Centralization, accountability key to UK procurement reform

Procurement "still needs a culture shift"

The coalition's new procurement strategy is the most coherent approach to reform yet and has resulted in savings but the government is failing to save as much as it could through centralised procurement, according to a report from the National Audit Office (NAO).

The NAO said that since 2010 there had been signs of good progress in key areas, such as expenditure on common goods and services and participation by small and medium enterprises (SMEs). Also, the creation of a Chief Procurement Officer and other posts had formed clearer lines of responsibility and the Cabinet Office has a much firmer grip on procurement expenditure. The NAO agreed that savings had amounted to around £426m in 2011/12.

However, the report highlighted ineffective governance structures, unrealistic targets, incomplete data and weaknesses in contract management. These "operational issues" meant that the centralised approach was not releasing procurement resources in departments as originally expected.

NAO head Amyas Morse said: "The Cabinet Office will have to lead a major cultural shift across government if the centralising of buying goods and services is to deliver the significant benefits on offer.

"There are signs of real progress, but the success of the reforms cannot depend on whether departments choose to cooperate. Departments must commit as much of their procurement expenditure as possible to central contracts and the government procurement service must be held accountable for its performance."

"Two and a half years after the government committed to centralising public procurement, individual departments are still too often doing their own thing," said Jim Bligh, CBI head of public services reform. "We need to see strong leadership from the Cabinet Office to drive a culture shift across the whole of Whitehall, highlighting the benefits of bringing procurement under one roof."

Bligh added: "High quality procurement can be an important driver of growth and although the government has made some progress in using more SME suppliers, it needs to create more opportunities for smaller businesses directly and through supply chains."

Richard Bacon, a member of the public accounts committee, said the Cabinet Office was making some real progress in improving government procurement, adding that big names do not necessarily mean best value.

Buying the unknown, pricing the unknowable

This article will likely confuse most of the procurement staff in local and municipal and probably state governments. It does not fit their typical need. Most things purchased, whether supply, service or work of construction, at local levels are standard commercial products. When you don't have to invent the wheel, there is no need to re-invent it either. Keep it simple and stick to what you know.

But, when developing new products, other acquisition paradigms come into play. No one size fits all and an inflexible means of achieving the acquisition will frustrate the goal. That is my take away from the following article, which I digest below, and which itself is a review by Sandra I. Erwin of a more extensive journal article by Frank Kendall, US Under Secretary of Defense for Acquisition, Technology and Logistics titled "Use of Fixed-Price Incentive Firm (FPIF) Contracts in Development and Production". You have the links, so pick your poison.

Pentagon Acquisition Chief Warns About Misuse of 'Fixed Price' Contracts

Kendall's latest policy guidance tells procurement officials to use "appropriate" contract types. "Unfortunately, sorting this out is not always easy," Kendall writes in the March-April 2013 issue of the Defense Acquisition University journal.

A shift toward fixed-price contract began during the second half of President Obama's first term. Pentagon officials had become increasingly frustrated as too many programs got started and “we find out later on that they were unaffordable,” Kendall says in a February 2012 speech. He cites fixed-price contracting as one of several contracting trends that are embraced and rejected in cycles. In the past two decades, he says, “We have been for-or-against fixed price contracting four or five times."

Kendall's rulebook, known as Better Buying Power, has been interpreted as a mandate to avoid "cost-plus" arrangements where the government agrees upfront to pay a vendor to design a product before it has determined its final price tag.

In the article, titled, "Use of Fixed-Price Incentive Firm Contracts in Development and Production," Kendall cautions buyers that there is no simple benchmark to select a contract type. "The choice of appropriate contract types is very 'situationally' dependent," he says.

Kendall suggests that even though fixed-price contracts do relieve the government from taking on all the risk in a program, if not used properly, such deals could backfire and lead to unneeded court battles.

"Fixed firm price development tends to create situations where neither the government nor the contractor has the flexibility needed to make adjustments as they learn more about what is feasible and affordable as well as what needs to be done to achieve a design that meets requirements," he says.

A fixed-price contract is basically a government “hands off” contract, he adds. "While we can get reports and track progress, we have very little flexibility to respond to cases where the contract requirements may be particularly difficult to achieve."

Shifting the risk to contractors should not be seen as the antidote to the Defense Department's poor track record in predicting costs, Kendall notes. The average EMD (engineering, manufacturing, development) program for a major defense acquisition over the last 20 years has overrun by nearly 30 percent. "Industry can only bear so much of that risk," he says. "It is unrealistic to believe contractors will simply accept large losses. They will not. ... Industry has a finite capacity to absorb that risk and knows how to hire lawyers to help it avoid large losses."

In most cases, says Kendall, there needs to be a "fair sharing" of the risk and rewards of performance. "For good reasons, I am conservative about the use of fixed-price development, but it is appropriate in some cases."

“The government rarely knows what it wants with sufficient specificity to support reasonable fixed prices for evolving, complex or sophisticated products to be delivered years later,” charges John Chierichella, a government contracting attorney at the law firm of Sheppard, Mullin, Richter & Hampton LLP.

He predicts the “latest federal fascination with fixed prices will end like the others — badly — with delayed fielding of the products, contractors deeply damaged by inadequate cash flow, increased claims and litigation, and focused “bail outs” in which the government decides which of the wounded contractors deserves triage.”

Even without rules, procurement principles lead the way

It appears the British government is going to roll out a decentralized, electronic (telecommunications) delivery system for health services across the country. It will span government, government supported and non-government providers, if I interpret the story accurately. 

This article describes an overview of the procurement regime required for the roll-out. The part I found most interesting is the advice given to those institutions caught up in the roll-out who are not strictly liable to the procurement regulations. The advice is consistent with the American Bar Association Model Procurement Code, which Guam follows, that admonishes, stated principles must be used to both interpret and apply the procurement law.

As usual, I cut and paste and rearrange or paraphrase all or parts of the article, so refer to the source if you are truly interested in the subject.

This article is posted on the Mondaq website by the authors Paul Barton and Emily Parris of the firm Field Fisher Waterhouse, in the form of a Q&A discussion.

The government has confirmed its policy commitment to telecare and telehealth services, first, through the NHS Mandate, published on 13 November 2012, and second, through Secretary of State for Health, Jeremy Hunt's announcement that telehealth services are to be rolled out to 100,000 people during 2013. A competitive tender process will begin in the New Year through which seven "pathfinder" NHS organisations and local authorities (including Clinical Commissioning Groups) will commission telehealth products and services at no upfront cost. This is an important first step towards the 3 million lives target. Against this background, Paul Barton and Emily Parris of Field Fisher Waterhouse answer questions on the regulatory framework for the procurement of telecare and telehealth products and services.

What are public procurement rules and who must comply?

The legal framework governing procurement of goods, services and works by the public sector is multi-layered. It comprises European Directives, the national laws of EU Member States implementing those Directives, as well as principles from the EC Treaty and case law from the Court of Justice of the European Union. In the UK, the Public Contracts Regulations 2006 implement the Public Sector Directive ((2004/18/EC) into UK Law. Central government, local authorities, bodies governed by public law, as well as associations formed by any of these must comply. Registered Social Landlords including Housing Associations are considered to be bodies governed by public law and are therefore caught by the Regulations. The new Clinical Commissioning Groups (CCGs), which will assume full commissioning responsibilities from April 2013, are also in scope. All of these organisations must assess whether their particular procurement is subject to the Regulations. This will depend on what is being procured, and whether the estimated contract value is above or below the specified financial thresholds that bring the Regulations into play.

The Government Procurement Service Framework Agreement for Assistive Technologies (RM784) was recently extended and will now run until August 2013. With some 55 suppliers across six lots covering broadly, telecare, telehealth and telecoaching products and services as well as full managed services, it provides for further competitions, reverse auctions between participating suppliers, as well as call-offs direct from a catalogue provided it is possible to determine from the catalogue which supplier represents best value for money against the buyer's requirements.

What if the Regulations are not applicable?

Even if a public sector body assesses that its procurement falls wholly or partly outside the Regulations, for example, because it is covered by one of the exclusions under the Regulations, or is below the relevant financial threshold, the procurement should still be conducted in accordance with principles established under the EC Treaty (as should regulated procurements). These principles require public bodies to (i) conduct procurements in a transparent way by advertising so that the market is open to competition, (ii) treat bidders equally, so for example, allowing one bidder alone to amend its tender would infringe this principle, (iii) ensure that any requirements imposed on bidders are proportionate, and (iv) recognise products, services and equivalent standards of other EU Member States.

What if a public sector body judges that it is preferable to buy "off-framework"?

That depends on what is being procured and the estimated contract value. Assuming the relevant financial threshold is met, public procurements of supplies, works and so called "Part A" services must comply with the full regime under the Regulations; whilst "Part B" services, which include health and social care services, are subject to lighter regulation. In order to determine to which category a procurement belongs, it is important to look at what is being procured, rather than the use to which the relevant supplies, works or services are to be put. This was made clear in a case called Jobsin Internet Service v Department of Health1. In that case, the provision of a website for NHS recruitment was held to be a "Part A" computer service, rather than a "Part B" recruitment service. So for example, if a housing association wishes to procure alarm installation and monitoring services for sheltered accommodation, the fact that the alarm system is for the purposes of a social care service is not relevant.

For a mixed contract covering the procurement of supplies (for example, the alarm kit), works (installation of the kit) and other services (for example, monitoring, call centre and paramedic support), then it is essential to identify where the main value of the contract lies. If the main value lies in the services and the services include Part A and Part B health and social care services, then it is necessary to identify whether the main value lies in the Part A or Part B services.

When the cat's away ...

... the mice will play.

Having recently raised concern about "fast-tracked" ways around prudent procurement strictures, this news item reported on The Hawai'i Procurement Institute website begs to be repeated.

But first, this bit of background. Hull: Building the campus at Palamanui

How exciting for the UH-Hilo campus … $66 million on three separate construction projects: a new student complex; a new campus student service building for $18, million; and a new permanent Ka Haka Ula Keelikolani College of Hawaiian Language for $20 million.

I am pleased for Hilo. This project was fast tracked after Gov. Neil Abercrombie released funding in December of 2011, according to Brian Minaai, VP/UH System for Capital Improvements.

At the Jan. 9 All Campus Meeting at the University of Hawaii Center in Kealakekua, VPCC John Morton announced the $21 million low bidder on Palamanui Campus withdrew the bid and the next lowest bid is $25 million for the long-proposed Hawaii Community College-Palamanui. We do have the funding of $7.5 million from the state bond issue and $9.7 million in private funds, but it seems like the project will be unable to proceed to break ground due to the almost $8 million needed for the $25 million bid.

At this meeting President MRC Greenwood told the attendees to contact Abercrombie and the Legislature to find the rest of the funds.

Now, the news item. UH official gave work to firm that built flawed softball field

Dennis Mitsunaga, who owns Mitsunaga and Associates, said the actions of UH’s associate vice president for capital improvements, Brian Minaai, on a Hilo dormitory project Mitsunaga is involved with would have been criminal had the university not had a temporary exemption from the state’s procurement code.

Mitsunaga, a major Demo­cratic political donor and supporter of Gov. Neil Abercrombie, made the startling accusations in written testimony submitted Thursday to a Senate committee considering a bill about UH construction projects.

The measure, Senate Bill 1383, would shift procurement oversight of construction contracts from UH and return it to the Department of Accounting and General Services, which handles that responsibility for most other state agencies. The bill passed the Senate Higher Education Committee on Thursday but was killed later that day by the Senate Economic Development Committee. UH opposed the bill while the Abercrombie administration supported it.

In his written testimony in support of the bill, Mi­tsunaga said Minaai’s process for selecting consultants for nonbid projects is highly suspect and, with the exception of Mitsu­naga’s firm, said Minaai picks only friends from a pool of hundreds of qualified Hono­lulu architects and engineers. Mitsunaga said working with Minaai on the Hilo dorm has been a nightmare for his staff. He accused Minaai of ordering the replacement of two project consultants and hiring of a third one after the selection process had been completed, adding to the cost. Minaai directed Mitsu­naga’s firm to hire the third company, Palekana Permitting and Planning, to do permit processing, even though that work usually is part of the engineer or architect’s basic service and normally doesn’t involve a separate charge. Palekana’s fee for this service is $23,000.

Asked about Mitsunaga’s testimony, UH spokes­woman Lynne Waters said in a written statement that the university leadership was aware of the serious nature of some of the Mitsu­naga allegations. “Please note these accusations have not been proven,” Waters wrote. “Nevertheless, a thorough investigation of the allegations will be conducted.”

When Minaai gave the general construction contract to Kobayashi, that company subcontracted what is normally considered the general contractor’s work to Isemoto Construction, the largest contractor in Hilo, according to Mitsu­naga. By not awarding the contract directly to Isemoto, the state probably has to pay an extra $3 million to $4 million, he estimated.

Louis Kiang, formerly with a company that settled a breach-of-contract lawsuit against UH tied to its soon-to-open cancer center, said Mitsunaga’s testimony is consistent with experiences he had with Minaai. Kiang said he believes Minaai is trying to subvert procurement rules to benefit friends and patrons. “It’s deliberate,” Kiang said. “These things go beyond incompetence.”

Read more at The Hawai'i Procurement Institute web link above.

Abnormally low vs unreasonably low bid

I have read enough cases to know that it can be reasonably expected that bidders will bid below cost, in part at least, in an aggressive tactic to win an award. This does not appear to be a matter that too terribly concerns either the government or the courts. But underbidding comes with a risk of more than lost profits on a contract.

First, if a bid is "abnormally" low, it probably should be rejected out of hand. See my post The price is not always right for a short review of that issue.

Second, at least in the UK, it may give rise to a question of bribery, depending on the wording of relevant statute(s). See this post: When low bidding raises question of bribery.

And now, we see that an "unreasonably" low bid could form the basis of a false claim under the US False Claims Act and similar laws in other jurisdictions. It is not for nought that the typical procurement law requires that bid prices be "fair and reasonable". I have, as usual, selected, chopped and rearranged and messed with rendering the case below, so you should click the link and read it yourself. I only deal with one of the issues of the case.

Nyle J. HOOPER, Plaintiff-Appellant, v. LOCKHEED MARTIN CORPORATION, United States Court of Appeals, Ninth Circuit, 688 F.3d 1037 (2012)

In his Third Amended Complaint, Hooper alleges that Lockheed violated the FCA by: (1) knowingly underbidding the contract. Hooper brings a claim under the False Claims Act ( particularly 31 U.S.C. § 3730(h)), alleging that he was wrongfully discharged in retaliation for FCA-protected activity. The FCA protects "whistle blowers" from retaliation by their employers.

The FCA was enacted "during the Civil War in response to overcharges and other abuses by defense contractors." United States ex rel. Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir.1999). The purpose of the FCA was to "[combat] widespread fraud by government contractors who were submitting inflated invoices and shipping faulty goods to the government." United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1265-66 (9th Cir.1996). To this end, the FCA creates liability for any person who, inter alia, "(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." 31 U.S.C. § 3729(a)(1).

Hooper asserts that Lockheed violated the FCA by submitting a fraudulently low bid, based on knowing underestimates of its costs, to improve its chances of winning the Air Force RSA IIA contract. Lockheed asserts that allegedly "false" estimates cannot be the basis for liability under the FCA, because an estimate is a type of opinion or prediction, and thus cannot be said to be a "false statement" within the meaning of the FCA. Specifically, Lockheed argues that "estimates of what costs might be in the future are based on inherently judgmental information, and a piece of purely judgmental information is not actionable as a false statement."

The United States filed an amicus brief, urging this court to hold that a false estimate and/or fraudulently low bid may be actionable under the FCA.

Although the issue whether FCA liability may be premised on false estimates where those false estimates were knowingly made is a matter of first impression for this court, both the First and Fourth Circuits have held that FCA liability may attach in such a situation. Their decisions rest heavily on United States ex rel. Marcus v. Hess, 317 U.S. 537, 63 S.Ct. 379, 87 L.Ed. 443 (1943).

In Hess, the Supreme Court found contractors liable under the FCA for claims submitted by government contractors that the contractors obtained by collusive bidding. Id. at 542, 63 S.Ct. 379. Most courts have interpreted Hess to stand for the "fraud-in-the-inducement" theory of FCA liability. Accordingly, many courts, including this court, have applied the FCA to bid-rigging situations.

The Fourth Circuit held that, after the 1986 amendments to the FCA, according to Congress the FCA should be broadly construed. See id. at 786 (quoting S.Rep. No. 99-345, at 9 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5274 ("`each and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, or in violation of any statute or applicable regulation, constitutes a false claim'") (emphasis added in case)). he Fourth Circuit reasoned that "an opinion or estimate carries with it `an implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.'"

As a matter of first impression, we conclude that false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met.

Construing the facts in the light most favorable to Hooper, there is a genuine issue of material fact whether Lockheed acted either knowingly, in deliberate ignorance of the truth, or in reckless disregard of the truth when it submitted its bid for the Air Force RSA IIA contract.

Hooper demonstrated that Lockheed employees were instructed to lower their bids without regard to actual cost. Mike Allen, an employee with Lockheed, testified that the Air Force did not accept Lockheed's initial bid because it was too high. Subsequently, Allen "was simply asked [by management] to change the cost" even though the change in cost was not based on any engineering judgment. Allen also testified that, in bidding on another contract, he was told to lower the cost. When Allen told his supervisors, "We can't. This is the real cost. This is what it's going to cost, if not more," he was dismissed from the bidding contract meeting. Allen later learned that Lockheed lowered the cost by almost half and was awarded the contract. He also testified that Lockheed was dishonest in the productivity rates that it used to determine the cost for a contract.

Further, in the Air Force memorandum analysis of Lockheed's bid, the Air Force noted that Lockheed was "optimistic about some of its inputs ..., resulting in an overstated potential for cost savings." Additionally, the Air Force stated that it found Lockheed's Risk Analysis to be "unrealistic..., so the total risk is understated."

On the other hand, the Air Force stated that "[o]verall, [Lockheed] was found `realistic' for this factor." The memorandum found that Lockheed's bid provided the best overall value, even if it was possible that there were risks which might "lead to cost growth beyond target cost."

Because there is a genuine issue as to whether Lockheed had actual knowledge, deliberately ignored the truth, or acted in reckless disregard of the truth when it submitted its allegedly false bid for the RSA IIA contract, we reverse and remand to the district court. See Balint v. Carson City, 180 F.3d 1047, 1054 (9th Cir.1999) (en banc) (when reviewing a district court's grant of summary judgment, this court must not weigh the evidence or determine the truth of the matter but only determine whether there is a genuine issue for trial).

Procurement as political theatre

Well, political theatre or sport. It doesn't matter. Politics and procurement just doesn't mix well. It's a curse on both houses.

Council’s Contract Oversight: Often a Waste of Time

When it comes to oversight hearings on city contracting, the [Washington] D.C. Council sure knows how to waste time.

Every few months, the council gets roped into and riled up over some relatively low-dollar contract dispute, like the horror of having a Baltimore-based company cutting the city's grass, and spends several hours grandstanding, wandering off topic, and ultimately not resolving anything. It would be funny, except that these sideshows distract from Council's long track record of missing massive fraud and ignoring systemic problems.

The latest brouhaha occurred yesterday. It was a four-hour hearing on whether to disapprove a $12.7 million contract to turn around Ward 8's United Medical Center. Councilmember Vincent Orange is pushing his colleagues to reject the contract because he says the winning bidder—Chicago-based Huron Consulting—did not abide by the letter of the law when it switched out its Certified Business Enterprise partner after submitting its initial bid.

None of the prime contractors who bid on the contract and lost filed a protest with the city's Contract Appeals Board, nor did they bother to testify at yesterday's hearing. But still Orange says Huron's wrongdoing was so egregious that the need for redress transcends the hospital contract. Nothing short of the fate of the city's 1,200 CBE-certified companies, says Orange, is at stake.

Monsoon of scams?

It's raining scams: Chopper controversy's yet another proof of political foot-dragging on corruption

It's politics as usual. Facing graft charges in a Rs 3,546-crore chopper deal inked in 2010, the Congress says spadework for the transaction began under NDA rule. The BJP exhumes the Bofors ghost, playing up the Italian origin of the scandal-hit defence firm, Finmeccanica, whose CEO was arrested in a graft-related probe in Italy. Instead of mudslinging, both sides should focus on the problem at hand. The corruption issue that led to widespread protests in 2011 hasn't gone away. The question is, what's been done about it?

It's not enough to say India won't lose money courtesy the deal's 'integrity clause'. What about powerful people and middlemen alleged to have illegally profited? We need a thorough probe to book those found guilty, no matter how influential they may be. Sadly, foot-dragging is evident across the political board on institutional clean-ups.

Not a single systemic reform is fully up and running yet, whether to promote transparent public procurement, non-discretionary resource allocation, strict social spending audits, targeted services delivery or revamp of land acquisition norms. The CBI's autonomy remains an issue. Judicial and police reforms are pending. And UPA-II seems to think knee-jerk moratoriums on defence purchases ”in lieu of effective monitoring” suffices to bury scandal, even if the price paid is delayed modernisation of India's military.

Whether it's the prime minister or defence minister, government representatives can no longer make personal probity an alibi against failure to stem all-pervasive corruption.