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Procurement Perspectives: One aspect for municipalities to control project costs

0 125 Government

by Stephen Bauld

The fact that every municipality is making an effort to reduce or control cost is a given. The real question is how you go about doing that in the first place.
Stephen Bauld
Stephen Bauld

So many articles have been written to help with this very important aspect of controlling taxpayers' money. I always say everything in government needs to have checks and balances as well as be constantly measured and monitored.

Having said that, it is not an easy task.

When I speak at events, municipal staff continue to tell me that government outsourcing is often resorted to in an effort to reduce or control costs. Should that be the case, it raises obvious worries regarding control over service delivery, quality control and fixing priorities. A municipal purchasing department needs to be able to provide impartial as well as expert advice to operating departments with respect to those risks and other aspects of the process.

Irrespective of how an outsourcing arrangement may be structured, risk and rewards must be shared between the partners on a rational basis that fairly reflects the legitimate expectations of each of them. If the assumption is that the private sector partner assumes the risk, in exchange for the chance of profit, then an allocation of the following responsibilities to the partner would seem to be justified:

Ownership — the government partner should be required to make a reasonable equity investment in the partnership with the opportunity of making a return on that investment (in the interest of public protection, the maximum rate of permitted return should be capped, and actual results audited).

Operations — the non-government partner should be required to assume all or most of the risk that revenues will cover expenditures while providing stipulated service level.

Financing — the non-government partner should arrange for a substantial portion of the financing cost, without government support.

In order to ensure that government policy objectives continue to be met, the municipality should retain the authority:

• To set the standards and monitor performance to ensure those standards are being achieved and maintained.

• To require the taking of remedial action where there is a deficiency in performance.

• To impose penalties, in order to discourage the possibility of cheating.

• To intervene directly, should actual standards of performance fall below a specified floor level.

Also available is some contract over fee selling, where costs will be paid directly by municipal residents.

Sometimes simple price comparisons can be misleading. For instance, if one assumes a yearly requirement for IT support in the range of 2,000 hours, and the hourly cost of outsourcing IT support is $100 an hour, while the internal salary cost of hiring an IT technician to provide force account support is only $40 per hour, a simplistic price comparison of these two items suggests that the force account solution is cheaper. However, a more comprehensive comparison of price and service can lead to a very different conclusion.

One of my concerns where outsourcing is used is whether market conditions permit a municipality to secure an adequate number of bids from a suitable range of competitive suppliers. Generally, outsourcing arrangements lead to exclusive source of supply commitments during the contract period. Even when the contract is up for renewal, the incumbent supplier will enjoy a tremendous advantage over competitors. Without a competitive market in which to outsource, there is a risk that cost will escalate towards the monopoly price level.

Indeed, one of the standard justifications for government supply of a particular commodity is the need to control price and cost overruns.

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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