This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
Awarding contracts through open competition is the first principle of public procurement. As the following case studies illustrate, public institutions that bypass open tendering and engage in direct contract awards bear the onus of justifying those contracting decisions in the face of audit scrutiny and legal challenges.
The sole-sourcing practices of public institutions are coming under increasing challenge in recent years, which underscores the importance of establishing legitimate grounds before varying from the duty to award contracts based on open competition. As the following cases illustrate, these direct award challenges have been launched across multiple jurisdictions by an increasingly sophisticated supplier community that understands its right to compete for contract awards.
For example, in its June 2015 decision in Michael Weinstein v. County of Los Angeles, the California Court of Appeal reversed a trial decision that had struck down a municipal sole-source contract award for healthcare support services. The Court of Appeal found that the trial court failed to apply appropriate deference to the sole-source decision since government procurement decisions should only be reversed where they are “arbitrary, capricious or entirely lacking in evidentiary support” or where they are “contrary to established public policy or unlawful or procedurally unfair.” The Court of Appeal found that the municipality had adequately documented the reasons behind its sole-source decision and upheld the award.
Similarly, in its January 2016 decision in Union of India v. HBL Nife Power Systems Ltd., the Supreme Court of India rejected a challenge to a restricted tendering process run by the government for the acquisition of navy submarine batteries. A supplier challenged the invitational tendering process, arguing that it should have the opportunity to bid on the contract. The Supreme Court disagreed, noting that defence department rules distinguished between common use items that are subject to open tendering and mission-critical strategic defence products that can only be procured from preregistered firms. The Supreme Court found that the batteries fell into the latter category as the sole power source for the submarines.
However, in its June 2016 decision in Technology Innovation & Strategy, the New York Office of the State Comptroller struck down a sole-source contract award by the Department of Law (referred to as OAG) for eDiscovery services. As noted by the Comptroller General, under New York State law, discretionary purchases under $50,000 (USD) do not require open competitive bidding. However, discretionary purchases that exceed that amount require a public posting and approval by the Comptroller. In this case, that approval was denied since the required three quotes or other documentation of cost-reasonableness were not provided:
State agencies are authorized to “piggyback” onto federal government contracts, or contracts of other governmental entities…However, where, as here, there are multiple vendors available under the GSA contract, we would generally require as a part of our review…that the agency engage in a reasonable competitive process…We would additionally require that such competitive process be fair, that the determination of a bidder’s responsiveness reflect an objective assessment of whether a bidder’s proposal meets clearly specified criteria, and that the contract be awarded to the lowest responsive and responsible bidder.
Rather, the public posting process conducted by the OAG denied other suppliers the opportunity to bid:
In the instant matter, in response to our audit questions, OAG has stated that it placed the advertisement in the Contract Reporter after an award had been made to W&K and W&K had already performed a substantial amount of the work. Then, once the advertisement was placed and OAG received interest from TIS, the record reveals (and OAG does not dispute) that OAG failed to respond to TIS’s inquiries about bidding on the project. In fact, the advertisement itself, which stated that bids would be received until February 18, as well as the Purchasing Memorandum issued by OAG on February 22, appear to be meaningless as no bids were accepted by OAG and, in fact, the work had been substantially completed.
The Comptroller found that OAG should have sought an exemption to public positing when it realized that the work would exceed the $50,000 limit:
The initial misestimate by OAG does not negate the need to comply with the applicable legal requirements once OAG realized that the purchase would exceed the $50,000 threshold. We believe the proper course of action at that time would have been to contact our Bureau of Contracts and seek an exemption from the advertising requirement.
The contract award was therefore overturned.
In keeping with these cases, in its June 2016 decision in Tempus Nova, Inc., the United States Government Accountability (GAO) office ruled that the Internal Revenue Service (IRS) improperly used a blanket purchase agreement to make an out-of-scope acquisition. The GAO found that the agency acquired a cloud-based product under a standing agreement that did not permit the purchase of cloud-based products but was instead “limited to acquiring updated or replacement versions of the agency’s pre-existing software portfolio that is installed in the agency’s own computing environment.” The GAO ordered the IRS to either conduct a new tendering process or seek appropriate sole-source approvals for its cloud-based requirements.
Similarly, in its August 2016 determination in M.D. Charlton Co. Ltd. v. Department of Public Works and Government Services, the Canadian International Trade Tribunal found that the Royal Canadian Mounted Police (RCMP) improperly used a national security exemption in an attempt to directly purchase night-vision binoculars with biased specifications. The Tribunal found that the RCMP’s attempt to bypass a competitive bidding process and circumvent the Tribunal’s review mechanism was not warranted by confidentiality concerns over the technical specifications since those concerns could have been addressed within the framework of a competitive bidding process.
Also, in August 2016, in its determination in The Access Information Agency Inc. v. Department of Global Affairs, the Canadian International Trade Tribunal found that the government had used an improper call-up process to secure professional services under a standing agreement and that those evaluation flaws had cost the complainant a contract award opportunity. However, the Tribunal refused to award a remedy since the complainant was subsequently awarded another contract under the standing agreement, which offset any prior lost business. The Tribunal ultimately ordered the government to follow its call up procedures more closely in the future.
Finally, in its October 2016 decision in Bluehorse Corporation, the GAO ruled that the Bureau of Indian Affairs failed to properly publicize its diesel fuel Request for Quotations (RFQ) and ordered it to cancel and re-issue its solicitation. The agency maintained that it met its posting obligations since it invited three bidders by email on the Saturday prior to the Monday bid deadline and, over the weekend, placed a copy of the RFQ in a three-ring binder at the reception desk of the closed government building. The GAO disagreed, finding that the three-quote process was flawed since one of the three invited suppliers was a propane rather than diesel supplier and that, in any event, the contract value required a proper electronic posting.
As these bid protest challenges indicate, win or lose, public institutions are facing increasing challenges where they are called on to defend their contract decisions based on claims that they are not meeting their open competition duties.