This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
While Canada’s new trade treaties have formally recognized Negotiated Request for Proposals (RFPs), many Canadian institutions were ahead of that adoption curve and have years of experience successfully deploying flexible formats in both their major projects and day-to-day procurements. From early adopters to recent innovators, Canadian institutions are now setting the standard in the strategic execution of these internationally recognized tendering formats.
Formal Trade Treaty Adoption
By way of background, Article 512 of the new Canadian Free Trade Agreement (CFTA), which replaced the Agreement on Internal Trade (AIT) in the summer of 2017 and aligned domestic rules with the international standards adopted in the Canada-European Union (EU) Comprehensive Economic and Trade Agreement (CETA), introduced express new protocols for using negotiations during a procurement process. These protocols require the disclosure of the intention to use a negotiation process, require that transparent criteria be used in the elimination of any suppliers during that process, and prohibit unfair or discriminatory treatment of any suppliers during the negotiations. For processes using concurrent negotiations, the protocols require that suppliers be provided with the same deadline to submit their new or revised tenders. For processes using consecutive negotiations, the protocols require that a specific amount of time be specified for a supplier to submit its final offer prior to proceeding to negotiate with the next-ranked supplier.
Phasing Out Contract A – Battle of the Operating Systems
With an increasing number of Canadian purchasing institutions adopting international best practices and implementing flexible, low-risk negotiated RFP models for everything from construction to information technology contracts, how long will it be before competitive bidding evolves to render the high-risk and inflexible Contract A operating system completely extinct?
In 1981, the Supreme Court of Canada decision in Ontario v. Ron Engineering & Construction (Eastern) Ltd. (referred to as Ron Engineering) imposed fixed-bid Contract A legalities onto the Canadian tendering process; however, in 1999, the Supreme Court of Canada decision in M.J.B. v. Defence Construction (referred to as M.J.B.) counterbalanced Ron Engineering and confirmed that purchasing institutions remain free to use traditional contract law to negotiate flexible, low-risk competitive bidding processes. After years of competing operating systems, we have reached the tipping point: Contract A is in an irreversible decline. Negotiated RFPs are the emerging standard.
The question remains, though: Why was Contract A ever used in the first place? The answer lies in timing. Just as Ron Engineering’s fixed-bid Contract A precedent was taking effect within the Canadian construction sector, senior governments across Canada were establishing trade treaties that required open, competitive bidding for most significant government purchases. Governments needed to quickly establish an operating system to facilitate these new requirements, so they repurposed the construction industry’s fix-bid tendering format and imposed its idiosyncratic rules on everyone else.
Lost in that equation was the fact that there were a number of pre-existing industry conditions that led to fixed-bid tendering in the construction industry, including an army of independent architects and engineers ready to prepare detailed specifications for the owners, an established industry group that creates standard-form boilerplate contracts to incorporate into tendering documents, and a prime-subcontractor supply chain that was ready to bid on pre-fabricated tender calls with bid bonds provided by the bonding industry.
That combination of critical pre-conditions does not exist in other industries, yet under Contract A all sectors were called on to bid on government contracts under the same operating system rules used for construction tendering. Outside of the construction sector, this led to significant problems in designing and awarding contracts suited to the specific industry and project. By the 1990s, the systemic defects were largely apparent to anyone following the case law or in tune with conditions at the front lines of the procurement cycle.
With the benefit of hindsight, the government’s decision to adopt the Contract A operating system for all of its procurements regardless of the industry or project proved to be a massive lost opportunity since by the early 1990s the United Nations Commission of International Trade Law Model Law on Public Procurement (known as the UN Model Procurement Law) had already established a broad range of tendering formats, including negotiated RFPs. However, the official adoption of flexible formats would have to wait another generation in Canada until the 2017 trade treaty reforms described above.
Instead of being early adopters, Canadian institutions became mired within the entanglements of the Contract A process contract. The use of the construction industry Contract A tendering format spread into a virus-like contagion thanks to the “generalized Peter Principle”, which Wikipedia defines as the following:
The Peter Principle is a concept in management theory formulated by educator Laurence J. Peter and published in 1969. It states that the selection of a candidate for a position is based on the candidate’s performance in their current role, rather than on abilities relevant to the intended role. Thus, employees only stop being promoted once they can no longer perform effectively, and “managers rise to the level of their incompetence.” The Peter Principle is a special case of a ubiquitous observation: Anything that works will be used in progressively more challenging applications until it fails. This is the “generalized Peter Principle”. Peter noted that there is a strong temptation for people to use what has worked before, even when this might not be appropriate for the current situation.
The failures of the Contract A system was soon apparent due to the inherent inability of that operating system to offer practical, low-risk solutions for dealing with tender compliance traps and overbudget bid roadblocks, and due to the restrictions on considering creative proposals and engaging in post-bid contract award negotiations based on supplier-proposed solutions.
Canada’s Supreme Court Reboots Competitive Bidding
By confirming a clear passage out of Ron Engineering’s Contract-A-minefield, the Supreme Court’s above-noted M.J.B. decision served as the catalyst for rebooting the procurement cycle. Giving purchasing institutions the right to choose a more flexible operating system based on traditional contract law gave those institutions the ability to cut through piles of red tape, avoid countless legal entanglements, and negotiate refinements to align their tendering practices to a broader range of industries. This proved a far better fit than imposing one-size-fits-all, prefabricated contracting approaches on every tendering process.
More and more purchasing organizations soon began realizing that client satisfaction, supplier engagement, and overall compliance with open tendering obligations could be increased by adopting a more flexible approach to tendering. The bottom line was that traditional contract law was proving to be a superior operating system, working better to fit more situations than the mass-produced standardization of the Contract A steamroller.
In this tale of two operating systems, the post-M.J.B. years have seen a steady erosion of the once seemingly unassailable Contract A operating system. In fact, even within the construction sector, we see an accelerating migration towards flexible formats. This is particularly true domestically and internationally in the use of negotiated RFPs for complex and high-risk projects. The endorsement of these formats in the UN Model Procurement Law and the UNCITRAL Model Legislative Provisions on Privately Financed Infrastructure Projects, both of which recognize the multi-stage negotiated RFP format as the default tendering method for those complex projects, further underscores the mainstream and widespread adoption of flexible formats within the construction industry.
The Tipping Point of Innovation
Outside of the construction sector, change has occurred at an even faster pace. The spark of innovation has been lit on multiple fronts. From the Atlantic to the Pacific, the Arctic to the Equator, the standardized process-driven approach to tendering has lost ground to a more principled, nuanced, and substantive approach that leverages flexible RFP formats. The same tipping point has arrived within Canada and across many other Commonwealth jurisdictions, while in the United States, a jurisdiction that does not recognize the Contract A process contract, negotiated RFPs have long been the default type of RFP format.
In addition to offering a far more effective shield against bidder lost profit claims, the negotiated RFP has set the new standard by simply working better at meeting the overall needs of the tendering cycle. For example:
- When bids contain irregularities, it’s no longer necessary to disqualify bidders. Transparent rectification processes can now be used to maximize competition by allowing all proponents to cure irregularities in their bids, thus ensuring full competition while avoiding tender compliance lawsuits. This is a far more practical approach for purchasing institutions and bidders than the alternative Contract A public opening format that leaves the institution’s hands tied and subject to compliance lawsuits whether they accept or reject a bid based on compliance issues.
- When bids come in overbudget, it’s no longer necessary to cancel and re-tender and expose the institution to project delays and potential bid-shopping lawsuits. While negotiated RFPs permit the safer termination of a bidding process, they also help organizations avoid re-tendering by enabling transparent post-bid price negotiations so contract awards can be made on time and on budget.
- When a selected proponent wants to discuss contract terms, it’s no longer necessary to impose pro forma boilerplate agreement terms with “take it or leave it” ultimatums. Where required, flexible formats permit the post-bid dialogue necessary to tailor contract terms to better reflect the interests of both parties and the specific requirements of the proposed contract.
- When suppliers propose a creative solution that can save time and money, it’s no longer necessary to leave value on the table and reject new approaches. Negotiated RFPs allow you to obtain improved performance standards and improved pricing through structured, transparent, and defensible evaluation and negotiation processes that encourage creativity and innovative solutions.
The Process Serves the Purpose
With Contract A tendering, the need to avoid getting served with lost profit claims often trumps the need to put a contract in place and have the requirements delivered on time. Rather than paving over the strategic objectives of a transaction with procedural orthodoxies, the use of flexible formats has re-established the paramount importance of achieving the desired outcome. With negotiated RFP formats, process no longer needs to be an end in itself: timely results matter and the final contract is once again paramount. After years of innovation and success, the debate over whether institutions should use flexible tendering formats is over. The verdict is in: the public procurement industry is voting with its feet in its race to adopt negotiated RFPs.
