Procurement
August 8, 2014

In defence of direct negotiation

From time to time, the popular media jump on examples of contracts awarded without competitive bids as examples of everything that is wrong in government. Perhaps, it is time to make the opposite case that open competition also has some problems and there are times when direct negotiation (or sole source) may be preferable.

First, I could point out that none of us use anything like the government “open competition” model in our private lives. Nor do private corporations use it for the vast majority of their purchases.
The key characteristics of most government formal bid processes are as follows:

• Governments must precisely define their needs in advance, using either a Request for Tender or Request for Proposal;
• Only bidders who submit formal and fully complying responses to the issued RFT or RFP will be considered. (The requirement for “fully complying” bids is important. I have participated in processes in which as many as three-quarters of submitted responses were rejected, often for seemingly trivial reasons – i.e. missing signatures – that could easily be corrected in a less formal process.)
• Only the precise solutions included in those responses will be considered;
• The contract will be awarded for the bid price with no or limited opportunity for further negotiation.

Problems associated with this process include:

• The process is time consuming for both government and responding vendors. From the government side, the process cost can and often does more than outweigh any “savings” achieved through lower pricing.
• From the vendor perspective, the cost to participate must be evaluated against the likelihood of winning the contract. As a result, many smaller firms choose not to participate in government procurements. Vendors who do must realistically factor in the added costs for participation into their bid price.
• Many suppliers of potential solutions (e.g. IT/software) may be based in other countries and/or have a business model in which their price is established and they do not respond to government issued procurement requests – meaning that they cannot be considered.
• The process assumes that the governments know precisely what they want in advance, including the factors that will be used to evaluate potential solutions. This flies in the face of our experience in other areas (e.g. buying a car), in which we learn as we go. My experience is that many RFPs are based on lists of “features”, usually gleaned from industry literature, and that the true differentiating factors between leading vendors appear only during the evaluation.
• Notwithstanding supposed “objectivity”, evaluations always come down to human judgement – what “score” to give each vendor for each factor being evaluated. From my experience, scepticism about the “objectivity” of such evaluations is often justified. Even the specifications can be (and frequently are) defined to favour preferred vendors.

Given these and other issues, the notion that “open competition”, as described here, always yields the best price and the best solution for governments is, quite frankly, an illusion. There are many situations in which we would get a better price – and a better solution – simply by sitting down with one or more vendors, discussing our requirements and negotiating a price – the way most of us buy a car. What is wrong with playing vendors off against each other? Why does it always have to be “one final bid”?

While I fully understand the need for “fair and transparent” government procurement in many (most) situations, such processes have a cost. When used with care and appropriate controls, direct negotiation can be an efficient and effective use of taxpayers’ dollars. Sometimes, it just makes sense to award a contract to someone who has done excellent work for a good price on a similar contract in the past. This isn’t always favouritism. It can be just common sense.

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