There are numerous reasons as to why governments pay more for goods and services than the private sector.
Among them are the following six in no particular order of importance.
Since the driving rational for government expenditure is the need to deliver some public service, rather than to earn profit, government suppliers understand that as customers, governments are far less price sensitive than the private sector.
As a supplemental factor, the high public and political profile of many government projects, particularly the most expensive project, make government more susceptible to pressure to increase contract prices in order to keep work on schedule.
Second, the public nature of the government budgetary process very often means any interested supplier can determine the upset price for a proposed contract, long before bidding on that contract.
Third, it has been said that “fair shopping” is the best protection the purchasing agent has against charges of fraud, incompetence, collusion with vendors and other malfeasance. However, the strong preference in the public sector for open competitions on the tender model leaves no or little opportunity to drive down a supplier’s price. A supplier in a tender knows that it must beat the prices bid by its competitors.
However, the price by the winning bid can very often be significantly above the minimum price at which the supplier would be prepared to supply. If governments wish to stay with an open, competitive and fair process for the award of contracts, one option would to be to use the tender as a process for identifying one or two suppliers with which the government will negotiate the final contract.
Forth, there is a considerable reason to believe in a significant number of cases, the bids for government work are rigged among competing suppliers.
The fact there have been so many prosecutions of highly reputable firms across North America — many of which are continental or international in their scale of operation and have subsidiaries active in Canada — suggests the problem of bid-rigging is a very serious one, posing a substantial threat to the integrity of the procurement process.
However, few municipalities seem aware of this risk, nor, from a review of publicly available purchasing bylaws and policies, does it appear that many have a formalized approach for dealing with it.
Fifth, governments routinely ask for special rights that impose risk on the other party to the transaction, even though instances involving the actual use of such rights are exceedingly rare. For instance, governments routinely demand extended warranty coverage beyond the normal terms provided in the marketplace.
Governments also require contract termination rights. Rights of this kind likely will result in the inclusion of a hedge factor in every bidder’s price.
Governments demand protection against default in the form of a bid, demand and warranty bonds and similar security to a far greater extent than the private sector. Such bonds involve a cost and it is municipalities that must pay it.
Government policies in relation to supplier selection often work against a systematic and consistent approach towards procurement. For instance, almost all municipalities (and other governments) are committed in principle to open procurement.
However, many municipalities prefer to deal with local suppliers. If given effect in relation to the award of a contract, such preferences are inherently inconsistent with the idea of open procurement.
Sixth, government contracts are generally short-term or are terminable on short notice. Contracts of this nature are unlikely to be priced aggressively by a supplier because they entail considerable risk of early termination.
The fact that as a result of the tender approach an existing supplier, even if performing at an outstanding level, will be dropped at the end of the contract unless its bid price is the lowest constitutes an incentive to offer a mediocre service.
Short-term contracting exposes the municipality to increased risk of lability over the award contract process.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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