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Procurement Perspectives: Contract provisions that scare off most sensible contractors

Stephen Bauld
Procurement Perspectives: Contract provisions that scare off most sensible contractors

Onerous contract provisions will likely scare off most sensible contractors.

It may be argued, of course, that the owner is no more responsible for unknown adverse site conditions than is the contractor, and unless well versed in construction, probably has less ability to identify and avoid such conditions than the contractor.

Moreover, there is some truth to the proposition that the contractor can often devise a work-around solution when such conditions are discovered that the owner cannot. However, these points overlook the fact that the provisions do not simply require the contractor to exercise reasonable care and to take appropriate mitigation measures.

They transfer the entirety of the risk from the owner to the contractor. Some contractors may very well prove willing to assume such a risk, but if they do, they will adjust their bid price accordingly.

Requiring a contractor to assume the risk of unknown structural faults, when carrying out the renovation of a building: The contractor will likely assume that the city suspects the existence of serious problems. The supplier will increase the price quoted by a significant amount to reflect this assumption.

Requiring insurance against risks that are remote, given the nature of the supply to be made: The risk associated with an insurance contract is reflected in the premium. However, there is usually a minimum premium for coverage of a given kind, reflecting the transaction costs associated with the policy, payment to hoteliers and so forth. If that minimum premium exceeds the anticipated value of the risk, then there is a dead weight cost. More generally, the transaction costs arising from the procurement of insurance against remote risk constitutes a dead weight cost.

Limiting a contractor’s opportunity to assess risk associated with a prospective contract: There may be legitimate reasons to restrict the number of site visits, the taking of photographs and the carrying out of tests, but each such limitations increases the amount of uncertainty associated with a contract. Such uncertainty will be reflected in the final contract.

Arbitrary rights to disqualify bids or to admit bids that are apparently not qualified:

In a negotiated, private sector contract, it is normal for the customer to deal with two or three possible suppliers, eventually narrowing the choice down through such discussions. At the end, the customer may bolt and deal with some stranger to the original discussions. Even if this is not done, ultimately, the choice of contractor may lack any element of transparency.

Such uncertainty is an inherent element of the negotiation process. The public contracting process is supposed to be transparent or, at least, reasonably so. By including arbitrary rights of this nature, the municipality suggests to prospective suppliers that there is something irregular about the process. This is enough in itself to encourage many of the best suppliers to walk away from the transaction. If they believe that the process is rigged, they are unlikely to be willing to invest in what they perceive to be a sham.

Unilateral options to cancel: The essence of a contract is that it involves an exchange of binding promises. However, governments often seek to reserve unilateral rights to cancel a purchase contract in order to allow themselves flexibility to implement policy changes.

Also, governments often want to reserve a right to buy from other suppliers, and to vary the size of an order. The following is a typical provision of this kind.

“The city makes no guarantee of the value or volume of work to be assigned to the selected proponent. The agreement executed with the selected proponent will not be an exclusive contract for the provision of the described deliverables. The city may contract with others for the same deliverables to those described in this RFP or may obtain the same or similar deliverables internally.”

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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