Cheaper Isn’t Necessarily Better for Government Purchasing

Many states and cities get hung up on low prices and fail to consider a company's performance when deciding whether to contract with them.
January 2016
(David Kidd)
Barrett and Greene
By Katherine Barrett & Richard Greene  |  Columnists
Government management experts. Their website is greenebarrett.com.

Everyone loves a bargain, even governments. When government purchasers put out a construction bid, the winning company is often the one that quotes the lowest price for the project. Previous performance is not necessarily taken into account. That’s like buying the cheapest used car on an auto dealer’s lot, without checking out the condition of the motor.

But such an approach regularly takes place in state and local purchasing. The San Francisco administrative code, for example, doesn’t require its six departments that contract out for construction to evaluate past performance when considering bids. Some departments do so, but inconsistently. This still goes on despite a 2014 survey conducted by the city services auditor in which 90 percent of construction employees agreed that departments should be required to conduct evaluations and use them in the bid-award process. “Continuing to award contracts to poor performers,” the audit warned, “negatively impacts the city and its resources in the form of project delays, abandoned projects, substandard work, and, at times, claims and litigation.”

Last June, a report from the San Francisco Civil Grand Jury made the same point. A task force is now at work to figure out how to change San Francisco’s practices, as well as revamp its policies.

San Francisco is no outlier. The failure to weigh past performance for construction contracts is common in many states and localities, though some, such as Los Angeles, New York City and Seattle, have adopted a performance-based approach. Since 1999, Los Angeles has required its departments to do performance evaluations when a construction contract is completed. Those results are then considered when future contract awards are made.

Digging a bit deeper into the fine print, most cities and states use the word “responsible” to describe the type of bidder with whom they’ll consider doing business. But whether or not past performance is taken into account is often contingent on how one interprets what “responsible” means: Does it include information about prior experiences or not?

A 2015 report by the Hawaii State Procurement Office, which noted that bidders must be “responsible,” found that the state’s 21 chief procurement officers had different definitions for what the word meant. Some believed the question of whether a bidder is responsible could be determined by its success or failure in past projects. Others rejected the idea that they should look at the past in evaluating eligible bidders. The state procurement office recommended to the legislature that it clarify the issue by mandating statewide past performance evaluations.

In fields outside of construction, it is much more common to make bid selections based on “best value,” as opposed to lowest price. This generally provides more freedom to look at the performance of contractors that are being considered.

This has been the case in the state of Washington, which has long utilized past performance as important criteria in the bidding process. In 2013, procurement reforms led to an even greater emphasis on this factor.

The reforms included the development of an electronic vendor report card for master contracts. It is filled out when a contract is rebid or an extension of a contract is requested. The idea, notes Cheral Manke, the state procurement manager, is to support the continuous open communication between agencies, the procurement office and contractors. That way, when problems with a contractor do show up, they are not a surprise.

Washington may also add performance information to its current contract database and is considering the development of a centralized database focused on past performance. “This needs careful consideration to ensure fairness and accuracy,” Manke says. “But if this can be established then it could be a useful and time-saving tool.”

Taking past performance into account makes sense, but it’s hard to put into practice. One of the tricky issues is figuring out whether the contractor was responsible for a past problem or if the government itself might have been the culprit.

If the vendor has made personnel changes, past performance, particularly in service contracts, may be a poor guide to current or future performance.  “When it comes to services, one of the issues is whether the individuals are the same ones that delivered services in the past,” says Jim Butler, California’s chief procurement officer. As a result, one contract clause that can help ensure success allows the entity to review the choice of a key member of the contract staff if that person needs to be replaced before the job is finished.

Butler emphasizes the importance of making sure that the team that is interviewed as part of the procurement selection process is the team that will be doing the work. He advises having clauses that guarantee that those individuals will deliver the service “so you don’t have a bait and switch when the A team presents and the B team shows up to do the work.”

Even with diligent examination of past performance, there’s no guarantee that public-sector contractors will all deliver at the level anticipated. A good record doesn’t necessarily predict a successful future. But it’s a start.