January 23, 2012

The procurement issue with over-budget bids

Poor specification can cause budget problems on construction projects.

Quite frequently in public contracting the lowest bid received will be in excess of the budget upset limit set by the contracting authority. A budget upset limit is the maximum price at which a contracting authority is prepared to award a contract. Very often, this limit will actually be part of the public record, as it will have been disclosed in the course of fixing the authority’s budget for the year, long before any invitation for tender is issued.

Nevertheless, few contracting authorities will specifically disclose the budget upset limit within the tender course itself, largely out of the fear that doing so would likely inflate prices that would be paid, towards the budget upset figure.

In all probability, over-priced bids are no more frequent in the public sector than in the private sector. However, public contracting authorities operate at a serious disadvantage relative to their private sector counterparts in that their budget setting (and adjustment) process is far less flexible. Thus, where all bids are above the upset limit, the contracting authority must select among a range of options, each of which form a commercial perspective in only limited circumstances. Specifically, a contracting authority may consider:

— Seeking an increase in the budget upset limit. This option may be employed where it is absolutely essential to proceed with the project – as, for instance, might be the case with emergency remedial work.

— Deciding not to proceed with the proposed project. This option is likely to be selected where there is a substantial difference between the lowest bid and the upset limit, and where the nature of the project is such that adjustments to its scale/scope are impractical.

— Scaling back the project so that it can be completed within the budget upset limit. This option is likely to be selected where the description of the work to be carried out can be readily modified so as to make it less costly.

— Trying to negotiate a lower price with one or more of the bidders. From the contracting authority’s perspective, this is attractive where the lowest bid is significantly lower than the other bids.

— Negotiating with two or more bidders. From a contracting authority’s perspective, this approach is attractive where there is no material difference among the bids received from those bidders, or where each bidder has strengths that might make it a preferable choice.

— Issue a new invitation for tender. This approach may be advisable where the initial competition produced only one or two bids, or where a close bidding system (such as a request for quotation among pre-qualified suppliers) was employed rather than an open competition.

Because there are so many different considerations that need to be taken into account where the upset limit is exceeded, not surprisingly, few contracting authorities have a uniform practice for dealing with such cases.

Generally, where such a situation arises, the preference among suppliers (or, at any rate, their trade associations) is for the contracting authority to enter into negotiations with the lowest bidder. The argument in favour of such a constrained negotiation process is that since the lowest bidder was the “winner” of the tender competition, it is entitled to the first crack at the negotiated contract.

The undisclosed benefit (from the suppliers perspective), is that it also means a supplier has the advantage of bargaining from a position of monopoly strength, with the probable result that the price concession yielded will be in the minimum required. The fallacy of this view is that there is no winner at all. The competition was subject to a test that bidders had to satisfy, and none of them did.

Stephen Bauld, Canada’s leading expert on government procurement, is president and CEO of Purchasing Consultants International Inc. He is also the co-author of the Municipal Procurement Handbook, published by LexisNexis Canada. He can be reached at stephenbauld@bell.blackberry.net.

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