts also were flagged as “unbid” — a total of nearly $3.2 million in all.

Asked for comment, Zielenski responded in an email: “Stonyhurst LLC maintains strict confidentiality with respect to all our clients and our business relationships with them.”

See related article, It can be a tortured path to get state records.
Note that almost every article I reference in this blog gets sliced and diced. Here, for instance, there is much detail that has been left out and many bits of the article have been re-arranged to suit a didactic, rather than newsworthy, intent, as a case study of procurement law and (mal)practice.  

You are advised, therefore, always to go to the article at the provided link for the straight scoop.