Oops -- My mistake

This article comes from Athol, Maine, and is a perfect textbook hypothetical procurement quiz question, played out in real life. It involves a bid error, and seeks to find a way to deal with it. The facts of mistake are always at the core of a problem such as this. But the clarity of the law would help its resolution.

I've set out the whole article as presented, but for our purposes, let's just pretend it is a test question. How would you analyze the problem and solution?

State AG’s office denies Kenefick bid protest

The attorney general has denied a protest by Kenefick Corp., which submitted the low bid to the town for the Queen Lake Dam rehabilitation project. Bids were opened Jan. 31, and the hearing was held March 9.

Kenefick’s bid of $268,150 was the lowest of the 11 bids received, but the town rejected it because the document was not properly filled out. Kenefick argued that the $60,435 error on the form was obvious and should have been corrected by the town.

On the form, Kenefick wrote the total bid price was $268,150. There was a unit price schedule attached to the form. Bidders were asked to provide a unit price for approximately 20 items. The bidders were expected to multiply each unit price by the estimated quantity to derive a total bid amount. Bidders were further instructed to write the extended price for each item in words.

Instead of listing the extended price for each item in words, Kenefick expressed its unit prices in words. The total of the amounts in written words equaled $207,715, which conflicted with the total bid price of $268,150. The town said it made Kenefick’s bid obscure, mandating the rejection.

In the town’s rules relating to bids, in case of a discrepancy between words and figures, the amount expressed in words governs.

Kenefick was notified that its bid read as $207,715. Project Engineer David Lenart told the selectmen this week that, “Kenefick was told to take the bid for the lower amount, or withdraw it. He filed a protest.”

Kenefick maintained the error was obvious, and the town should have corrected it.

The town argued that Kenefick’s bid was obscure because of its $60,435 discrepancy, and also that Kenefick is not a responsible bidder, because it does not have experience with three dam projects, which was called for by the bid specifications.

The company’s lack of experience was also a concern, the town said. Lenart said, “Kenefick could only come up with two projects, which were not comparable” to the scope of the work needed on the Queen Lake project.

State Assistant Attorney General Deborah A. Anderson wrote that the town was under no obligation to correct Kenefick’s bid price, noting if a bidder’s error makes the price or scope of work ambiguous, the bid must be rejected. She further stated the town did not abuse its discretion by failing to correct Kenefick’s error.

Anderson ruled, “I find that Kenefick’s error was an obvious one, even though Kenefick’s bid price could be read as either $207,715 or $268,150. The town had the discretion to correct this error, but it chose not to do so. This was not an arbitrary decision.’

Anderson said as protestor, Kenefick did not meet its burden to prove that its rejection was arbitrary. She said the town was rightfully concerned about allowing Kenefick to choose which bid price was the correct price, thus giving Kenefick ”two bites of the apple.” Also, she said the town followed its own rule. For those reasons the protest was denied.

The second-lowest bidder, R. Bates & Sons, who bid $270,540, made similar, though fewer, errors on the bid forms. He was informed of the same issue.

Selectmen signed two documents prepared by the town’s attorney, officially rejecting the Kenefick and Bates bids. Selectmen then voted to award the bid to the third lowest bidder, Edward Page Corp., which came in at $319,069 ($50,919 higher than the Kenefick bid).

Chairman Thomas Brouillet and John Telepciak signed the contract saying Page “did everything right, and has good experience.”

The project involves the demolition of the dam’s existing spillway and outlet conduit, and construction of a new concrete spillway and gate structure, outlet gates, trash racks, low level outlet pipe, riprap slope protection, gravel crest and landscaping.

Representing the town at the Boston hearing were Thomas McEnaney (town counsel) who filed a response to Kenefick’s protest, and David Lenart, the project engineer.

Work on the dam will begin after Labor Day.

So, what happened here? Kenefick presented a bid with itemized unit prices. In accordance with bid requirements, Kenfeck's bid amount was provided for each itemized line item, but was spelled out in word form. The total amount of all bids was then provided, in Arabic numerals.

Setting aside the question of Kenefick's responsibility for the moment, because the article makes it look like its bid was rejected on grounds of responsiveness, not responsibility, its bid was rejected because the bid "was obscure because of its $60,435 discrepancy" between the total bid price and the mathematical total of the itemized prices. Kenefick argued it was an obvious mistake, but the State Assistant Attorney General held that the town was under no obligation to correct the bid, on the ground that, if a bidder's error makes the price ambiguous, the bid must be rejected. She said the town did not abuse its discretion by failing to correct Kenefick's error.

That may well be the applicable law in Athol, which evidently has a rule that, "in case of a discrepancy between words and figures, the amount expressed in words governs." But this blog is about the ABA Model Procurement Code, and more particularly the Guam procurement law, which follows the ABA MPC, and there is no such law in that context. Remember, we are treating this article as a hypothetical factual situation for our analysis purposes.

MPC § 3-202(6) states that "correction ... of inadvertently erroneous bids before or after award ... shall be permitted in accordance with regulations. This is the same language in Guam law, 5 GCA § 5211(f).

The pertinent ABA MPC regulation is in R3-202.11 ("Mistakes in Bids"), in particular R3-202.11.4(b)("Mistakes where intended correct bid is evident"), which states, "if the mistake and the intended correct bid is clearly evident on the face of the bid document, the bid shall be corrected to the intended correct bid and may not be withdrawn. Examples of mistakes that may be clearly evident on the face of the bid document are ... errors in extending unit prices, ... and arithmetical errors." 

It might be the case that the town did not consider this to be a "clearly evident" mistake. But the AAG was certain it was a clearly evident mistake: "I find that Kenefick’s error was an obvious one...."

The AAG also said "the town was rightfully concerned about allowing Kenefick to choose which bid price was the correct price, thus giving Kenefick 'two bites of the apple'.” Again, I do not question the AAG's statement of applicable Maine law. But the "two bite at the apple" old saw is irrelevant in the MPC regulation, which says such a mistaken bid "shall be corrected ... and may not be withdrawn.

Moreover, there is another element here. Both bites of Kenefick's bid were the lowest prices bid. "Kenefick’s bid price could be read as either $207,715 or $268,150." The next lowest bid, at $270,540, was higher than both of those bids, if we assume, for argument, they were intended to be two separate bids. Even if the totaled low bid written in words,$207,715, the total bid expressed in Arabic numerals, $268,150, remained the low bid. For some reason, “Kenefick was told to take the bid for the lower amount, or withdraw it. He filed a protest."

I hope that there was a stronger reason to reject the bid because of issues of responsibility, though there is not much in this article that would help an analysis of that issue. This bid was rejected before it was evaluated from all appearances, even though it was the lowest bid. It was reported only that "Kenefick is not a responsible bidder, because it does not have experience with three dam projects, which was called for by the bid specifications." 

In the ABA MPC regulations (R3-401.10), it is not necessary to actually have all the experience at the time of bid if it can be obtained (R3-401.03) after bid evaluation, for instance by subcontractors or other professionals available for hire. This regulation requires a separate inquiry to determine responsibility after bid opening, so long as the low bidder's responsibility is determined to the satisfaction of the procurement officer before award (R3-401.04). There was evidently here no finding that Kenefick was nonresponsible (see, R3-401.05), merely "a concern".

And what did the town get from this? The obligation to pay $50,000 more for the next available bid, about 20% more than Kenefick's stated total bid.

It might be asked, why is the ABA MPC so lenient on allowing low bidders to correct bids? It would seem, unless the low bidder has determined to be nonresponsible, that government should be allowed the opportunity to take a low bid, notwithstanding technical mistakes in it that do not prejudice the competitive standing of other bidders. Here, correction of the bid, even to the higher amount, would not improve the competitive position of any of the other bidders.  

It is one of the foundation purposes and policies of the MPC, and Guam's procurement law, "to maximize to the fullest extent practicable the purchasing value of public funds". (MPC § 1-101(2)(f); 5 GCA § 5001(b)(5).)  It is mandated that the procurement law is to be construed and applied to promote its purposes and policies.  (MPC § 1-101(1); 5 GCA § 5001(a).)

Late paying government brings out the worst in vendors

$2.4M state warehouse lease renews procurement questions

Controversy surrounding a former furniture store in Springfield highlights the problems of a state lease procurement system dogged by bureaucracy, reliance on old-fashioned paper files and a state unable to pay its bills.

Climate Controlled Holdings LLC of Chicago bought an abandoned furniture store and refurbished it to meet the needs in the City of Springfield for a climate controlled warehouse for the Illinois Department of Human Services records. Although the details of the contracting process are fuzzy in this article, it appears Climate Controlled Holdings ended up with a five year lease worth $2.4 million. Climate Controlled Holdings and the five-year, $2.4 million lease since have become the focus of controversy over political influence in state leases, bureaucracy, reliance on paper records in a digital age, and the difficulty of determining whether the state is getting its money’s worth from public documents in private storage.

Allegations of improper political connections were raised in April when Champaign-based WCIA-TV reported on links between Springfield businessman Bill Cellini and Climate Controlled Holdings. Cellini has been dubbed “The King of Clout” for extensive business and political ties to state government through the years. He served about nine months of a one-year, one-day prison sentence on a 2011 federal corruption conviction for a failed attempt to shake down a Hollywood film producer for a $1.5 million contribution to the campaign of former Gov. Rod Blagojevich.

The Champaign station also highlighted the longtime Cellini friendship with Springfield businessman Frank Vala, who is chairman of the Illinois Procurement Policy Board. That board, which reviews state leases, allowed the South Grand Avenue lease to be approved in January without a vote. Secretary of State’s records show Climate Controlled Holdings agent Thomas Storniolo is also the agent for multiple Cellini-controlled New Frontier Management companies with Cellini’s children, William Jr. and Claudia, listed as presidents. But it was part-ownership in Climate Controlled Holdings by Claudia Cellini’s husband, Raffi Vartnaian, that raised questions of political influence and the Valla friendship with Cellini. Climate Controlled Holdings submitted the only bids for the lease through two separate companies.

Vala did not return messages, but Hurwitz said on behalf of the building partnership that the lease has been unfairly portrayed in media accounts and by state lawmakers. In addition to the $575,000 purchase price, she said the partnership invested approximately $1.25 million – a figure confirmed by state records -- to bring the building up to specifications required by the state, including construction of a loading dock, legal services, new lighting, security, new heating and air conditioning, roof work and electrical upgrades.
The partnership also is responsible for monthly management fees, property taxes, maintenance, insurance and other operational costs.

Hurwitz also said she learned of the state request for storage space thorough regular public notices sent out by the Department of Central Management Services, the state agency in charge of state buildings. “We did everything by the book and by the law, and we won the bid,” Hurwitz said.

“It’s an OK deal, if the state pays us,” Hurwitz said.

Hurwitz said there is reluctance among developers to take on the risk of state leases when Illinois is months behind in payments on dozens of local buildings, but that such deals remain attractive at a time when the commercial-leasing market continues to struggle.

“We went to another developer in town, but he turned it down because he was not willing to risk money on a state lease,” said Hurwitz, who added that the deal keeps the building on property tax rolls. Property taxes total just over $33,800 for 2017, according to county records.

Former state Sen. Susan Garrett, now chairwoman of the Illinois Campaign for Political Reform, said the state still needs stricter disclosure rules on companies involved in state leases. “It appears as if they’re shell companies,” Garrett said. “There are just so many loopholes there that allow this to happen.”

Ed Bedore has been a member of the Policy Procurement Board for 19 years, including when the Barney’s building lease was approved without a vote in January. Bedore said he understood at the time there had been two competitive bids, rather than separate bids from the same company.

He said he recently toured the facility and found it only about 40 percent to 50 percent full, though state officials indicate additional files would be moved to the site. In addition to questioning storage of public records in private buildings when so many state properties are vacant, Bedore said he has been pushing for years for the state to begin moving away from paper documents to digital records.

“We’re not in the 21st century, we’re not even in the 20th century, we’re in the 19th century,” said Bedore, who added that the transition could be done gradually to minimize costs.

Central Management Services Acting Director Mike Hoffman, who has insisted rules were followed on the Barney’s building lease, said after a legislative hearing on Thursday that it is common to receive only one or two bids on state leases, given the complexity of the process. He added that the bureaucracy often limits bids to companies that know how to work the system.

In an understatement, “The state also is not making payments,” Hoffman added, “and a limited number of people are willing to go through that process.”

Just a quick reminder: I edit, slice and dice articles discussed here for didactic focus and emphasis and personal viewpoint, so you absolutely must read the article at its source via the link in the title.

There is no point, though, in full disclosures, published notices and much of the effort involved in trying to "foster" competition, as the ABA Model Procurement Code requires (as does Guam's, which follows in the footsteps of the MPC: 5 GCA § 5001(b)(6)), if the government does not timely pay its vendors.

Slow and other delinquent payments, or even nonpayment, is the single most salient factor in dissuading vendors to bid. the fewer vendors there are who are willing to do business with the government, the higher prices will be. The more often government business is done with the same "boys' club", the more they will take advantage. The fewer competitive bidders there are, the less effective the policing of the procurement process is, because the only real time policing of the process is through a fair and expeditious protest system.

Government can do a lot to improve its systems to achieve lower costs.  But before fussing around with all the bureaucratic rigmarole, first pay the vendors promptly. That will save you more money in the long run than all that other distraction.

Good governance is rarely sexy

Detroit's Cruise to Nowhere, by Charles Chieppo, a research fellow at the Ash Center of the Harvard Kennedy School. Usual caveat applies: read the original story at the link, because I take liberties in presenting materials, as case studies and other teaching tools.

When the Detroit/Wayne County Port Authority built the $22 million Carl M. Levin facility, named for Michigan's longtime former U.S. senator, the idea was to entice ships from the growing Great Lakes cruise market to dock there. The good news is that dockings are up; the bad news is that they're holding steady at one so far this year after coming in at zero for all of 2014.

U.S. Customs officials refused to staff the terminal so passengers could disembark. According to a Customs spokesperson, "The facility … has not been completed and does not meet the IT and security requirements necessary to properly process cruise vessels and/or cruise passengers. These and other issues were discussed with the Detroit Port Authority over four years ago."

Port Authority Executive Director John Loftus and Port Authority Commissioner Alisha Bell trot out the old warhorse that the facility attracts jobs and visitors. Numerous studies, of course, have documented that projects like these rarely stimulate economic activity on a level that comes anywhere close to justifying their costs.

Bell makes another argument for the project: "It's a beautiful space for weddings and events that enhances our visibility." Weddings, in fact, seem to be the terminal and dock's main business. Continental Services, a catering firm whose founders are big contributors to local officials' election campaigns, holds them there. The company also owns a luxury yacht and offers party cruises from the dock. Lest you think that the fees from weddings and party cruises cover the $22 million facility's costs, all of $140,000 was collected from the company last year.

Even though the terminal and dock isn't a city project, such wasteful spending is particularly hard to stomach in Detroit, where local residents have already endured so much. The city's 2013 bankruptcy declaration, the biggest municipal bankruptcy in American history, has forced retirees to absorb genuinely painful pension cuts. Detroit's population is down to around 700,000 from a high of 1.9 million. So much land has been abandoned that one of the revitalization strategies being pursued is urban farming.

Elective politics rarely attracts small egos, so it's only natural for officials to want to do big things. But good government is rarely sexy. Sometimes it requires resisting the siren song of projects that rely on patently unrealistic economic assumptions.

I like to say, good governance is the corner stone of good community, and good spending through good procurement is the corner stone of good governance.

Take the money and run -- amuck

Billy Mack is a detective down in Texas

You know he knows just exactly what the facts is

He ain't gonna let those two escape justice

He makes his livin' off of the people's taxes

Bobbie Sue, whoa, whoa, she slipped away

Billy Joe caught up to her the very next day

They got the money, hey

You know they got away

-- Take the Money and Run, by Steve Miller Band

GAO Report is a Good Reminder to Bidders on Federal Procurements: Agencies Don’t Always Follow the Rules! by Zachary D. Jones of law firm Stites & Harbison

Congress typically funds federal agencies through annual appropriations. An elementary principle of federal fiscal law is that if an agency’s appropriations are not obligated by the end of the fiscal year in which the appropriation was made, those funds expire and generally become unavailable to the agency. Often, agencies spend their appropriated funds late in the year in an effort to save some “dry powder” early on in case an unforeseen need arises. With Congress always looking for ways to cut spending, agencies do not want to end a fiscal year with unobligated funds. In Washington it is hard for an agency to justify to lawmakers the need for more money if the money Congress appropriated last year—money the members of Congress had to explain to their constituents was needed then—was not used. Accordingly, at the end of each fiscal year agencies resolve this dilemma by finding ways to close the gap between the portion of their appropriation obligated and the portion faced with becoming expired on September 30. This August and September is likely to set a blistering pace of federal contract awards.

In late July, the Government Accountability Office (GAO)—tasked with investigating how the federal government spends taxpayer dollars—released what many are calling a scathing report. The report explains that many federal agencies fail to follow the procurement regulations found in the Federal Acquisition Regulations (FAR). The report is a good reminder for contractors who bid on federal procurements to be watchful of procurements that appear to deviate from the rules. Data suggest not only that these agencies are breaking the rules, but also that protestors who call them on it are increasingly getting some relief.

In GAO report (available online at http://www.gao.gov/products/GAO-15-590), GAO evaluated a sample of procurements made by federal agencies under the Federal Supply Schedule (FSS). The FSS is used by agencies to purchase certain goods and services, typically the type of commercial items one would expect to find on the shelf, and represents a small percentage of overall federal spending (in FY2014 it was $33.1 billion or only about 7% of federal contract dollars). The individual contracts, however, can be substantial. For example, one of the procurements the GAO report examined exceeded $120 million.

In total the GAO looked at 60 procurements made under the FSS. What it found, among other things, is that of those 60 procurements, in only 23 did the procuring agency actually bother to get three or more prices or quotes from contractors—a fairly clear requirement in the FAR. Basically, what the report found was that federal agencies do not appear overly concerned with ensuring competition for the taxpayer’s procurement dollars.

Sometimes, agencies have a valid (or at least excusable) reason for not getting multiple prices or quotes from contractors. One reason is that some items the government purchases are simply not items widely available on the market. In other words, for some procurements there just was not enough contractors who could supply the good or service sought. Unfortunately, as the GAO report makes clear, sometimes the agencies simply issue solicitations which either overly restrict competition or are not offered to enough potential bidders. For example, in one of the procurements studied, an agency specified only a single brand of a commonly used filing system. To make matters worse, the agency then failed to solicit any contractors that sold the specified brand. The result was the agency failed to receive a single response to the solicitation. When it failed to get a response to the solicitation, the agency procured the specified brand under the FSS directly from the manufacturer—with absolutely no competition from anyone. When confronted by the GAO, the agency admitted that many other brands would have met their needs. Essentially, the agency admitted that it failed “to specify its needs and solicit offers in a manner designed to achieve full and open competition, so that all responsible sources are permitted to compete.”

Because bid protests based on unduly restrictive solicitations (like the agency above who specified a single brand when other brands would have met the agency’s needs) must be filed prior to the agency receiving bids, the best explanation for the rising effectiveness of protests is agencies are increasingly likely to agree to expand a solicitation’s competitiveness if a bidder or potential bidder raises a valid concern about the solicitation’s competitiveness prior to bid time. In those instances where the agency takes such corrective action, the bid protest is recorded as effective even though it is not sustained.

The next month and a half will prove telling. In 2013, The National Bureau of Economic Research (NBER), a private, nonpartisan research organization, found that the annual dash to spend our cash—or as they politely put it, agency “year-end spending”—results in a significant drop in the quality of goods procured. One conclusion from all of this data is that as federal agencies rush to obligate their appropriations, there is likely to be a rash of procurements which do not abide by the rules.

As usual, do not rely on this rendition, which is edited and perhaps distorted for my own uses. Make sure you read the whole piece at the link.

Procurement too difficult, to a degree

Bill would change procurement rules for public universties, including NIU

House Bill 4215, the Illinois College Procurement Reform Act, would allow public university boards of higher education to develop their own procurement rules. As it is, universities are required to follow regulatory processes outlined in the Illinois Procurement Code. State Rep. Mark Batinick has filed the house bill.

The procurement process is complicated and often requires universities to jump through administrative hoops, Batinick said. Some of the regulations include a strict approval process and competitive bidding requirements, Batinick said.

Paul Palian, NIU director of media and public relations said university officials would like to see the process streamlined to conserve time and resources and allow the school to attract the best options for business partners.

You Paid For It: Univ. purchase rules cost millions

A law to prevent corruption has had some unexpected consequences, and it could be costing taxpayers millions. State Senator Chapin Rose (R-Champaign) said it’s gotten so bad, universities take advantage of opportunities to buy out of state.

The university’s deputy comptroller Mike Bass said the university could run a cheaper, more efficient purchasing system on its own. He said it would still comply with all of the states transparency and ethics requirements. [But not competition, compliance and accountability ones?] "We should operate in the most nimble fashion that we can to get the job done for our constituents,” Bass said.

He said colleges often take higher bidders because of lower ones forget or have trouble filling out the dozens of forms required or because the system delays the actual purchase and prices go up. [Have you ever tried to apply to get in a college, or register, or change a class? Or teach, get tenure, get permission to obtain a grant in one? Educational institutions are amongst the most bureaucratic, yet authoritarian, institutions in the country, yet they can't run a simple procurement regime like the rest of government?]

Bass said colleges often take higher bidders because of lower ones forget or have trouble filling out the dozens of forms required or because the system delays the actual purchase and prices go up. "The whole procurement process can extend and when you do that, not only could the price point change but you could lose other competition,” Bass said.

Chief Procurement Officer for Higher Education Ben Bagby said there has been nothing to back up university claims of million dollar losses. He said the state is attempting to give exemptions for time sensitive grants. He said he isn’t convinced the university proposal will actually save money.

“We should be doing things right,” Bagby said. “The universities have not shown that moving to a separate procurement office will save money.”

"Those folks should be allowed to control their own destinies. Who cares that somebody in Springfield has to sign off a piece of paper to buy a pencil. Buy the pencil,” Sen. Rose said.

I feel pretty sure it's not about the pencil.

Of croquet and magicians

A couple of years ago or so, I posted a note on the efforts of the UK Ministry of Defense to outsource its procurement selection process. Yes, privitise procurement of the UK's defense apparatus: UK considers outsourcing defense procurement

So, what has become of that?

Fraudulent arms companies charged taxpayers for magicians, croquet and speeding fines

Plans to privatise the arms procurement sector collapsed in 2013 after bidders withdrew from the process. The Labour party described it as a “complete shambles". Defence Minister Michael Fallon will lift the lid on the abuses and tell the audience at an Institute of Directors dinner in Durham that “vital” work is required to overhaul the procurement process used by the Ministry of Defence, the FT reports.

This will include a new Whitehall defence watchdog, which will have the power to fine arms companies up to £1m for breaching contract rules.

As noted in that short article (not as short as this excerpt, so you should always read the full source-linked citations in this blawg), the FT has a story on the matter:

Arms companies charged taxpayers for croquet and magicians

“It will now be up to suppliers to justify, rather than for us to disqualify, every pound of their contracts,” the defence secretary will tell the audience, adding that the MoD will demand “100 per cent transparency”.

A bit more is available here:

Exclusive: UK single-source procurement reportedly led to claims for 'croquet and magicians'

Fallon claimed that a "lack of commercial leverage" and "information" led defence contractors to claim for costs including croquet, horse racing trips, motoring fines, and "close-up magicians". He stated that there were expenses that the "taxpayer had no business paying".

Fallon - in his current role since July 2014 - expanded on reforms to single-source procurement that were enshrined in the Defence Reform Act of May 2014.

On the reforms, Fallon said that "the bottom line is that we [UK MoD] spend around GBP6 billion [USD8.9 billion] a year on single-source contracts - nearly 50% of our procurement budget".

The measures outlined in the Defence Reform Act include a single-source pricing framework for non-competitive procurements valued at GBP5 million or more; the establishment of a Single Source Regulations Office to ensure value for money and the payment of what was described as a "fair and reasonable" price to contractors; and the requirement for contractors to disclose costs through a standard reports. The latter measure gives the MoD "full open-book rights" according to Fallon.

Not all commentators seem to understand the new direction (or maybe they do and are trying to lead it off track):

BEN GRIFFITHS: Prosperity firmly linked to safety and security - and that's why defence MUST be an issue for this election

Michael Fallon was looking to the past when he unveiled reforms of the procurement process for military equipment.

He flagged up a shocking and unacceptable culture where arms-makers claimed back costs including croquet, horse racing trips, motoring fines and even two magicians. Fallon was right to castigate the previous regime of suppliers exploiting a lack of competitive pressure and transparency. Today’s defence sector is changing for the better, however.

As Ian King noted this week, partnership between government and industry is essential so that the armed forces get the equipment they need at a price the taxpayer can afford to bear over the long term.

Getting "equipment they need at a price the taxpayer can afford to bear" is an invitation to "soak 'em". A pricing model that is intent on getting whatever the market can bear will always be more expensive for the government and other consumers than it could be.

A pricing model that focuses on the cost and fair and reasonable value of that item shifts attention away from what the market can bear to "do we really need it at that price?" It often turns out that our perception of need is quite faulty, especially when close attention is not paid to fighting the next war but fixated on fighting the last one or supporting the military industrial complex that supplied the last war.  See, Recycling the procurement cycle

We don't need a model that justifies expense of an item because, on someone's assessment, the taxpayer can bear the burden. We should balance the cost against the perceived need and evaluate both need and cost with scrutiny.

I think the Defense Minister is on the right track when he says the government will require suppliers to justify costs. The federal procurement regime in the US, as well as the state and local regimes based on the ABA Model Procurement Code, like Guam's, have that focus. But, of course, it does little good to have that power in a regime if it is ignored or implemented poorly.

Having to deal with responsible bidders is taking too much time and money, say Illinois universtities

Tom Kacich: Change in purchasing laws may be ahead Read the full, original piece at the link.

The presidents of the University of Illinois and Illinois State were pressed by committee members to suggest how much procurement laws were costing universities. UI President Robert Easter said he had heard one estimate that it cost the UI $70 million a year in waste and inefficiency in the purchase of equipment, supplies and services.

Sen. Chapin Rose of Mahomet said "The governor's entire life has been taking over a company and making it more efficient. This is the kind of stuff that drives him nuts."

Ben Bagby, the state's chief procurement officer for higher education, acknowledged that changes "absolutely" are needed. "There are too many situations where we have to qualify a vendor before they submit a bid and if they make a mistake, because the way the law is written, we have to disqualify them. That means we go to the next high vendor. Sometimes we've reached up to the 10th vendor before we can get somebody who actually meets all the requirements of the procurement code. I'm not talking about whether they have a good product or a good price or not, but just the basic statutory requirements."

"These issues we're having with higher ed are the same issues the (state) agencies are having," Bagby said. "There definitely is a cost to the state of Illinois to disqualify vendors or to rebid. Or just the lack of competition because it is so difficult. It does make it more difficult for us to get full and open competition and the best price from the market."

In one case, Bagby said, "Eastern Illinois University told me that at one time in one procurement they lost $230,000 because of these particular types of issues. It's usually the inability of the vendor to qualify or to understand the documents or the law itself. It's very complicated."

It's worth noting that the tougher procurement laws were reform measures instituted in the aftermath of the conviction of former Govs. George Ryan and Rod Blagojevich.

"There was a cost to the state from corruption, and the fact that the process wasn't thoroughly reviewed and didn't go through the scrutiny it should have gone through," noted Sen. Dan Kotowski, D-Park Ridge. "When we have situations where we have previous governors who were indicted and convicted, we take steps to remedy the problem. Sometimes we may overcompensate for that.

"But there was a cost that was never really indicated to taxpayers in the fact that these contracts were being given out. I remember the testimony on the Senate floor about people writing their own requirements for RFPs due to the fact that they had given a campaign contribution."

Rose agreed. "Did we need procurement reform after Blagojevich? Hell yes, we needed it," he said. But we need a trailer bill to fix the problems from that procurement bill.

I think it is important to remember that good governance requires full time procurement accountability, and not just from government but from the private sector participants. It should not be seen as something to pull off a shelf for political shellacking. It's hard work, and someone's got to do it, or governance will deteriorate. It sounds to me like some training and education would go a long way to helping staff and vendors learn the ropes.

A penny saved is a penny earned

Benjamin Franklin is credited with the saying in the title to this post. He's also quoted in the following story, but I hadn't heard this one before. Loose lips, yes, but small leaks?

UK public procurement most expensive in EU

"Beware of little expenses. A small leak will sink a big ship." The words of Benjamin Franklin, one of the founding fathers of the United States, are as relevant today as they were in the 18th century. In fact, they are eerily true when considered in the context of government procurement.

Public sector procurement in the United Kingdom is certainly a big ship. It accounts for some £230bn of public funds each year. And as for the leaks? Fresh research released by the Centre for Economics and Business Research has found that the UK has the most expensive public procurement processes in the European Union. The cost to a public sector body to attract a bid from a potential supplier in a competitive process is £1,260.

This leads to the question of why the UK is such an expensive place to conduct procurement processes.

Combined with high labour costs, the length of a typical competitive process plays a critical role in increasing the cost of public procurement on both the buy-side and sell-side. The public sector purchasing process was found to be 53 days longer than the EU average.

Higher costs are obviously bad news for government departments that are fighting budget cuts, but the high cost of procurement also has more indirect negative effects. Expensive processes create barriers to entry and dissuade firms from taking part. The net result is that fewer firms submit tenders, reducing choice and competition, and therefore value, for public sector organisations looking to award contracts.

But all of this is about to change. In 2016 the European Commission's ruling mandating e-procurement for all European public sector organisations will come into force. The savings are predicted to be substantial: in the region of £30bn according to some estimates. These cost reductions will come in part from better management of costs and improved spend analysis enabled by e-procurement. But as well as cost savings, the widespread introduction of e-procurement will bring benefits such as greater transparency, a reduction in procurement fraud, plus faster and more cost-effective purchasing and bidding processes.

The UK public sector already has e-procurement frameworks, such as CloudStore, which private sector companies are compelled to join to ease the process of selling to public sector organisations. However, some firms feel the accreditation process for joining is still too stringent to justify the allocation of limited resources. For e-procurement to enable greater competition and lower costs for buyers and sellers, these barriers need to be removed. If the government can make best use of these new platforms, it could soon be plain sailing for public and private procurement.

Read more: http://www.publicserviceeurope.com/article/3755/uk-public-procurement-most-expensive-in-eu#ixzz2Z6wrvhSH

We'll see, and hope for the best.

Outsourcing the burdens -- and benefits -- of eProcurement

New User Fees Fund Pennsylvania's No-Bid Website Contract   By Melissa Daniels | PA Independent Read more at the link.

Pennsylvania teamed up with a private company to revamp and manage its official websites, promising the latest and greatest advances over its own old technology. Last fall, Pennsylvania entered a sole source contract with NIC USA, an “eGovernment” services firm. It will operate Pennsylvania’s entire online system, from page design to online transactions, and from customer support to hardware upgrades.

The state pays NIC nothing out of its own budget. Instead, the site work gets funded by adding “convenience fees” to certain online transactions residents or businesses might complete, like a license renewal. This self-funded model spares the state from spending up front on expensive redesigns, system upgrades or app development.

But the contract does not have a cap on what fees might be for users, meaning there’s no limit to how much could be assessed. It was a sole source contract, meaning there was no competitive bid process.

NIC provides all website design, development, services and maintenance, managed through a Harrisburg-based subsidiary called Pennsylvania Interactive, LLC. Because there is no other company that provides all these services under one umbrella, the state deemed a competitive bid process unnecessary, according to the contract summary.

But NIC’s own filings with the Securities and Exchange Commission seem to dispute that point, as they attest to “intense competition” in their industry. The filing, from late February, says NIC faces competition from government-managed services, system integrators like CGI and Unisys and developers like Microsoft and Oracle.

Dan Egan, spokesman for the Office of Administration, said the NIC contract was precipitated by multiple issues with the current system. The state was faced with a need to upgrade its server by 2015. “No one company does everything that NIC does and can do in a way that isn’t going to cost us tens of millions of dollars,” Egan said.

The state researched NIC with an outside research firm and contacted other states who use its services. “None of those states who’ve ever contracted with them have left,” Egan said. “It’s because they like the service and they like what they get from the company.

”Before the contract was signed, the state put the procurement on its website, and offered a 10-day comment period where no other vendors reached out to the state, Egan said. It was also approved by the Office of the Attorney General, like any other state contract.

Angela Skinner, director of communications for NIC, said NIC is “comfortable with the sole source procurement,” given the commonwealth’s research, legal justification and the public comment period. And a majority of the services, she said, are “free.” Any fees are set and approved by state officials.

Egan said the state expects to keep about two-thirds of transactions free, while a third may have some kind of “convenience charge.”

Egan compared the fee to what a consumer might pay for having express delivery to their home – the charge is there for the extra convenience.

“There will still be a choice,” he said. “If you still want to walk into a government office or lick a stamp or do what the old process was, it will remain available to you without the convenience charge. But if you want to get online, get it faster, get it more conveniently, that’s what it’s there for.”

Beauty contest or drawing straws?

This article is about the debate over negotiated best value versus lowest price technically acceptable ("multi-step") competitive bidding. The subplot is whether one source selection method necessarily determines a more optimal outcome. If all facts, past, present and future, were known, best value would be a no-brainer, but best value has not insulated government from cost overruns or less than optimal contractor performance.

OFPP lets DOD deal with pricing complexities first

the Office of Federal Procurement Policy looks to DOD's experience for guidance on the balance of price against value in contract awards, [as revealed by] Joe Jordan, OFPP administrator, at a recent breakfast hosted by the Coalition for Government Procurement. “The bottom line is it’s just a tough area, because you’ve got tricky incentives,” Jordan said.

Generally speaking, he said industry likes best-value procurements. They allow companies to propose higher prices, since officials will consider other evaluation criteria beyond price. On the other hand, the government is pushing low price and not always fully analyzing the entire lifecycle of a project, Jordan said. Both sides have good arguments, so the contracting officer's judgment is the final arbiter.

“It’s always a challenge with the overburdened acquisition workforce, but I think we’re at a place where we need to do some more analysis, having some more conversations with industry and agencies, especially the Department of Defense, to figure out exactly where equilibrium lies,” Jordan said.

Industry experts have been increasingly concerned that federal officials have developed a lowest price technically acceptable attitude for their procurements.

Larry Allen, president of Allen Federal Business Partners, said “They [DOD] seem happy with the drive to low price and uninterested in whether it may be misapplied in some circumstances.”

In his speech, Jordan said both the lowest price technically acceptable and the best value procurements have their place. He emphasized that he isn’t choosing one over the other.

“Do both, but do them at the right time,” he said.

Read more at the link to the article above.

The problem is that no one can predict the future. One method gives the procurement officer a warm fuzzy feeling at the time the bid is awarded, in the belief that "best value" has been achieved. The other gives the procurement officer cover from second-guessing score keepers of her career. But either method can, and too often does, yield to buyer's remorse when the winning bidder hits the road.

Buyers like to find comfort in dealing with proven bidders with known track records, thus tend to favor "best value" and its "old boy" network of quantifiable "past performance". But multi-step must also be made only after the responsibility of the bidder is determined, so I tend to suspect that the presumed reliability of "past performance" is a red herring, deflecting the process away from competition from newcomers, erecting unnecessary obstacles to market entry.

It's a case of choosing a winner by beauty contest (best value) or drawing straws (lowest price technically acceptable). Only time will tell which method truly gives the government what it actually seeks at the most optimal cost over the life cycle, through an efficient source selection process.

And there is no "right time" to make that choice before the ultimate facts are known.

Buy or build: cost of outsourcing services depends on scope of factors considered

New GAO Report reads a bit like the two-handed lawyer: on the one hand....

But that appears to have been the limited goal of the study. Notwithstanding, it did highlight the problematic notion that method may determine outcome.

Results of Studies on Federal Pay Varied Due to Differing Methodologies

A careful consideration of federal pay is an essential part of fiscal stewardship and is necessary to support the recruitment and retention of a competent, successful workforce. Recent studies comparing the compensation of federal workers to workers in other sectors have produced varying findings. To improve understanding of federal pay setting, GAO was asked to examine

(1) how annual pay adjustments for the GS system are determined;

(2) the extent to which the pay increases and awards available to GS employees recognize individual performance, and how the Office of Personnel Management (OPM) provides oversight of pay increases and awards; and

(3) how selected studies compare federal and private pay and total compensation and the factors that may account for the different findings.

GAO reviewed legislation, OPM regulations, executive orders, and federal agency documents; analyzed OPM data; and interviewed agency officials. GAO reviewed six studies that met three criteria: issuance since 2005, original analysis, and focus on federal and private sector compensation.

GAO compared and contrasted the differences between their approaches, methodologies, and data sources, and interviewed the studies’ authors, people with expertise in compensation issues, and agency officials responsible for the data.

Findings of selected pay and total compensation (pay and benefit) comparison studies varied due to different approaches, methods, and data.

Regarding their pay analysis, the studies’ conclusions varied on which sector had the higher pay and the size of pay disparities. However, the overall pay disparity number does not tell the whole story; each of the studies that examined whether differences in pay varied among categories of workers, such as highly or less educated workers or workers in different occupations, found such variations.

Three approaches were used to compare pay:

• human capital approach (3 studies)—compares pay for individuals with various personal attributes (e.g., education, experience) and other attributes (e.g., occupation, firm size);

• job-to-job approach (2 studies)—compares pay for similar jobs of various types based on job-related attributes such as occupation, does not take into account the personal attributes of the workers currently filling them; and

• trend analysis approach (1 study)—illustrates broad trends in pay over time without controlling for attributes of the workers or jobs.

When looking within and across the studies, it is important to understand the studies’ differences in approach, methods, and data because they impact how the studies can be interpreted.

The differences among the selected studies are such that comparing their results to help inform pay decisions is potentially problematic. Given the different approaches of the selected studies, their findings should not be taken in isolation as the answer to how federal pay and total compensation compares with other sectors.

GAO provided drafts to agencies and study authors for review and comment and made technical changes as appropriate in response to comments received. One study author provided written comments concurring with the findings.

GAO is not making any recommendations in this report.

No Mention of Contractors, But Federal and Private Pay Differences Depend on Methodologies

The issue of federal vs. private sector pay has been hotly contested, and was the subject of a March 2011 hearing before Chairman Ross’ Subcommittee. Unfortunately, that hearing raised more questions than it answered and GAO was called into to analyze the pay gap issue. The GAO report fails to make any recommendations, but it provides a comprehensive explanation of the legal and practical reality of the federal pay system and why comparisons to the private sector vary in their conclusions about the pay gap.

GAO found that the studies used different methodological approaches, methods, and data. That was expected, as we had previously pointed out flaws in the Heritage Foundation 2010 study, which found that “federal employees earn approximately 30 percent to 40 percent more in total compensation (wages and benefits) than comparable private-sector workers.” POGO calculated the federal and private sector compensation gap to be 20 percent, but we emphasized that no one will really know the truth until uniform systems are created and apples-to-apples comparisons are conducted that factor in comparable skills, work experience, education, and other non-pay factors.

The debate is important for the limited purpose of complying with the Federal Employee Pay Comparability Act of 1990. However, if the prevailing attitude is, as Heritage has proclaimed (see p. 16), that the private sector is cheaper than the public sector, and therefore we should “Hire More Private Contractors,” then GAO’s time and energy was wasted.

A comparison of federal and private sector pay doesn’t do anything to help contribute to the government’s decisions to insource or outsource work. While there are relevant policy concerns related to the 2.1 million civilian federal employees (who cost $200 billion in fiscal year 2011), there are more concerns with the unknown number of service contractor employees, who cost about $120 billion more.

Not sexy enough for this shirt

Illinois remains a wasteland: Taxpayers pay high price when governments lose their way

"Procurement is not sexy, but procurement is the heart and soul of corruption," said Emily Miller, policy and government affairs coordinator for the Better Government Association. "That is where it continues to be bred and it lives and thrives."

A February University of Illinois at Chicago study estimated that political corruption costs state taxpayers no less than $500 million a year. Even if it fails to reach the level of criminal misconduct, the not-insignificant added cost of fiscal missteps and Keystone Kops-style oversight – a corrupted process, if you will – are well beyond the means of a state nursing a sizable budget deficit and even larger unpaid obligations.

The day before the inspector general's report on the aviation department's wrong turns on GPS, Illinois' Auditor General torched the Department of Healthcare and Family Services and Executive Ethics Commission over "serious deficiencies" in a process that resulted in the awarding of three state-worker health-insurance contracts worth $7 billion. One result was that it's difficult to know if the state got a good deal on the insurance or not.

Ironically, some of the problems cited stem from confusion over rules, responsibilities and requirements of revamped purchasing laws established to prevent the sort of corruption that thrived during ex-Gov. Rod Blagojevich's administration.

"This was supposed to be the fix, and now all this waste happened after the fact," Miller said.

"It does seem to be verging on incompetence in this case unless they find a direct so-and-so gave money to so-and-so for the contract, which is what we find in the corruption reports, like the Blagojevich contracts," said Dick Simpson, a former Chicago alderman who's now a UIC political science professor and co-author of the school's "Chicago and Illinois, Leading the Pack in Corruption" report last month. "The thing about waste and inefficiency is they're mostly out of sight."

The Office of the Auditor General's 169-page insurance-deal state audit report set off a wave of animated finger-pointing and finger-wagging.

Among the audit's findings: The state agencies signed off on a deal allowed a consulting firm to help review the bids that business relationships with each of the bidders; an original recommendation to award the contract was changed after an agency head met with the governor's office; one insurer scored a contract in 20 counties in which it did not bid and in 24 counties where it had no in-network primary-care physicians. And finally, that all of this should have been flagged before the deals were done.

Red tape or red herring?

It is a perennial ruse of political detractors and government agencies to blame the procurement process for the failure of politicians to appropriate and government to properly spend. Here's a current example.

MPs brand MoD’s procurement ‘extraordinary failure’

In a report published today, the PAC[Public Accounts Committee] found that, since the 1998 Strategic Defence Review, there had been an ‘extraordinary failure’ to produce necessary principal armoured vehicles. These include tanks and other reconnaissance and personnel-carrying vehicles.

The PAC blamed budget cuts, an overly complex procurement process and an ‘unrealistic culture’ where the MoD was demanding cutting edge technology it could not afford.

As a result, the armed forces will not have enough vehicles until at least 2025, making it more difficult to undertake essential tasks such as battlefield reconnaissance.

The reasons for this were ‘all too clear’, committee chair Margaret Hodge said, because £10.8bn had been taken from the armoured vehicles plans in the last six years as the department sought to balance its budget.

She added: ‘The MoD seems as far away as ever from establishing a clear set of affordable defence priorities. The problem for the armoured vehicle programme is that the department has yet to say how it is going to find the money to buy the vehicles it needs in future to carry out the full range of military tasks.’

Around £5.5bn will be spent on new armoured vehicles in the next ten years, but the report also warns this may be insufficient. It calls on the MoD to set out clearer procurement priorities, and to stop ‘raiding’ the armoured vehicles funding every time it needs to make savings.

As a result of the failure to produce vehicles through its core procurement programme, the department needed to be given £2.8bn by the Treasury to buy vehicles for the separate Urgent Operational Requirements programme.

The faster UOR process has been used to deliver mine-resistant vehicles for operations in Iraq and Afghanistan, but these are more expensive, the MPs said.

Responding to the report, defence minister Peter Luff said that ‘the armoured vehicle programme was left in a mess by the previous government’.

He added: ‘We are now sorting out their unrealistic and unaffordable plans by balancing the budget, investing real money in equipment and reforming outdated procurement practices.’
However, the minister said that the PAC was ‘misrepresenting the facts’ of some procurement deals.

‘It is not true to say the £1.1bnspent on armoured vehicles has not delivered any equipment. It has delivered Titan, Trojan and Viking vehicles, with Trojan and Viking used on operations in Afghanistan.’

He also said that the UOR process has been used correctly to ‘swiftly deliver world-class equipment to the frontline’.

While there may indeed be some problem with the procurement process, it was not detailed in this article. What was detailed is a failure of government to live within its means and aims. It then must resort to less competitive emergency procedures to compensate for its failure to properly plan and manage its acquisition needs, and, as this again reflects, emergency acquisitions tend to be more costly, if more expeditious, than competitive ones.

(For those unfamiliar with the term, "red hearing" refers to a deliberate attempt to divert attention. See, Wikipedia here and here.)

Manage spending by following procurement rules

The Deputy Auditor General of South Africa said, "the failure to stick to proper procurement rules almost invariably led to a failure to manage spending." We've seen plenty of instances of exactly that lesson on Guam, too.

AG faults biggest state spenders for poor reporting

[Deputy Auditor General Kimi Madwetu said] "They are doing their accounting properly but failing the test in terms of complying with the system of sourcing goods and services."

This resulted in irregular expenditure of R2.286-billion by national departments, most of which was not identified by the departments themselves but by the AG's office.

Provincial departments, public entities and legislatures racked up another R18.4-billion in irregular expenditure for the past financial year.

"In terms of non-compliance, 92% of national departments are in the red, meaning that they have not complied with whatever applicable laws and regulations they needed to comply with," Makwetu said.

Most "would easily migrate [from in the red] to the green" if they made an effort to account properly on predetermined objectives and to comply with laws and regulations, notably supply chain management rules.

He said the failure to stick to proper procurement rules almost invariably led to a failure to manage spending.

"If procurement and contract management is not complied with the chances are that expenditure is also not going to be complied with. It is very interesting to see the correlation between the two."

A breakdown of the reasons for the adverse findings on supply chain management showed that unfair procurement and award contracts to government officials and their close family members were by far the biggest problems.

The deputy auditor-general on Wednesday lamented the lack of improved accounting in education, health and public works, as most state spending flowed through these departments.

"Since 70% of resources are going in this direction maybe the effort also needs to be directed at these areas."

"There are no clean audits in that area where the bulk of expenditures are being incurred," deputy auditor-general Kimi Makwetu told parliament's Standing Committee on Public Accounts ("Scopa"). Scopa chairman Themba Godi said the auditor-general's findings were disappointing because they reflected the same problems in state departments year after year.