Competuition: Teach Competition to Your Procurement Process
Written By: Pascal PERRY
Published On: June 2006
1. Ethical Procurement
Ethics dictates that business be conducted with integrity, fairness, and openness, which require open communication within and among both buying and supplying organizations, and thereby give any organization a chance to compete for contracts and win. It seems like a week does not go by without one hearing a story demonstrating lapses in business ethics stories, where lucky contract winners share close friends in strategic places, as was the case of Halliburton, which was awarded billions in federal no-bid contracts during the years when Dick Cheney was its chief executive officer (CEO).
Recognizing this longstanding problem, the US government launched the Federal Acquisition Regulation (FAR) more than twenty years ago, to help federal agencies manage procurement more efficiently. FAR is an official document setting forth procurement policies and procedures that US federal agencies should follow when soliciting goods, products, services, or construction from qualified suppliers (bids or proposals). Rules are delineated into eight chapters:
- General Information, Definitions, Practices, and Administrative Matters
- Competition and Acquisition Planning
- Contracting Methods and Contract Types
- Socioeconomic Programs
- General Contracting Requirements
- Special Categories of Contracting
- Contract Management
- Clauses and Forms
In response to competition becoming the exception rather than the rule in procurement, Part 6 of the FAR, Competitive Requirements, incorporated the Competition In Contracting Act (CICA). It seeks to establish full and open competition (FOC) as the standard, in order to eradicate partiality, favoritism, political lobbying, and bribery.
In light of these corporate scandals and the heightened scrutiny over corporate practices, FAR will have a greater impact on business. It contains key elements that all organizations should be aware of, whether they are conducting business with a government agency, or with private entities. Using the policies and procedures outlined by FAR, we will
- define what exactly is a competitive procurement, its purpose and benefits;
- present the different competitive and non-competitive procurement methods and their supporting processes; and
- detail the two key procurement methods:
- Invitation for bids (IFB), and
- Request for proposals (RFP).
2. Competitive Procurement
Benefits of Competitive Procurement
The purpose of competition is to benefit your enterprise, and competition should not be promoted for the sake of competition. Indeed, in some cases, it may cost more to enter into a competitive procurement to do business directly with a supplier because of the unicity of the requested products, the inadequacy of other sources, the immediacy of your needs, or the emergency or legitimacy of circumstances. In other words, competition should be promoted pragmatism, with other methods thus becoming exceptions.
Competitive procurement is the contractual acquisition (purchase or lease) by an organization of any kind of asset, whether material (goods, products, or construction) or immaterial (services) with appropriated funds, enabling all deemed responsible sources to compete in a fair and open environment. Competitive procurement is also known as FOC, or competitive solicitation.
While procurement is supposed to bring fairness, impartiality, transparency, and suitability to corporate practices, a competitive procurement process will ensure the highest level of openness, thus maximizing the suitability of the requested assets or services, and the best return on investment (ROI).
3. Different Procurement Methods
There are several procurement methods that can be used to complete an acquisition. Let us define the difference between procurement methods and their supporting processes. A procurement method is the manner chosen to perform a contractual acquisition. Procurement methods could be any of the three following:
- Simplified acquisition, like micro-purchases, small purchases;
- Full and open competition (FOC), like bids, proposals; or
- Other than full and open competition (OFOC), like sole source.
Simplified acquisition procedures are the procurement methods used for acquisitions for which the amount does not exceed $2,500 for the micro-purchase threshold, and $100,000 for the small purchase threshold (FAR 2.101). Simplified acquisitions are equitably distributed among qualified suppliers in the local area, and purchases should not be split to avoid the requirements for competition above their respective thresholds. Minimal documentation is usually required, including a determination that the price is fair and reasonable; and material on how this determination was derived.
Full and Open Competition (FOC)
When do you have to put a formal solicitation process based on competition in place? You may be required, depending on your organization's purchasing policy, to use a formal solicitation and selection process for acquisitions for which the amount exceeds a certain threshold—in our case, the simplified acquisition threshold.
The competitive procurement methods available for use in fulfilling the requirement for full and open competition in the acquisition process are
- sealed bidding, relying on bids, also called sealed bids;
- negotiated procurement, relying on competitive proposals; and
- two-step sealed bidding, a combination of bidding and negotiating.
Sealed Bidding (Sealed Bids)
Sealed bidding is a procurement method used when the best value is expected to result from a selection of the lowest evaluated priced offer. It relies on a solicitation document called invitation for bids (IFB) (also known as invitation to bid [ITB], or invitation to tender [ITT]) and involves the following steps:
- Preparation of invitation for bids
- Publicizing of invitation for bids
- Receipt of bids
- Public opening of bids
- Evaluation, and comparison of bids
- Selection of the lowest-priced technically acceptable solution
- Award of contract
Sealed bids are normally solicited if
- Time permits the solicitation, submission, and evaluation of sealed bids;
- The award will be made on the basis of price and other price-related factors;
- It is not necessary to conduct discussions with the responding providers about their bids; and
- There is a reasonable expectation of receiving more than one sealed bid.
Negotiated Procurement (Competitive Proposals)
Negotiated procurement is a procurement method used when the best value is expected to result from selection of technically acceptable proposals, with the lowest evaluated price, in other words, when cost is not the most important factor of evaluation.
The negotiated procurement method relies on a solicitation document called request for proposals (RFP).
This process involves the following steps:
- Preparation of request for proposals
- Release of a public notice of solicitation
- Pre-proposal meeting, mandatory or optional
- Receipt of proposals, kept closed in a secure place until due date
- Addenda or amendments to the RFP and, eventually, extension of the proposal receipt due date
- Modification of the initial RFP, modification and receipt of proposals, and, eventually, extension of the proposal receipt due date
- Disqualification of proposals, proposals returned unopened
- Proposal opening at proposal receipt due date
- Rating, scoring, and sorting proposals in a decision matrix
- Selection of the best matching proposals
- Providers contacted and requested for their best and final offer (BAFO)
- Selection of the best matching proposal
- Award notice
Competitive proposals are normally solicited when
- the use of sealed bids is not deemed appropriate; or
- it is necessary to conduct discussions with providers, because of differences in areas such as law, regulations, and business practices, especially for contracts to be made abroad.
Two-step Sealed Bidding
Two-step sealed bidding is a combination of the two aforementioned competitive procedures, and is designed to obtain:
- the benefits of negotiation for helping the requesting organization complete or define specifications without any pricing consideration; and
- the benefits of sealed bidding for getting the best price for the technically acceptable solution agreed-upon.
Two-step sealed bids can be used in preference to negotiated procurement when all of the following conditions are present:
- Specifications are not definite or complete or may be, without further technical evaluation or discussion, too restrictive to ensure mutual understanding between each source and the requesting organization;
- Definite criteria exist for evaluating technical proposals;
- More than one technically qualified source is expected to be available;
- Sufficient time will be available for use of the two-step sealed-bidding method; and
- A firm-fixed-price contract or a fixed-price contract with economic price adjustment will be used.
Other than Full and Open Competition (OFOC)
Because Part 6 of the FAR, formerly the Competition In Contracting Act (CICA), defines competition as the standard for procurement, other non-competitive methods are considered to be exceptions, and thus should be used only under certain, well-defined conditions, and they should be carefully and thoroughly justified and documented. Contracting without providing for full and open competition is called other than full and open competition (OFOC). OFOC cannot be justified because of a failure to plan in advance, or concerns about the availability of related funds or budget.
Sole source is an example of non-competitive purchase or procurement process accomplished after soliciting and negotiating with only one source, so-called sole source, thus limiting full and open competition. Sole source solicitation constitutes a violation of the CICA unless it is justified under one of seven specific circumstances.
These circumstances, which can be invoked as sole source justification, are described in FAR 6.302 as follows:
- Only one responsible source and no other supplies or services will satisfy requirements
- Unusual and compelling urgency
- Industrial mobilization; engineering, developmental, or research capability; or expert services
- International agreement
- Authorized or required by statute
- National security
- Public interest
Although only one of these conditions may justify setting competition aside, each and any of them present limitations that are supposed to hamper, or limit, their abuse.
If a sole source acquisition is ethical, it can shorten the acquisition process, and lead to several benefits:
- a reduced decision cycle (in other words, less time is required to award contracts);
- lowered administrative costs (the procurement process is reduced to a minimum);
- prices reflecting the best value;
- better promoted small business participation; and
- improved delivery of products and services.
As Terence said in his play, homo sum, humani a mi nihil alienum puto (I am a human being, so nothing human is strange to me). Humanity is, above all, our nature, and commerce and trade have always been accompanied by some degree of faulty business ethics. Yet, FAR has been successful, and is inspiring more and more private enterprises to exercise due diligence in their procurement practices. By maintaining a healthy level of competition, both the buying and supplying organizations will benefit.