Potential Pitfalls in Public Procurement
What to watch for when securing that big deal with the government
Contracting with local, state or federal governmental entities can be an exciting prospect on the one hand but pose daunting obligations on the other. In many locales, governmental entities are the single largest owners and consumers of vertical-transportation equipment and services; consequently, government contracts procuring materials and services may be significant, both in scope and total revenue, to the contractor. However, unlike negotiated contracts in the private sector, governmental procurements are almost always prepared by or on behalf of the governmental entity and often filled with nonnegotiable terms, conditions and impositions that invariably favor the governmental entity over the contractor and sometimes present extraordinary obstacles to performance or, worse, payment.
This article highlights some of the important issues to consider before bidding on or entering into any contract with a governmental entity. Focusing on certain key issues and following some of these recommendations could save you and your firm many hardships and headaches later.
Identify and understand any terms dictating how the contract would be interpreted in the event of a dispute.
Obtain Complete Documents
You must obtain the complete set of documents that will ultimately comprise your entire contract before you submit a bid. Note whether the opportunity to bid or request for proposal (RFP) refers to any documents, or versions of documents, not included with the RFP. For example, in this digital age, RFPs increasingly refer the bidder to terms, conditions and other substantive requirements found only on websites or special access portals. It is imperative that you log on to these websites, locate the specific documents referred to in the RFP, then download and save the documents immediately. Not only do you need to know what you are agreeing to, but saving the version of these documents at the time of the RFP may eliminate disputes later on in the event an internet-only document is modified or updated during the term of your contract. This is particularly important, since the modified version could change the scope of your obligations.
Review RFP-Specific Site Conditions, Machines, Facilities and Equipment
Government procurements may or may not permit an opportunity to attend pre-bid visits to relevant jobsites, machines and facilities, but you normally will not be able to examine existing equipment at the level of detail private industry may permit. However, you should do everything possible to physically observe the sites, machines and equipment in the RFP to confirm their characteristics; specifications; and, sometimes, their very existence, even if those observations are informal or superficial. Government procurements can, and often do, contain inaccuracies, yet the RFPs typically hold the bidder responsible for those inaccuracies. In fact, your author was involved in one matter in which the governmental entity blamed the contractor for not telling the governmental entity about significant inaccuracies in its own RFP documents before submitting its bid.
In addition, if the procurement you are bidding on is to service or supply existing equipment, it is critical that you assume and make estimations that the equipment you are bidding on is the same equipment you will be servicing or supplying at the end of your contract. The law generally does not require governmental entities to make capital improvements through purchases or modernization; capital improvement spending is within the government’s discretionary decision-making powers, and such action (or inaction) generally cannot be challenged in court. For that reason, governmental entities are exceedingly slow to purchase and modernize, and they do not and cannot guarantee such purchases in any procurements for service or supply activities.
Familiarize Yourself With All Terms and Conditions, and Be Cautious of Ambiguity
Bidding on a government contract means you likely have several sets of eyes looking over the RFP, and that you have read, fully understand and can perform all the technical specifications of the RFP. However, the trouble in government contracting comes less from performing to the written specifications and more from a government official exercising an
“interpretative difference” between what the contract calls for and actual performance. It would be impossible to include a list here of all the potential “gray areas” to look out for, because often, what seems clear in language becomes less clear in performance and even murkier once personalities get involved. One way to plan for this possibility is to identify and understand any terms dictating how the contract would be interpreted in the event of a dispute. Terms such as “the latest addendum controls” are helpful, albeit less so when the “latest addendum” itself is ambiguous. But, it may be the starting point of any discussion concerning claims of performance deficiencies. Unfortunately, government contracts rarely allow for the inclusion of “practice of the parties” or “industry custom and practice” as a primary basis to interpret ambiguities, so a proactive review of your contract and planning will be helpful.
The oft-used phrase
“lowest responsible bidder” means, in reality, the “responsible lowest bidder,” effectively prioritizing cost savings over realistic expectations.
Additionally, pay close attention to any language allowing contract modifications. Private-industry contracts normally require mutual written consent to modify the terms, but government contracts often eliminate “mutual” consent and insert “in the best interests of ” the government language, instead. Keep in mind it is often more laborious and time consuming for a governmental entity to get funding for new contracts and go through the RFP process than to simply increase the scope of an existing contract or its length of time; thus, it prefers scope expansion and unilateral renewal. However, contract modifications through unilateral addendums can lead to scope expansion well beyond what was originally contemplated and that for which you may have planned. Even if a scope expansion is compensable, in whole or in part, it may still present problems of practicality and scale for your firm. It is important to consider at the outset how the contract can be modified, to what extent it may be modified and with what notice there will be to you. Additionally, review any opportunity you have to accept, reject or renegotiate based on the modification and whether rejection of the modification, either by choice or necessity, constitutes a default or possible grounds for debarment. If your firm’s discretion is limited or nonexistent, consider that with your bid.
Identify Standards for Performance and How Performance Is to Be Monitored
The primary goal of a government contract is to obtain the highest level of performance from a contractor for the least amount of taxpayer money. Indeed, the oft-used phrase “lowest responsible bidder” means, in reality, the “responsible lowest bidder,” effectively prioritizing cost savings over realistic expectations. One way to accomplish the government’s objective is by ambiguous phrases to define a standard of performance. “First class condition,” “white glove clean” or “all relevant records” are good examples. These phrases have no objective meaning in the vertical transportation industry; in reality, they are the opposite, allowing a purely subjective evaluation of performance and inevitable differences in interpretation. Be skeptical of any vague terms in an RFP, but even more so with terms that may compromise your ability to show that you have, in fact, performed as required under the technical specifications.
At a minimum, note when and where any vague terms or phrases are used in the RFP to identify potential trouble areas. If possible, publicly question such vague terms and phrases during the appropriate period before bid opening, perhaps by asking for examples. If the RFP requires conformance to a national code, for example, question which version(s) of the code apply and whether, if the code changes, conformance must be to the amended code. Ideally, you could negotiate assigning objective measures to ambiguous performance phrases under the premise that, even if the objectives are difficult to achieve, at least they will eliminate a subjective evaluation of whether you have performed to the terms of the contract. However, assume the ambiguous phrases are intentional and will therefore remain, and prepare to be vigilant with your performance under these standards.
In addition to understanding how performance will be measured, it is also critical to understand how it will be monitored. Who monitors your performance, what qualifies them to monitor your performance, how often will they monitor performance and in what manner are all important to understand so that issues can be dealt with quickly and directly before they escalate to a point where payment becomes compromised. If answers to these questions are not clear in the RFP, inquire during the appropriate pre-bid period. It is also helpful to have a singular point of contact in your organization who can communicate with the government employee charged with monitoring your performance and keep track of all monitoring efforts. A singular point of contact in your organization will help reduce the risk of miscommunication from the government monitor and reduce the potential for personality conflicts. They will also minimize confusion when implementing any corrective action and informing the governmental entity of those actions. If you determine that multiple government employees are assigned the role of monitoring performance, it may be helpful to request a singular point of contact on the government side through which all communications are channeled or at least copied — again, to reduce the risk of miscommunication and reinforce the visibility of your performance.
Also, keep in mind that governmental entities are subject to public-records requests. With few exceptions, the general public may access records
pertaining to your procurement without notice to you. This means that all your communications, including emails with government officials, are subject to public disclosure. Most communications are probably innocuous, but if disagreements arise, communications should be kept civil and focused toward resolving the disagreement.
Identify What Constitutes “Non-Performance” or “Default”
Perhaps the biggest pitfall in any government contract is what constitutes grounds for a penalty or holding the contractor in default under the contract. Government contracts seldom, if ever, allow a contractor to hold the government in default under the contract, even when the government fails to do the one thing required of them: pay invoices when due. Usually, payment disputes must be handled through an administrative process in lieu of declaring breach or cancellation of the contract, and the contractor must continue performing while that administrative process runs its course. Thus, default provisions in government contracts invariably pertain to the contractor’s performance or lack thereof.
A singular point of contact in your organization will help reduce the risk of miscommunication from the government monitor and reduce the potential for personality conflicts.
Most states interpret contractual default to be a material and substantial breach of the contract such that the nonbreaching party has effectively been deprived of the core benefit for which it bargained. Using that interpretation, technical breaches of the contract are usually considered trivial and not a basis to default the contractor. Although a technical breach or instance of nonperformance may carry some consequence such as an agreed-upon monetary deduction, termination of the contract is not likely to be supported, even if threatened.
Most contracts spell out remedies in the event one party believes the other has not performed or is in default, including a requirement of notice to the other party. The law generally permits a reasonable time period under the circumstances to cure any nonperformance unless the parties expressly agree otherwise. These so-called “cure” provisions often require written notice to be served on the nonperforming party in a specific manner, but government contracts frequently require no written notice, any specific method of delivery nor any specific person as the recipient of such notice.
Note whether your RFP requires written notice of a claimed breach or default, how such notice is to be delivered and what opportunity you have to dispute the notice or cure nonperformance, with or without penalty. You should have a clear understanding of exactly how to dispute a claim of nonperformance or default, including the method of disputing the claim and specific person to whom or place to which such dispute must be delivered. You should also make note of any timeframe you have to cure a claimed breach or default (assuming it can be cured) and whether the timeframe starts the moment notice is provided or from the time you commence to cure the breach or default. Finally, if the contract permits the government to withhold payment in the event of nonperformance, consider whether the contract allows withholding of all amounts due or only the amounts arguably attributable to the instance of nonperformance; this distinction clearly has potentially substantial consequences.
As this article serves only to highlight areas of concern, it is not, nor could it ever be, an exhaustive list of considerations when reviewing a governmental RFP. Every RFP is different, and areas of highest concern will often vary. However, exercising the appropriate degree of caution, scrutiny and planning at the RFP stage will give you the best chance to perform — and get paid — in what can sometimes be difficult circumstances and a tough environment in which to succeed.