Procurement
March 24, 2014

As certain as death and taxes

Benjamin Franklin said that “in this world nothing can be said to be certain, except death and taxes.” I think he missed three others.

The Law of Power Cords says that if a power cord can get caught on something it will; if a power cord cannot get caught on something, it still will; and if a power cord is close to you, you will find a way to trip over it. Trust me: personal experience.

The Law of Unintended Consequences says that any action will have at least one outcome that you did not foresee; its corollary is that a negative consequence foreseen but ignored will cause more damage than an unforeseen one.

I have yet to link procurement to the Law of Power Cords, but clearly can to the Law of Unforeseen Consequences. Perhaps most obvious is the Agreement on Internal Trade (AIT) that weakened, if not breached, the then-existing wall against foreign suppliers having full access to Canadian defence procurement. It was not specific; rather, it evolved from the definition of what constitutes a Canadian supplier. Presuming no federal intent in negotiating the AIT to breach that wall, this was an unintended consequence.

The recent refresh of the federal Task and Solutions Professional Services (TSPS) standing offers and supply arrangement by Public Works and Government Services is important because, as a result of a Treasury Board decision, all departments must use TSPS to procure services in the areas of human resources, business consulting, project management (including procurement), and real property project management.

The refresh process included a provision that supplier “prices’”(per diem rates) could not be significantly (more than 20 percent) higher or lower than the median of all the per diem rates proposed: exceeding either limit meant rejection of a proposal.

Many years ago this “limiting” process was used as a defence against unusually low full bid prices for individual contracts. The premise was that such low prices, in the context of a number of bid prices received, offered too much risk. The bidder either had simply not understood the work to be done and so had not costed the work properly, or had bid excessively low in hopes of winning the contract only to later seek contract amendments to get more money.

That, to me, was reasonable – but in the context of complete bids for full contracts. When applied to per diem rates, and given that the eventual price of any resulting contract will be the product of the per diem multiplied by the days of work actually required, I am far less certain.

Suppliers can see benefits flowing from this approach. It may reduce the number of price-cutting body shops that participate, and by reducing that often-seen-as-unfair approach, may encourage suppliers with more permanent but higher priced resources to participate. By reducing the likelihood of cut-rate suppliers getting first refusal access to contract opportunities, it may encourage some higher-priced suppliers to stay in business or to re-enter the competitive government contract arena.

All increasing competition, all good things, and presumably intended consequences.

However, will there be an unintended one? In contemplating a bid under this approach, a supplier having compared its rates to what it knows of its competitors, could easily be inclined to jack up its price – basically guaranteeing itself higher profits – not because it is necessary for business purposes, but simply to become one of the crowd around the median and avoid getting kicked out of the competition.

If “poor” suppliers get rejected using the approach, that is a good thing. If contracts continue to flow to such suppliers simply because they have jacked up their prices, it is not. If the latter consequence was foreseen, the decision must have been that the overall benefits would justify a possible undeserved price increase.

Unfortunately, this brings us to the third certainty not included by Franklin. Murphy’s Law can be traced to the mid-19th century, so it was probably unknown in Franklin’s time (similar to power cords, invented long after his death). It says that if anything can go wrong, it will go wrong.

So, whether unjustified price escalation is an expected or unintended consequence of the TSPS approach, the end result will be “wrong.” The unanswered question is whether this negative result will be outweighed by the other benefits.

More generally, though, government procurement too often seeks to guarantee no negative outcomes. The search for zero risk flies in the face of the Laws of Unintended Consequences and Murphy.
Just try not paying taxes…

 

Registration for the May Canadian Institute of Procurement and Materiel Management Workshop is now open: www.cipmm-icagm.ca

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