II. Elements of an Open/Public Bidding System

Devising a bidding system is both an administrative and a legal task. The bidding system must suit management needs by attracting bidders, establishing desired performance levels, and detailing the necessary specifications and requirements. It is also a legal action because it spells out the government's authority to bid and enter into contracts. Additionally, some bidding systems give formal preferences in a percentage of contracts to specified groups such as females or minorities.

A. PRELIMINARY STEPS BEFORE BIDDING

Several preliminary steps should be taken prior to the bidding process. First, a careful inventory of activities must be undertaken to assure that the unit has considered contracting carefully. Next, performance standards for these activities should be developed. Establishing standards after the bidding is too late to control the contract.

At some point, the cost of public agency service provision should be estimated. This is an important step. It requires obtaining an objective analysis of costs, including an estimate of the fully allocated cost of providing the service, and comparing these figures to informal quotes obtained from contractors. This comparison makes it possible to assess whether contracting out is likely to be cost effective.

Finally, a careful analysis of the target service should be made. This includes: 1) the ease of defining the service; 2) the number of likely bidders; 3) the ease of monitoring contract compliance; 4) the political climate; and 5) legal issues because a number of states restrict certain types of contracting out.

B. INVITATIONS TO BID (ITBs)

ITBs are formal requests or invitations for bidding that list the standards and specifications required for the target service. ITBs are usually used for services that can be clearly and precisely defined. They are usually written by lawyers, although managers should make sure that they are as free as possible from legal jargon. The following checklist includes the most typical provisions of ITBs.

Table 1

Source: John Marlin, ed., Contracting Municipal Services (New York; Ronald Press, 1984).

The service specifications are the most important part of an ITB. If they are not adequately detailed, the government unit cannot compel performance and the contractor is unsure of how much to bid or what performance level will be required. On the other hand, excessive specificity may reduce competition. For instance, requiring tow car response in 5 rather than 15 minutes may rule out smaller contractors without large fleets of available trucks and drivers. Table 2 gives a few sample specifications for a custodial contract.

Table 2

Standards should be set by an objective party. They should never be set by anyone bidding for the contract: either the in-house unit or a private firm.

After the bid request has been advertised, a prebid conference for contractors is held. This meeting of prospective contractors has a number of important elements. It clarifies instructions, interprets bid specifications, introduces the unit's contract manager, and often includes a tour of the contract site.

The next step is to obtain information about the financial capacity of the bidders. This includes securing credit reports from banks and/or visiting the contractors' offices. If there are questions about the financial conditions of bidders, the government unit may require prequalification. These financial tests must be uniformly applied to all contractors or the tests appear arbitrary and invite criticism.

C. PERFORMANCE BONDS AND CONTRACT AWARDS

To guard against temporary service interruption in the case of bankruptcy or other factors, performance bonds are commonly required from the contractors. The bonds usually range from 10 to 100 percent of the contract's value. Bonds should vary according to the difficulties that would be imposed by service failure. For example, if other contractors or the unit itself can assume a failed contract easily, a smaller bond is appropriate. In contrast, a complex data processing contract, with no ready replacement, calls for a higher bond. As a rule, however, performance bonds should be kept as low as possible, since the cost of a bond usually increases the contract price; moreover, small bidders may decline to bid if the bonds are too high.

In some cases, liability waivers are required to protect the agency from lawsuits. These, however, may not always be enforceable, and, like bonds, may price out smaller contractors.[6]

Awarding the contract is an important element of the bidding process. Ideally, a team of officials reviews the bid, even though it may be perfectly clear who is the low bidder. The team usually has representatives from the legal, finance, purchasing and contracting departments. This group certifies that the bid meets all specifications; meets all requirements (including bonds); is from a "responsible" bidder (i.e., an experienced and financially stable concern); and is the best (usually lowest) bidder. The bid award process should be transparent and announced at an open, public meeting that is widely publicized.

D. REQUESTS FOR PROPOSALS (RFPs)

If the contract specifications cannot be spelled out precisely, an RFP is often used instead of an ITB. RFPs are negotiated bids, usually entered into after costs, provisions, and other elements of the contract have been agreed upon. By permitting some post-bid variations and allowing negotiations, competition is more informal in an RFP process than with the more rigorously specified ITBs. This is because RFPs place a greater emphasis on the quality of the product rather than the cost (see Table 3).

Table 3

*Preference given to a more expensive bidder only if the candidate is sufficiently superior. Award should always be made to the qualified offerer whose proposed services are most advantageous to the contracting government agency.

Source: John Marlin, ed., Contracting Municipal Services (New York; Ronald Press, 1984).

RFPs are often used for a variety of programs and services including:

• Personnel services like attorneys and engineers;

• Experimental programs such as drug-treatment programs;

• Management of facility operations; and

• Sole source suppliers such as computer software programs.

It is often a good idea to accompany an RFP with a justification for its use. This will indicate that quality is a crucial factor in the award and that focusing primarily on cost may not be appropriate.[7]

Because of the greater degree of subjectivity in awarding contracts via RFPs than ITBs, they are more subject to unethical practices such as kickbacks and cronyism. In order to lower the possibilities that political contributions will corrupt the bidding process, some states and localities have enacted stiff restrictions on the political contributions of contractors. An Ohio statute, for example, prohibits the award of noncompetitive bids — such as all RFPs — to almost anyone who has made a contribution of over $1,000 within the past two years to any public official in a position to award a contract.[8]

RFP provisions are similar to ITBs. The service to be delivered should be clearly specified, performance reports should be outlined, and staffing levels identified. RFPs should have price quotations, as well as information about vendor qualifications and relevant experience. Normally, a team similar to the ITB team will be recommending an award, after a review of the different proposals. Because the reputation and proven ability of the contractor is so important in RFPs, a form for rating potential contractors is commonly used, as shown in Table 4.

Table 4

Note: 1=low, 5=high

The weighting system, of course, can be changed depending on the importance local officials attach to the different criteria. If price is very important, for instance, its weight can be increased and the weight for technical merit decreased. Another way to make cost a greater factor, without dominating the decision between consultants, is to use a two-step process. First, technical merit is established by some means such as in Table 4. Then sealed bids are submitted (or are submitted earlier with the RFP) and the low bid from contractors with good technical merit is taken. Keep in mind, however, that there can be potential political objections to RFPs. One reason: the judgment required in rating contractor's "technical merit" is inherently subjective and thus may be controversial, particularly if those selected seem to have ties to elected officials.

Once the list of contractors is narrowed, the team or some individual negotiates with the finalist(s) over the contract. This includes visits to the contractor's office, and the preparation of a draft con-tract. A record of the negotiations should be kept. Eventually a final contract is prepared, which is similar to that for an ITB, except that performance standards may be less specific.

Encouraging Competition

The single most important technique for preventing contracting problems is to promote competition between service providers. Competition encourages bidders to lower their bids through concern that a competitor will bid lower. Furthermore, in a competitive process unsuccessful contractors are quick to raise legal objections, thus discouraging sweetheart deals and other forms of collusion between contractors and public officials. Frequent competitive rebidding of contracts ensures that ineffective contractors who may have developed cozy relationships with public officials are replaced by new firms if they fail to provide quality services.

There are a number of ways to encourage competition in the bidding process, such as:

1. Have city forces compete with outside bidders. The best known example is Phoenix, where city crews have underbid private contractors for the last 10 years for solid waste pickup.

2. Divide up the service areas into smaller units such as groups of buildings for custodial work. Small contractors, often lower-cost producers, may be able to compete for a smaller unit.

3. Encourage individual contractors, particularly smaller ones, to bid.

4. Avoid excessive performance bonds that discourage small contractors.

5. Avoid lengthy bidding documents and unnecessary reporting requirements, for they often frighten small contractors.[9]

6. Pay contractors on time.

7. Do not create overly detailed specifications.

8. Only use sole-source contracting when competitive bidding is impractical.