Good enough for government work

Pentagon Pleads With Contractors to Step Up Fight Against Industrial Espionage

It is a wide open secret that the Pentagon’s complex supplier base has become a huge target. The Pentagon’s nightmare scenario: An orchestrated campaign to not only sabotage U.S. weapon systems but also steal sensitive design data from American companies. “We see growing opportunities for bad people to get at our products,” said Undersecretary of Defense Frank Kendall, who oversees weapons acquisitions.

The security gaps have widened over time, resulting from a combination of economic and technology trends — the globalization of electronics supplies and proliferation of counterfeits, the internet of things and the widespread use of software in military systems. The prospect of malicious tampering has become all too real, said Kendall. “What is my greatest fear? That we’ll find one day when we ask our systems to do something, they won’t work.”

These issues fall under the broad category of “supply chain security,” and they have put the Pentagon in a tight spot because it has limited visibility and control of the vast web of suppliers that design and produce equipment for the military. The security gaps have widened over time, resulting from a combination of economic and technology trends — the globalization of electronics supplies and proliferation of counterfeits, the internet of things and the widespread use of software in military systems. The prospect of malicious tampering has become all too real, said Kendall.

But only in recent years has the Pentagon seen substantial data and evidence of cyber attacks, tampering and other nefarious actions aimed at the defense industry. Without naming names, Kendall said there are mounting concerns about “things that are hidden in the things that we buy.” The Pentagon is taking steps such as increasing cybersecurity training for procurement officials and is trying to raise awareness of the risks, but the overwhelming responsibility for preventing and catching bad actors falls on contractors, simply because they are the first line of defense.

Dan Payne, director of the Defense Security Service, an agency that oversees industrial security, said suppliers are stepping up voluntary reporting on suspected spying. The defense industrial base is “facing a changing threat, one we’ve never faced before, a counterintelligence threat that is unprecedented in our history,” he insisted. “It’s bigger than anything we’ve ever seen.” And it’s all happening behind the scenes,” he said. “We’re in a knife fight and most people don’t know it.”

The DSS is rethinking its internal processes for dealing with industrial espionage. Many of the agency’s methods have not changed since the Cold War, said Payne. “We’re looking at prioritizing technology we truly need to protect, and looking at the companies that are producing those technologies,” he added. “Knowing how enemies are coming at us, we are working with industry on tailored security for each facility.”

In this frightening environment, Payne told executives at the Bloomberg forum, “We have to partner with industry. The nation’s top corporations can afford to spend a lot of resources vetting suppliers, but the majority of defense vendors lack such means. The U.S. government doesn’t have the resources to fight this battle alone.”

One way foreign actors can access U.S. defense industry products and data is by buying up companies. This is a “huge issue,” said Payne. “We’re never gong to be able to guarantee the supply chain 100 percent, it’s too vast.” As globalization has taken over the economy, foreign intelligence services are using businesses to get inside our supply chains to steal our secrets, our technology.”

With a globalized work force, there is a higher risk of “insider threats” that can be even harder to tackle than digital intrusions. “At no time have our adversaries ever had the access and the ability to come from different avenues as they do right now,” said Payne. “The Chinese are very good.” Having cornered 56 percent of the consumer microelectronics industry, the Chinese are in strong position to woo U.S. companies to partner with them. “This is tough one,” said Payne. “Never before have we seen the volume of joint ventures getting into our supply chain.”

The Pentagon admittedly has limited weapons to fight back, but it is slowly gearing up, said Kristen Baldwin, acting deputy assistant secretary of defense of systems engineering. “We understand security, but it’s not in our practices and processes to think about that,” she said. “We worry about quality and reliability.”

Defense program managers have to prepare to cope with counterfeit parts, malicious tampering, reverse engineering and infected software. And as much as the Pentagon needs contractors to share information about potential threats, she said, the government also needs to be more transparent with the industry.

Baldwin suggested the answer might be to rethink how weapon systems are designed so they are less vulnerable to single points of failure. “We should think about not only where the part comes from but also whether we need to design our systems so they are not completely degraded just because we don’t know what’s in that black box.” There is no way to guarantee the performance of every single component, she said.

The Pentagon funds a small number of “trusted foundries” that produce sensitive microelectronics for exclusive government use. But the majority of electronic components found in military systems come from commercial suppliers. “The fact is that we can’t afford to shut ourselves off the global supply chain nor do we want to,” Baldwin said. “That’s technology we need for our systems.”

Read more of the story at the link above.

I was interested in the comment, "The Pentagon funds a small number of “trusted foundries” that produce sensitive microelectronics for exclusive government use." It reminded me of the early years of government contracting in the United States, up to the early 20th century. My perspective of that was informed by the excellent book, "A History of Government Contracting" by the esteemed practitioner and professor, James F. Nagle. See a review of this book here.

As I recall what he wrote, in the earliest days of manufacturing, the US government took to making its own things because there was no defense industry, as such, to speak of, and what industry there was had not mastered the process of making and assembling interchangeable parts. 

Nagle expressed the observation that the government's products, made in its own "trusted foundries", were widely admired and sought around the world. Today, we take the phrase, "good enough for government work", as a cynical statement that government cannot make anything worth its salt. But, back then, when the phrase was first used, it was an admirable statement of the gold standard. If a private supplier could lay claim to have products or services "good enough for government work", he or she could proudly peddle products any where in the world.

In a day when government is intent on outsourcing everything to private contractors, who very often have foreign ownership or other influence, we might find it useful to more often rethink the gold standard. 

Exceptionalism

The procurement manifestation of NIMBY-ism is exceptionalism: I'm a unique critter and too precious to be subjected to the procurement rules.

I have previously posts concerning the expression of exceptionalism in the esteemed halls of academia, e.g., here.

This article is about the precious IT industry. Read the article at the link for fullness and accuracy and to avoid my editing for my own purposes. (FITARA is the acronym for the Federal Information Technology Acquisition Reform Act.)

National labs' FITARA exemption nixed in Senate funding bill

The Energy Department's national laboratories will likely lose their exemption to procurement rules in the Federal IT Acquisition Reform Act after just one year.

Under FITARA's enhanced CIO authorities, Cabinet-level IT chiefs typically have budget authority and some influence over hiring when it comes to the activities of their bureaus and agencies. The Senate's fiscal 2017 energy and water development appropriations bill would not renew a provision from last year's funding bill that allowed the national labs to conduct IT procurement without the involvement of DOE's CIO.

The labs and its contractors had sought the exemption because they believed their supercomputing programs should not be treated like garden-variety IT. They had a well-placed advocate on the Senate Appropriations Committee.

"Our national laboratories are building the fastest research supercomputers in the world and developing next-generation exascale machines," Sen. Lamar Alexander (R-Tenn.), chairman of the Appropriations Committee's Energy and Water Development Subcommittee, told FCW in June 2015. "One-size-fits-all models don't work well, and I am concerned that this well-intentioned law could make it more difficult to develop the technology we need to support the Department of Energy's research and national security missions."

In its budget request for fiscal 2017, the Obama administration advocated a rescission of the language that authorized the exemption.

In a June 2, 2015, letter to Senate Appropriations Committee Chairman Thad Cochran (R-Miss.), Director of the Office of Management and Budget Shaun Donovan called the exemption "highly problematic." He wrote that, if passed, the provision would "eliminate the administration's ability to ensure information technology resources effectively support the department's mission by reducing duplicative IT systems, implementing a comprehensive cybersecurity solution and addressing other IT management issues that support the president's goal to deliver a government that is more effective, efficient and accountable."

Office of Federal Procurement Policy Administrator Anne Rung echoed that sentiment during a House hearing that same month, saying, "It's our viewpoint that FITARA is a tremendous management tool for the agencies, and we are not carving out the Department of Energy labs."

Although the White House appears to have won the fight, there is a catch: If the government is funded on the basis of a continuing resolution for 2017, rather than by new appropriations bills, the exemption will likely remain in force. Given that the appropriations process for fiscal 2017 is taking place against the backdrop of a presidential election, a continuing resolution is a strong possibility.

The "Toyota Way" has gone wayward

Over and over, we hear that government should purchase like private business, and develop better working relationships and collaboration with its suppliers. Maybe, but consider this case in point (please read the article at the link): Daihatsu Dismantling 'Toyota Way' As Market Changes, by Norihiko Shirouzu, Reuters

Daihatsu Motor Co launched the Mira e:S minicar in 2011, and the car was a hit. A number of improvements – in manufacturing, engineering, procurement – went into the car. But the real secret to success, says Kosuke Shiramizu, Daihatsu’s chairman at the time, lay in taking something out of the company’s business model. Daihatsu shaved off roughly $1,000 in the manufacturing costs of the car by dismantling its keiretsu - an informal but close interlocking business relationship between a manufacturer and its suppliers, cemented by cross-shareholdings and personnel exchanges.

Keiretsu, pundits preached, defused adversarial relationships between assembler and supplier, allowing them to share information and create better product quality. Hence Japanese automakers were able to leap ahead. [Cause and effect are not so easily understood.]

Shiramizu says the days of the keiretsu are numbered. Companies, he says, are competing for price and value by using market mechanisms instead of relationship-based arrangements. "The Toyota way is the high-cost way,” says Shiramizu, 74, in an interview at Daihatsu headquarters in the Osaka suburb of Ikeda. “Keiretsu doesn’t work anymore. If we stick with it, Daihatsu won't survive. Toyota might face a similar fate, too."

Shiramizu, who became advisor to Daihatsu's board and technical executive after stepping down as chairman three and a half years ago, says his parts procurement reform isn’t meant to be a template for Toyota. But it is being taken seriously there, he says.

Two major shifts over the past two decades in the competitive landscape have been working against Japanese car makers and their keiretsu systems.

First, Western rivals dramatically closed the gap with the Japanese. That was partly due to the fact cars have become easier to design and manufacture, because they are less mechanical and are controlled more electronically. Competition thus shifted to who could offer more value to the customer: the highest fuel economy, the sexiest look, and the most compelling functions for the lowest price.

The other competitive shift came from the emerging world. Keiretsu worked beautifully for Toyota because an overwhelming majority of the finely engineered cars it made were sold in the high-priced developed markets of the United States, Europe and Japan. That began changing in the early 2000s, with the rise of emerging economies such as Brazil, Russia, India, China, Indonesia, South Africa and Turkey. These economies already collectively buy half of the automobiles sold worldwide today.

Daihatsu is mostly in the lower end of the market. As it began buying more components from Toyota-group suppliers such as Denso and Aisin Seiki over the years, it was also stuck with Toyota's lofty quality standards. Shiramizu says Toyota’s specs are often too high for vehicles that some Daihatsu officials describe as “sandals,” as opposed to the dress shoes that Toyota makes. “Do we need parts and cars that withstand the desert heat in Arizona?” Shiramizu asks.

Shiramizu's first move was to send agents of change into the company’s procurement office. Until then, Daihatsu's purchasing office was staffed by non-technical types with little knowledge on how components are designed and produced and, says Shiramizu, "no ability to assess true cost." Instead of attacking costs, those purchasing managers put a priority on their relationships with suppliers - getting wined and dined and showered with gifts in the process, Shiramizu says.

Shiramizu then initiated another move: abolishing the “account” system that governed procurement deals. The status quo, he says, made it almost impossible for new, non-Toyota-group suppliers to do business with Daihatsu, even when they offered better quality and price. Under the account system, only existing suppliers with Daihatsu accounts could supply parts to Daihatsu. [Sounds a bit like the "best value" focus on "proven reliability".]

It allowed Shiramizu to deploy his new procurement leaders in the hunt for lower-cost parts across Japan - and beyond to China, Indonesia and India. Inoue, who was plucked out of the production engineering division by Shiramizu, and his team focused on China. The team quickly found Chinese suppliers of windshields, mirrors, speakers, and aluminum wheels at savings up to 50 percent.

One of the team's most critical findings was not a new supplier, however. It was the discovery that some account holders were slapping a hefty margin on components they procured cheaply in China.

Daihatsu last year bought approximately 1.3 billion yen worth of aluminum wheels in China without going through middlemen. “We have too many middlemen skimming off," Shiramizu says. "Getting rid of those middlemen is the shortest cut to cost savings.”

Buying directly from those suppliers has made the job of procurement specialists more complex. They have to ensure that the logistics for parts delivery are sound, making sure equipment orders are delivered to plants on time. It's worth it, Daihatsu officials say.

The China team discovered factory hubs in the eastern China province of Zhejiang for dirt-cheap generic auto parts – or, as one Daihatsu executive puts it, “fakes.” The results have been mixed: Designs by the generic parts producers are often robust, but the production quality is unreliable, according to Daihatsu officials.

One solution being pursued now is to produce on its own many of the core, high-ticket parts Daihatsu currently buys from Toyota suppliers. Those include air-conditioning and steering systems, drive shafts and wire harnesses. “Toyota suppliers aren't going to like it,” one official says, “but our basic philosophy is to go ‘in house’ - and that means no more middlemen.

Daihatsu had to find a better way to procure when it faced an austere emerging marketplace. That is exactly the condition the US, and other advanced economies, are in: austerity is the new black.

One of my takeaways from this fascinating case study is that we should not allow a fully assembled (or "bundled") product to determine if something should be made subject to "best value" rather than low price bidding.

Here, Daihatsu took the product apart, and even if it did not then acquire each part independently, it learned the true cost of the product, and that is a valuable piece of knowledge when buying in bulk, versus building in house. That's some serious market research.

An article I referenced in a recent post contained a statement by the author of it, Eric S. Crusius, that

"prior to the 1984 Competition in Contracting Act, which jumped-started best-value contracting in the federal marketplace, a common refrain heard in the federal market was “good enough for the government.” In other words, the government was content to settle for mediocrity—or worse."

That's a curious turn of phrase, as pointed out by the distinguished James F. Nagle, in his treatise, "History of Government Contracting". He points out that, in the early days of US procurement, before the Civil War, the government abandoned purchasing weaponry and other things from manufacturers when it found it could make all the parts and then assemble them "in house" in US armories and ship yards. It thereby developed the specifications needed to get exactly what it wanted, both in house and from suppliers. He says,

The rigorous inspection standards gave rise to a saying still in use today but with vastly different meaning. The saying was "close enough for government work". Originally the saying was a boast by contractors to would-be commercial customers, that their products were so well manufactured that the government would accept them even with its known high standards. Unfortunately, by the middle of the twentieth century because of scandals [recounted in the book], the same saying now is used to denote a feeling by a contractor that even shoddy work will be accepted by the government.

If we are ignorant of history, we are bound to repeat its mistakes. Taking the steps Daihatsu has taken are something out of the early days of US federal procurement; if they can do that and avoid the scandals Dr. Nagle described, we may go somewhere in procurement where man has gone before, but survive it with our integrity intact.

Fools rush in where planners failed to go

Get a contracting plan in place early

For all the debate about the effectiveness of government contracting, the success or failure of programs involving government contracting is actually determined very early, often unfortunately before the contracting officer’s involvement—that is, during acquisition planning.

FAR’s Part 7 acquisition planning guidance provides a great roadmap to all the many considerations necessary before satisfying a government need via contract. The program office must take non-delegable responsibility to figure out what, why, when, where, and how they will obtain acquired resources to support their goals. This shouldn’t be another paperwork drill, completed by support contractors or the contracting officer and subsequently filed away.

Defending the FAR isn’t always popular, but it does provide clear, understandable guidance on what to consider in an AP, who to include, when key milestones should occur, and how to get there. Just about anything significant and reasonable should be considered and addressed during acquisition planning, along with any alternatives, well before requesting a contractor’s proposal. Later surprises should be few if the homework was completed beforehand. This homework includes open communication with industry to better understand the market, business trends, financing, and available technology; seeking out required expertise within the acquisition team; analyzing affected internal business processes or regulatory/policy mandates; collaborating closely with the requirements community; etc. The FAR even recommends periodically updating the AP to account for inevitable program changes.

So is acquisition planning one of those unnecessary, self-serving, bureaucratic, and burdensome requirements that slows the process and leads to poor outcomes?

The integrity, responsibility, quality, and length of acquisition planning must be part of any discussion to improve acquisition outcomes. Contracting solicitation and award processes (like most business) can go smoothly if planned well. But acquisition planning that only completes the file or occurs after the fact will result in less optimal program results. Good contracting managers are instrumental and must be included in this process, but ultimate responsibility lies with the agency, company executive, or program manager. Let’s develop the game plan before we take the field!

Far Part 7, Outline

7.000 Scope of part.
Subpart 7.1—Acquisition Plans
  7.101 Definitions.
  7.102 Policy.
  7.103 Agency-head responsibilities.
  7.104 General procedures.
  7.105 Contents of written acquisition plans.
  7.106 Additional requirements for major systems.
  7.107 Additional requirements for acquisitions involving bundling.
  7.108 Additional requirements for telecommuting.

Subpart 7.2—Planning for the Purchase of Supplies in Economic Quantities
  7.200 Scope of subpart.
  7.202 Policy.
  7.203 Solicitation provision.
  7.204 Responsibilities of contracting officers.

Subpart 7.3—Contractor Versus Government Performance
   7.301 Definitions.
  7.302 Policy.
  7.305 Solicitation provisions and contract clause.

Subpart 7.4—Equipment Lease or Purchase
  7.400 Scope of subpart.
  7.401 Acquisition considerations.
  7.402 Acquisition methods.
  7.403 General Services Administration assistance.
  7.404 Contract clause.

Subpart 7.5—Inherently Governmental Functions
  7.500 Scope of subpart.
  7.502 Applicability.
  7.503 Policy.

Excerpts:

  7.101 (a) Agencies shall perform acquisition planning and conduct market research (see Part 10) for all acquisitions in order to promote and provide for—
    (1) Acquisition of commercial items or, to the extent that commercial items suitable to meet the agency’s needs are not available, nondevelopmental items, to the maximum extent practicable ; and
    (2) Full and open competition or, when full and open competition is not required, to obtain competition to the maximum extent practicable, with due regard to the nature of the supplies or services to be acquired.

  7.103 The agency head or a designee shall prescribe procedures for—
  (b) Encouraging offerors to supply commercial items, or to the extent that commercial items suitable to meet the agency needs are not available, nondevelopmental items in response to agency solicitations; and
  (c) Ensuring that acquisition planners address the requirement to specify needs, develop specifications, and to solicit offers in such a manner to promote and provide for full and open competition with due regard to the nature of the supplies and services to be acquired.
  (d) Establishing criteria and thresholds at which increasingly greater detail and formality in the planning process is required as the acquisition becomes more complex and costly.
  (f) Ensuring that the principles of this subpart are used, as appropriate, for those acquisitions that do not require a written plan as well as for those that do.
  (l) Assuring that the contracting officer, prior to contracting, reviews:
    (1) The acquisition history of the supplies and services; and
    (2) A description of the supplies, including, when necessary for adequate description, a picture, drawing, diagram, or other graphic representation.
  (r) Ensuring that knowledge gained from prior acquisitions is used to further refine requirements and acquisition strategies. For services, greater use of performance-based acquisition methods should occur for follow-on acquisitions.
  (s) Ensuring that acquisition planners, to the maximum extent practicable—
    (1) Structure contract requirements to facilitate competition by and among small business concerns; and
    (2) Avoid unnecessary and unjustified bundling that precludes small business participation as contractors.

  7.104 (a) Acquisition planning should begin as soon as the agency need is identified, preferably well in advance of the fiscal year in which contract award or order placement is necessary. In developing the plan, the planner shall form a team consisting of all those who will be responsible for significant aspects of the acquisition, such as contracting, fiscal, legal, and technical personnel. If contract performance is to be in a designated operational area or supporting a diplomatic or consular mission, the planner shall also consider inclusion of the combatant commander or chief of mission, as appropriate. The planner should review previous plans for similar acquisitions and discuss them with the key personnel involved in those acquisitions. At key dates specified in the plan or whenever significant changes occur, and no less often than annually, the planner shall review the plan and, if appropriate, revise it.
   (b) Requirements and logistics personnel should avoid issuing requirements on an urgent basis or with unrealistic delivery or performance schedules, since it generally restricts competition and increases prices. Early in the planning process, the planner should consult with requirements and logistics personnel who determine type, quality, quantity, and delivery requirements.

The Desiderata of the value of local preference rules

Local preference rule on government contracts an ineffective gimmick

The Hernando Commission just can't resist feel-good, but ineffective, public relations gimmicks. It is again considering skewing its procurement rules to benefit local bidders. It is at least the fifth time since 2008 that commissioners have considered rewriting their rules even though their own attorneys and the previous purchasing staff frowned on this poor public policy which has the potential to raise taxpayers' costs.

The county's standards include promises: To deal fairly and equitably with all suppliers wishing to do business with Hernando County; to maximize competition for all procurements; and to purchase goods and services at the lowest price, consistent with quality, performance, and delivery requirements from capable suppliers meeting the county's requirements. Except, under the proposed ordinance, none of that matters if you have a local zip code. Fair treatment, maximum competition and lowest prices no longer apply.

The misguided plan calls for giving local companies a 5 percent credit on contracts up to $500,000. Local companies bidding on projects exceeding that amount can get a 3 percent discount and other considerations by documenting local vendors to be used as subcontractors. Essentially, a local company bidding within 5 percent of the lowest bid coming from an out-of-towner can be awarded the contract.

Commissioners, charged with the duty of being stewards of the public purse, need to ensure the public receives the best product for the best cost, regardless of the address of the supplier.

This article succinctly summarizes the main points in opposition to local preferences, such as "Buy American" rules of the federal government. It does not even mention what some might say are benefits. The author might consider the observations of Prof. Steven Schooner.

Desiderata: Objectives for a System of Government Contract Law, by Professor Steven L. Schooner, George Washington University Law School, Washington, D.C.

Sometimes the most simple questions prove the most vexing. For example, what does your government hope to achieve through its government procurement law? It is possible to draft and enact a new law without answering the question, and experience demonstrates that this is often the case. (Arguably, it is equally challenging to sustain a commitment to these objectives over time, but that is a topic for another day.) Nonetheless, it seems reasonable to attempt to describe general aspirations for a procurement system before drafting begins.

Unfortunately, it is difficult to articulate objectives for a procurement system. There are many options, and most are contradictory.

At a macro level, the author prefers to begin with three “pillars” that, in my opinion, underlie the United States procurement system: system transparency; procurement integrity; and competition. In the United States, we believe that, as a general rule, our government enjoys access to the best contractors, lowest prices, most advanced technology, favourable contract terms and conditions, and the highest quality goods and services. We think this is so because our system, for the most part, encourages participation by the widest possible pools of potential competitors; it consistently demonstrates that competitors will be impartially considered for award of our contracts; and it treats all contractors in a manner that balances appropriate risks with meaningful profit incentives and rewards.

There are plentiful exceptions to this description, and a number are identified below. [You will have to read the article, at the link above, for the full discussion; here I just cut to the chase run in the lead article above.]

Historically, our elected representatives have viewed our procurement system as a vehicle to distribute wealth. For example, our government has chosen to leverage its purchases to support domestic firms and, more specifically, small businesses.29 At the same time, our procurement dollars may be directed towards specific manufacturers to maintain sufficient expertise or industrial base capacity in anticipation of future contingencies. You may target your buying towards contractors located in geographical areas of high unemployment. It is axiomatic that government spending can influence behaviour and infuse growth in communities and economic sectors. Conversely, efforts to redistribute wealth through the procurement system – by their very nature – restrict competition.

No system can achieve all of these goals. Nor can a state expect that its objectives for its system will remain constant over time. Determining which goals are most important is a daunting, ever-evolving challenge. Because no system can achieve all of the goals here (or the many not discussed), your desiderata entails important tradeoffs. There are significant transactional, economic, and social costs associated with maximizing transparency, integrity, and competition. Nonetheless, the author believes these costs are an excellent long-term investment.

Outsourcing pendulum starting to swing back?

Analysis: Government Privatization Paves the Way for Crony Corruption By Norm Ornstein

There are good reasons why not all governmental functions can or should be done by government employees or officials. It can be more cost-effective to hire contractors instead of training government employees; contractors can have more expertise; and contractors can do many things more efficiently. Some states have privatized such things as toll roads in order to raise cash in the short run to resolve serious budget problems (in the process, of course, sacrificing long-term revenue). In other cases, such as infrastructure, public-private partnerships can be the most cost-effective and efficient way to accomplish public and private ends.

But in recent decades, the dramatic push for more and more privatization of federal functions has gone beyond a discussion or analysis about how to best sort out public and private functions, turning into a headlong rush to privatize more. A good part of this is ideological in nature—driven by vociferously antigovernment ideologues who want to squeeze the size and role of government, decapitate government-employee unions, and discredit government generally along the way. Another part is greed: Sell off parts of government, or hand out contracts, in ways that reward one’s cronies and campaign benefactors. And a third part is to hide the costs of difficult or unpopular activities such as war or spying. Mixed in with these motives is a broader, less malign one: As government has been squeezed and public employees vilified and cut back, the only feasible way to hire competent people who are needed to fill important functions is to do it through the back door.

The intelligence brouhaha and Snowden fiasco—how could this guy have been hired, given his high-level classification, paid $122,000 a year, and gain access to areas expressly off-limits for someone at his level?—should make us focus on the bigger issue, and bigger problem, here. We have vastly over-privatized, and in the process lost control over swaths of important policy areas while allowing unaccountable and even outlaw behavior to expand. There were at times more than 100,000 contractors in Iraq, including nearly 50,000 “soldiers,” many making $1,000 a day, far more than active-duty military, with the money coming from American taxpayers. Conveniently for politicians, if these “soldiers” died, they were not counted in the official death toll of Americans killed in the war.

And we have created areas where crony capitalism can meet crony government to create crony corruption that cheats all taxpayers. If multiple public functions are privatized, or partially privatized, government employees have huge incentives to curry favor with potential private employers by granting them rich contracts or consulting fees, and then subsequently getting jobs paying multiples of their government salaries—or just giving nice perks to one’s former colleagues and friends who left for the private sector. Private contractors know the game well; they can recruit top government employees and then effectively lease them back to the government, where they do the same jobs and stick taxpayers with much higher bills.

Private Attorneys General and frivolous protests

I have often made the claim that we outsource the policing of defects in the procurement system to protestors, and that frivolous protests are frivolously over-hyped.

Now comes Danial I. Gordon, currently Associate Dean for government procurement law at the George Washington University, and formerly administrator of the Office of Federal Procurement Policy. So you don't have to take it from some small island lawyer who dabbles in local procurement. Take it from a pro. 

His paper, Bid Protests: The Costs are Real, but the Benefits Outweigh Them, is soon to be published in the American Bar Association Public Contract Law Journal, and freely downloaded at the link below. Here's a few tidbits intended to tempt you to read the whole piece.  And if you are a student of procurement law, you must read it for the citations and explanatory footnotes.

Bid Protests: The Costs are Real, but the Benefits Outweigh Them

In the U.S. federal procurement system, bid protests have existed since the 1920s. Despite its longevity, however, critics have come to characterize the bid protest process as costly and overly complex. This Article explains why, in the author’s view, the benefits of the bid protest system substantially outweigh the burdens it imposes on the procurement system.

In 1925, a company wrote to the GAO alleging that Panama Canal officials had issued a solicitation with specifications for a truck that were “wired” to a particular brand name and that thereby unfairly precluded the complaining firm from fair consideration for the contract. The GAO requested the agency’s views on the matter, and, when the Canal authorities admitted that they had used the specifications of one company’s truck in the solicitation, the GAO issued the first published bid protest decision, ruling that the challenged solicitation was unlawful. For many years, courts did not consider bid protests, so that the GAO (and the contracting agencies themselves) represented the only place to file a protest.

For more than a decade now, the only places outside the contracting agency where disappointed bidders have been able to file protests have been the GAO and the Court of Federal Claims. One forum is administrative and the other is judicial. In any event, having two fora hear bid protests may be healthy for the procurement system.

It is worth looking outside the United States, because the protest process has received substantial attention around the world in recent years. A protest system has come to be seen as a required part of a good public procurement regime. Perhaps most interesting is the attention bid protests have received during the past twenty years in the European Union (EU). Not mentioned in the EU’s Public Procurement Directives, protests were first addressed by the European Commission in what is known as the Remedies Directive. The Remedies Directive has had an enormous impact, requiring all member states to have a forum that considers protests. Furthermore, the Court of Justice of the European Union has also issued decisions that have reshaped the protest process in the EU. Of particular importance was the Alcatel decision that led to the requirement (codified in Article 2a of the 2007 revision to the Remedies Directive) that there be a “standstill” period (typically ten days) between the announcement of a potential awardee and contract signing to allow a window for filing protests.

What about the mantra we often hear about increases in protest numbers? It is true that the GAO has reported a substantial increase in the number of cases filed over the past few years, but even if the numbers doubled, from .5% of procurements to 1%, it would still mean that something like 99% of procurements are not protested. Thus far, among the hundreds of thousands of federal procurements that occurred in FY 2010, there were only 45 procurements for which the GAO sustained bid protests. What happened in those 45 procurements, after the GAO sustained the protests? Did the protester that was successful in the GAO litigation succeed in obtaining the contract? The answer: rarely.

Protests impose litigation costs on the parties, including attorney costs, although the author is unaware of data regarding those costs. Moreover, even when a bid protest is denied, it usually holds up the protested acquisition. The automatic stay for protests filed with the GAO can last up to 100 days and even the most promptly dismissed protests may trigger a CICA stay that is in place for at least a few days. In short, the CICA stay does disrupt procurements. Moreover, the fact that a protest has triggered a CICA stay does not mean that the procurement will be on hold for 100 days.
Most protests are resolved well before the 100th day, which is the maximum length of time the GAO has for resolving a protest. In 2009, the GAO reported to Congress that it “consistently closed more than half of all [Department of Defense (DoD)] protests within 30 days.”

A CICA stay may end because the protester has withdrawn the protest, or because the GAO has dismissed the case.1 When an agency takes corrective action, that also ends the stay, but, of course, the corrective action itself will generally delay progress in the procurement. Even for the minority of protests that make it to the published decision stage, the GAO has reported that, on average, it issues a decision within 80 days. Truly long procurement delays lasting for months really only occur when the GAO issues a decision sustaining a protest and the agency implements the GAO’s recommendation, which typically calls for the agency to re-do at least part of the competition for the contract.

Finally, in the author’s view, there is adequate justification for a substantial delay in a procurement where the GAO has determined that the agency violated procurement law, and that the violation has harmed the protester. At the very least, any delay that such an agency’s unlawful action has caused should not be blamed on the bid protest system.

Critics of the protest system may also view the GAO’s authority to recommend that successful protesters be reimbursed the costs of filing and pursuing their protests, including costs attributable to attorneys’ fees, as another cost of associated with bid protests. This situation arises only when the GAO finds that a protest is clearly meritorious, which means that the contracting agency violated procurement law to the detriment of the protester, and when the agency has unduly delayed taking corrective action. In the author’s view, reimbursing protesters for their actions as “private attorneys general” is justifiable.

critics point to abuse of the protest system in particular contexts as causes for concern. Specifically, there are persistent complaints that abuse arises in the form of “frivolous” protests, and the author has often heard calls for imposing sanctions on firms that file frivolous protests. In the 2009 report to Congress on DoD procurements, the GAO responded to a request from the House Armed Services Committee to address frivolous protests filed in connection with DoD procurements. The GAO pointed out that the fact that a protest is denied or even dismissed does not mean that it is frivolous; instead, the GAO expressed the view that only a protest filed in bad faith should be viewed as frivolous. It did point out, however, that contracting agencies rarely assert that protests are frivolous. In a footnote, the GAO indicated that the last reported decision noting that an agency had characterized a protest as frivolous was issued in 1996, and that in that case, the agency subsequently acknowledged that the evaluation scheme used in the protested procurement was flawed.

The GAO also expressed concern that any effort to impose sanctions on frivolous protests (such as imposing a fine or requiring the protester to reimburse the Government for costs incurred in defending against the protest) would risk “the unintended consequence of discouraging participation in federal contracting and, in turn, limiting competition.” The GAO also pointed out that penalties could not properly be imposed on “frivolous” protesters without adding a new layer of litigation, for which the GAO would then need to determine whether protesters had filed their protests in bad faith. Besides the burden that such litigation would place on the GAO, distracting it from its focus on resolving protests as quickly as possible, a new layer of litigation could impose additional costs on agencies and protesters, the burden for which might fall disproportionately heavily on small businesses and protesters not represented by counsel that may have protested in good faith but acted with a misunderstanding of the facts or the law. The appropriate response, in any event, would appear to be to press the GAO to continue (or intensify) its efforts to resolve protests promptly, not to create a new round of litigation about the imposition of sanctions, and certainly not to limit or abolish vendors’ right to have an independent body consider their claims of unlawful action by contracting agencies.

Benefits of the Protest Process: First, protests introduce a relatively low-cost form of accountability into acquisition systems by providing disgruntled participants a forum for airing their complaints. Protesting firms decide which procurements are to be investigated: if no one protests, then neither the GAO nor the Court of Federal Claims would look into a procurement. While reliance on audits by government officials would also inject accountability into the workings of procurement systems, it may be more efficient to focus on procurements where a participant is dissatisfied by a government agency’s conduct; that is what the “private attorney general” model of a protest provides. In blunt terms, if no one is dissatisfied with the way the Government conducted a procurement, then it may not be a wise use of auditors’ time to investigate it.

Second, by being directly responsive to participants’ complaints, protests can increase potential bidders’ confidence in the integrity of the procurement process, and thereby lead more players to participate, thus increasing competition. Increasing competition, in turn, can translate into bidders offering lower prices, higher quality, or both, to contracting agencies.

Third, protests can increase the public’s confidence in the integrity of the public procurement process. While the public only rarely focuses on public contracting, having a protest process mentioned in the press – as happened when The Boeing Company successfully protested the Air Force’s award of a tanker contract to Northrop Grumman151 - may raise the public’s trust in the fairness of the Government’s acquisition system and the way it spends taxpayer funds.

Fourth, because protests are a known avenue for complaints, their availability empowers those in contracting agencies who face pressure to act improperly. Thus, if a Contracting Officer were to be pressed by users within an agency to award a solesource contract to a favored firm, the Contracting Officer, who may lack the bureaucratic clout to resist the pressure, could point to the risk of a successful protest as one additional reason to follow the statutory and regulatory requirements for competition.

Fifth, protest decisions, because they are public, and have been released publicly since the GAO issued the first one in 1926, provide a high level of transparency into what is happening in the federal procurement system; protest decisions can often provide more useful information than databases. This is particularly the case where protests demonstrate how problematic certain issues are.

Finally, the fact that protest decisions are published and widely read by practitioners brings an additional benefit: the decisions provide guidance, particularly to agency counsel and attorneys representing potential protesters, as well as to their clients.

Conclusion: The Costs of the Bid Protest System are Overstated, and the System’s Benefits Outweigh Them

Protests: Rare and worth it

You will gain more by reading the linked articles than accepting this rendition at face value.

Steven Maser Authors Study on the Federal Bidding Process

Steven Maser, Professor of Public Management and Public Policy, recently authored a study funded by the Acquisition Research Program at the Naval Postgraduate School and distributed for practitioners through the IBM Center for the Business of Government. It evaluated the way government agencies manage the bidding process when they purchase products or services.

What Maser found was eye-opening. In the past few years the number of bid protests, where a rejected bidder complains to the Government Accountability Office, has been on the rise although the total number is small. Maser found that in most cases bid protests were not sustained.

However, bid protests aren’t necessarily bad. Maser argues that they provide an important benchmark. "In general, the system serves a very good purpose of helping the government actually police itself," he said during an interview with Federal News Radio. The study notes that the more transparency and disclosure that’s built into the process, the less likely a bid protest will occur. It recommends that agencies should simplify the requirements they create for the products and services they need and adequately train staff members who will evaluate proposals.

Bid Protests Are Worth Their Costs, Ex-Procurement Chief Says>

Contractors on the losing side of a competitive bidding who protest to the Government Accountability Office do not hurt or game the procurement system as some critics allege, says a forthcoming study.

The percentage of contracts that spark protests is also comparatively small, while the overall impact of the protest procedure is healthy, according to Dan Gordon, the former Obama administration head of the Office of Federal Procurement Policy and now associate dean for government procurement law studies at George Washington University Law School.

In an article set for publication this spring in the Public Contract Law Journal, a copy of which was provided to Government Executive, Gordon wrote that “there exist a number of misperceptions concerning bid protest statistics that deserve attention, because these misperceptions can taint judgments about the benefits and costs of protests. In particular, even people quite familiar with the federal acquisition system often believe that protests are more common than they really are, and they believe, inaccurately, that protesters use the protest process as a business tactic to obtain contracts from the government.”

Because of the difficulty of knowing precisely how many contracts the federal government awards each year, the reports of protest to GAO -- which reported 2,353 in fiscal 2011 -- are actually overstated, Gordon says. “Between approximately 99.3 percent and 99.5 percent of procurements were not protested,” even though the trend since the 1990s has been upward. That’s because of increases in procurement spending, the article says.

“It is, of course, true that very high-dollar procurements are much more likely to be protested: the higher the dollar value, the greater the likelihood of a protest,” he said. “For a company that loses the competition for a $100 million contract, with all the bid and proposal costs that competing entails, the additional cost of filing a protest may seem minimal, so that filing a protest can be very tempting.”

Of protests making it through the full GAO process in fiscal 2010, only a handful succeeded in winning the contract, according to Gordon’s calculations.

Overall, Gordon finds the bid protest process to be positive for the procurement system, citing several advantages:

>Protests introduce a relatively low-cost form of accountability into acquisition systems by providing disgruntled participants a forum for airing their complaints;
>They can increase potential bidders’ confidence in the integrity of the procurement process if the GAO is directly responsive to participants’ complaints, leading more players to participate;
>Protests can increase the public’s confidence in the integrity of the public procurement process; --The known availability of the protest avenue empowers those in contracting agencies who face pressure to act improperly;
>Protest decisions made public provide a high level of transparency into what is happening in the federal procurement system; and
>Protests provide guidance.

Bid protesting system helps agencies police themselves

It's nothing personal, but bid protests are one way of keeping the federal procurement system honest. Congress and the Government Accountability Office have been encouraging greater transparency in contracting. One way of doing that is giving the unsuccessful bidder the opportunity for a debriefing, in which the contracting agency describes how the bidder failed to secure the contract and how they could be more successful in the future.

"What the agencies have some fear of is the more they disclose, the more a company or an attorney for that company will find a basis for a bid protest."

According to Maser, if agencies were more open at the beginning of the bidding process, the likelihood of a bid protest could be reduced. "But again, there's some risk that's inherent in this that they'll never be completely eliminated," he said.

Canada opting to centralize some defense procurement processes?

Ottawa eyes plan to loosen DND’s grip on military procurement (NB: filed by the Globe and Mail under "politics")

The Harper government, eager to fix Canada’s chronically dysfunctional system for buying military equipment, is considering changes that would strip the Department of National Defence of significant responsibility in steering major purchases. Ottawa has considered the notion of a standalone central purchasing agency but judged it too onerous. There’s no support among the Harper cabinet for creating an arm’s-length entity, sources say.

One option under serious study is the creation of a permanent secretariat, reporting to the Department of Public Works, that would take responsibility for all major military procurements above a certain dollar value, a Department of National Defence source said. It would also represent an important reduction in DND’s traditional role in drawing up specifications for big expenditures: in effect, the designing and selecting of the options for purchase.

In military procurements, DND is responsible for taking a required purchase and developing the specifications for precisely what features are needed. This can be a lengthy process, partly because regular turnover among project managers at National Defence means the task of drawing up specifications ends up being restarted more than once.

National Defence’s involvement more often than not results in the department picking the supplier before a competition has been held. That’s because it draws up specifications that can be met by only one product – the one it likes best.

Under the proposed new system for major purchases, the Defence Department would tell the secretariat what its requirements are. But it would hand responsibility for generating the options and specifications to Public Works.

At the end of the process, the new procurement secretariat would return to the Minister of National Defence and unveil the options for purchasing before launching a competition for suppliers. The military would still have the final say on whether the options put forward meet its requirements, but National Defence would no longer be able to tailor the specifications to a particular supplier’s vehicle, equipment, vessel or plane.

A big embarrassment for DND last week – when the Harper government shut down a project to buy new army trucks because National Defence was trying to spend as much as 86 per cent more than authorized on the vehicles – is being held up as the last straw by procurement reformers.

The article is also interesting for some of its observations on similar approaches in Australia. And contrast that philosophy with the partial (?) privatisation of procurement contemplated in the UK.

Further reading on this subject:

Army trucks project cancelled after DND added $300 million to price tag without permission

The Defence Department had received government approval in 2009 to move forward with the $430 million purchase of 1,500 off-the-shelf medium-sized trucks. But in subsequent years department and military officials began adding more capabilities to what they wanted in the vehicles, bumping the estimated cost to between $730 million and $800 million.

Army trucks project canned due to $300M cost overrun

The cancellation is not fair to contractors who invested time and money into the bid preparations, NDP defence critic Jack Harris argued. He said taxpayers are too often kept in the dark about the ballooning costs of military purchases.

Read that last remark carefully. The contractors were not kept in the dark; the taxpayers were.

Diet tip: Only bite off what you can chew and swallow

One way to make procurement more efficient, from the perspective of contract management structure, is to put everything under one contractor. One way to keep costs down and deliverables more effective is to bite off only what you can chew.

There are many goals and ideals used to describe "effective" procurement, but they involve trade-offs. That is one of the most aggravating things about implementing a procurement regime for the ages. And why it hasn't happened yet.

Contracting Guidance to Support Modular Development, Office of Management and Budget Report

This guidance presents a variety of factors that contracting officers, in support of IT managers, will need to consider as they plan for modular development efforts, such as whether to award to a single vendor or multiple vendors; how to ensure that there is appropriate competition at various stages in the process; how broad or specific the statements of work should be; when to use fixed-price contracts or rely on other pricing arrangements; and how to promote opportunities for small business

It is primarily focused on outlining acquisition guidance to support modular development approaches.

Federal agencies have traditionally taken a multi-year “grand design” approach for developing, modernizing, and enhancing investments in IT. This approach is grounded in the common notion that responsible development necessitates a full detailing of requirements before work can start.

Although a seemingly reasonable assumption, practical evidence and private sector experience has shown that large and complex IT implementations often encounter cost and schedule overruns, as the painstaking process of requirements gathering too frequently takes years to complete. Subsequently, agencies lose visibility into the performance of these multi-year IT development investments which affects their ability to implement corrective actions that reduce risk or mitigate financial exposure.

The Government increases investment risk in these situations because: (1) the IT solutions that had once addressed agency requirements may no longer be pertinent or a priority; (2) substantial funds are allocated towards outdated solutions without any returns on the investments; or (3) agencies encounter budgetary constraints before substantive work is completed.

To help resolve these issues, modular approaches should be used in the development of IT investments, allowing agencies to implement significant capabilities for investments through the use of modular solutions that can be defined, developed, and deployed within months instead of several years.

Modular approaches involve dividing investments into smaller parts in order to reduce investment risk, deliver capabilities more rapidly, and permit easier adoption of newer and emerging technologies. Section 5202 of the Clinger-Cohen Act of 1996 and section 39.103 of the Federal Acquisition Regulations (FAR) each recognize these potential benefits of modular contracting and state that agencies ͞should, to the maximum extent practicable, use modular contracting for an acquisition of a major system of information technology.

Furthermore, OMB Circulars A-130 and A-11, as well as the Capital Programming Guide, include modular development and contracting approaches for capital asset acquisitions in general, which also readily apply to acquiring and developing investments in IT.

By following a modular approach, agencies can recognize the following benefits:

-- Delivery of usable capabilities that provide value to customers more rapidly as agency missions and priorities mature and evolve;

-- Increased flexibility to adopt emerging technologies incrementally, reducing the risk of technological obsolescence;

-- Decreased overall investment risk as agencies plan for smaller projects and increments versus “grand design” (each project has a greater overall likelihood of achieving cost, schedule, and performance goals than a larger, all-inclusive development effort);

--Creation of new opportunities for small businesses to compete for the work;

-- Greater visibility into contractor performance. Tying award of contracts for subsequent Task Orders to the acceptable delivery of prior projects provides agencies better visibility into contractor performance and allows a greater opportunity to implement corrective actions without sacrificing an entire investment;

-- An investment can be terminated with fewer sunk costs, capping the risk exposure to the agency when priorities change, a technology decision doesn’t work or the contractor’s performance doesn’t deliver results.

Read more at the link above.

Government IT Projects Pushed To Use Modular Contracting

The goals of the updated policies include breaking down contracts into more manageable pieces and turning projects around more quickly. VanRoekel and Jordan said the new policies will increase contractors' accountability by requiring more frequent deliverables that meet agencies' requirements. They also will encourage increased competition by putting more projects within reach of small businesses.

It's as simple as A, B, see?

There is a necessary but entirely uneasy fit between procurement law (government contracting) and the private law of contract. In the evolutionary emergence of government contracting, they share a common ancestor, or two, but care must be taken not to conflate the two . They are different in important and fundamental ways, too many and subtle to be canvassed in a blawg post.

For instance, in the Guam Procurement Process Primer, I take great pains to try to reconcile the meaning of "award" in the context of traditional contract formation law. It's an uneasy fit, perhaps more full of rationalization than design.

An award in the procurement context is both the end game of the solicitation process and the new beginning of a relationship that then becomes more cognizable in contract law. It is a moment, or moments, when the courtship gives way to the marriage, de facto or de jure.

I've concluded, rightly or wrongly, an award is that point in time, evidenced by acts and omissions of the parties, when negotiation is complete and acceptance finalized. That has never been a bright line in contract law, as the many cases over the centuries have made clear, but one that is hornbook orthodoxy.

Why should it be any clearer in procurement law? It is simply a construct, one constructed bespoke from the circumstances, every time. Somewhat like trying to determine the instant of death, or birth, or other things transitional that are better described, if clumsily defined, by comparison of the "before" picture with the "after".

An example of the struggle to put theoretical form to the award process is illustrated by the procurement bulletin published by Mr. Paul Emanuelli in the Canadian Daily Commercial News online publication, wherein he paints the transitional process as actually two separate contracting events: A, the "contract" of the solicitation process, and "B" the contract resulting from the solicitation process that executes what it is that was sought in the solicitation.

That is probably not a very artful way of expressing what he was trying to say, so here it is, in excerpted and re-ordered in parts, for you to determine. You ought to read the whole article, however, and not take my take at face value.

Ontario court rules against contractor who made mistake in bid on Toronto bus garage construction project

In Toronto Transit Commission v. Gottardo Construction Ltd., the defendant bidder attempted to rely on its own mistake as the basis for avoiding liability after it failed to honour its tender.

The tender call rules required [successful] bidders to provide additional documentation on demand within two days. This post-bidding process gave rise to confusion.

The trial judge determined that because the tender instructions provided that the TTC could demand the production of certain documents after the opening of the tenders, Contract A would not be formed until sometime after these additional documents were demanded and provided.

The reasons, however, do not address the critical issue as set out by the Supreme Court of Canada in M.J.B. Enterprises Ltd.: when did the parties in fact intend to initiate contractual relations? Rather, the trial judge appears to have confused the creation of Contract A and the process of analysis that leads to the acceptance of the tender and the formation of Contract B.

The Ontario Superior Court of Justice found that the tender was incapable of acceptance and that the bidder was therefore not liable for failing to honour its tender. In coming to this conclusion, the Superior Court found that the bidder had failed to fulfil the post-bidding follow-up steps required by the tender call rules. The bidder was therefore able to rely on its non-compliance as the basis for not honouring its tender.

Acceptance or rejection of the bid is not what leads to the creation of Contract A. Acceptance or rejection is the end point of the tender process. Once the tender is accepted, the parties enter into the construction contract referred to as Contract B. The fact that certain steps are taken and certain documents are to be produced by the tenderer after the submission and opening of tenders will not delay the formation of Contract A when the clear intent of the parties is to be bound as of the opening of the tenders.

Accordingly, the Court of Appeal concluded that Contract A had crystallized and that the tender became legally binding when the tenders were opened after the tender submission deadline. The Court of Appeal therefore found the bidder liable for $434,000 for failing to honour its bid.

This "two contract" theory is one of the unique features of Canadian procurement law, according to the following highly informative Blakes law firm article of date September 23, 2011 written by Judy Wilson and Joel Richler.

Canadian Procurement Law – The Basics

What is somewhat unique to Canadian law is that competitive procurement processes create two contracts: (i) the bidding contract which sets out the “rules” that apply up until the completion of the competitive procurement process; and (ii) the substantive contract entered into between the procuring authority and the successful bidders.

The first, and seminal, case is The Queen (Ont.) v. Ron Engineering & Construction (Eastern) Ltd., where the SCC first articulated the “Contract A”/“Contract B” analysis. Contract “A” is the contract that is made when a bidder submits a bid in response to an invitation to tender (or similar document). Contract “B” is the agreement that will be formed between the procuring authority and the winning bidder.

In M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., the SCC clarified that Contract “A” can only be formed between a procuring authority and compliant bidders, that is, a procuring authority is contractually obliged through Contract A to accept only compliant bids, and only compliant bidders have legal remedies arising from the procurement process as against a procurement authority. At the same time, the SCC recognized and accepted that procuring authorities are entitled to consider “nuanced” views of price, and are therefore not bound as a matter of principle to accept only the lowest of compliant bids.

The third case, Martel Building Ltd. v. Canada, affirms that there is a duty owed to treat all compliant bidders fairly and equally, but always with regard to the terms of “Contract A” as set out in the competitive procurement documents (in this case, a tender call). At the same time, the SCC held that competitive procurement requirements aren’t negotiable, that procuring authorities have the right to reserve privileges and impose stipulations and that there is no duty of care owed in respect of the preparation of competitive procurement documents.

For some time, a reading of these SCC cases, and the many cases decided in trial and appeal courts throughout Canada since Ron Engineering, suggested three somewhat competing principles.

First, the law imposes obligations on both the procuring authorities and the bidders. Procuring authorities must, at all times, adhere to the terms and conditions of Contract A and cannot accept any non-compliant bids, no matter how attractive they may be. As well, procuring authorities must act towards all compliant bidders fairly and in good faith, particularly during the evaluation of any bidder’s submission. Also, procuring authorities cannot make their ultimate decisions to award or reject submissions based on criteria that are not disclosed in the terms and conditions of the procurement documents. Bidders, for their part, cannot revoke or supplement their submissions, unless permitted to do so by the terms and conditions of Contract A.

Second, the law does permit procuring authorities to create the terms and conditions of Contract “A” as they see fit. Thus, privilege clauses – clauses which provide the procuring authority with discretionary rights – are recognized as fully enforceable and, if properly drafted, allow procuring authorities to reserve to themselves the right to award contracts to bids that may not be for the lowest price, or not to award contracts at all. As well, procuring authorities are free to impose any number of criteria on bidders such as: prior similar work experience; the absence of claims or prior litigation; local contracting; scheduling criteria; composition of construction teams; and so on.

Third, and perhaps somewhat contradictory of the second principle, while the list of requirements and criteria imposed on bidders may be extensive, it will always be open to the courts to impose limitations where the discretion retained by the procuring authority is extreme. The courts have made it clear that maintaining the integrity of competitive procurement processes was a fundamental goal of procurement law in Canada. For some time, practitioners believed this could mean that, no matter how broadly drafted, there would be a point at which a court would say that a competitive procurement process was by design unfair, or that an “unfair” privilege clause (or another type of clause) would not be enforceable by a procuring authority. The view was that public policy concerns would come into play and the court would refuse to enforce an explicit Contract A provision on the basis that it created “unfair” consequences in the competitive procurement process. It was long suspected that the SCC would not allow procuring authorities to have “carte blanche” in the drafting of their competitive procurement documents.

These views were tested in the recent Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) case, in which the SCC refused to enforce a waiver clause with respect to damages arising out of a breach of Contract A. This case required the SCC to face the competing tension between the implied obligation of fairness in procurement and the principle that courts should enforce valid contractual terms. It appears that in a conceptual battle between the right to contract and public policy to protect the integrity of fairness in competitive procurement processes, the “fairness” obligation has prevailed. There were two other important issues dealt with or alluded to in Tercon. First, the SCC left open the door for negotiation within a competitive procurement process, subject to disclosure and a prohibition against changing the fundamental nature of Contract B. Second, the SCC made a brief reference to other administrative law remedies available to a disgruntled bidder, thereby reinforcing the idea that judicial review was an available course of action to challenge public sector procurement processes.

Two other key cases have been decided by the SCC recently and are worth mentioning. In Design Services Ltd. v. Canada, the SCC refused to recognize a new cause of action for “negligent procurement”, and in Double N Earthmovers Ltd. v. Edmonton (City), the SCC held that a procuring authority is permitted to renegotiate a contract on which a competitive procurement process was based after Contract B is signed.

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However the process is theorized, the point is, if the solicitation requires a bidder or tenderer or offeror to perform its contract in certain manner, and it fails or refuses to do so, it is in some kind of strife, whether as a default of the solicitation or of the obligations of the "contract" consummated in contract by offering a bid. Whether the theory is implied contract, contractual reliance or quasi-contract or "two-contract", it is undisputed that one party, the government, has gone to great lengths to engage a willing offeror in reliance on that offeror's implicit(actually, usually explicit under solicitation documents) agreement to perform if awarded the fruit of the selection process.

That is why there are bid bonds. The failure to enter into the contract the solicitation required is a breach of procurement law. Let the contract theorists find a way to reconcile that with their models if they feel the need. In my view, contract law has almost always been a deduction from case results, and not the other way around.