This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide.
As recent case studies illustrate, rushed contract awards raise a series of red flags relating to uncompetitive practices, a lack of transparency, value-for-money issues, and concerns over the probity of the decision-making process.
For example, in May 2021, Transparency International, in collaboration with the University of Toronto, released a report entitled For Whose Benefit? The report raised serious concerns over the lack of transparency in the award of COVID-19 vaccine contracts. As the report stated, “the urgency of the COVID-19 pandemic has demanded rapid disbursements of public funds, quick decision-making, and unprecedented public health interventions.” The report concluded that “the development of and contracting for the supply of COVID-19 vaccines has also been accompanied by a disturbing and dangerous lack of transparency.” More specifically, the report found that “robust guidance on contractual transparency in public health emergencies was not in place at the onset of the pandemic” and that this resulted in “an extremely low publication rate of COVID-19 vaccine contracts worldwide.”
In fact, in reviewing 182 contracts involving the purchase of 12 different COVID-19 vaccines sold to 75 buyers worldwide, the report found that only 13 of those agreements were publicly released, including two that were unofficially leaked. That accounted for “only six per cent of the 182 concluded agreements”. Further, Transparency International noted that even that small sample of agreements contained significant redactions in key areas including pricing and indemnifications that were not supported with justifications that explained the reasons behind the redactions.
As the report stated, “justification of redactions should detail the decision-making process that led the buyer to conclude that it is of a higher public interest to redact, or not redact at all.” The report noted that redaction rationales, rather than providing general statements that accompanied the redactions, “should be specific to discrete sections of the contract rather than blanket explanations.” This lack of transparency caused concerns over the “notable variability in pricing of vaccines” since some buyers paid “more than we would expect when compared to GDP per capita”, as well as concerns over the inclusion of extensive indemnification clauses that increased the risk that the contracts were “pushing financial risks onto national governments, and away from the developer.” However, the full extent of these issues remains unknown. The report concluded that better protocols need to be established by global bodies to help support greater future transparency.
Recent concerns over rushed procurements, and the resulting lack of due process and transparency, go well beyond the purchase of COVID-19 vaccines. For example, in its June 2021 report entitled Southwest Border, the U.S. Government Accountability Office (GAO) raised concerns over a lack of due process in the rush to award contracts to build the US–Mexico border wall. As the report detailed, after the 2019 Presidential Declaration of National Emergency, billions of dollars in Department of Defense (DOD) funding were made available for the U.S. Army Corps of Engineers (USACE) to use on rushed border barrier construction.
This resulted in the award of $4.3 billion in non-competitive contracts, including several contracts that were awarded before the specifications and costs were even finalized. As the GAO explained, the award of open-ended contracts, referred to as “undefinitized contract actions” (UCAs), enables rushed awards that “allow contractors to begin work while the scope and terms—along with the price—are negotiated and the contracts are fully definitized.” USACE justified the use of these open-ended direct awards based on urgency, since it maintained that “competing and negotiating a definitive contract would not allow it the time needed to undertake construction in fiscal year 2019” as directed by DOD to meet USACE’s 18-month delivery schedule.
In fact, the GAO found that these contracts, which were not competed and not scoped, were awarded before project requirements or cost estimates were even finalized. Rather than including clear specifications and pricing, the contracts proceeded on a time-and-materials basis so that specifications and price could be finalized later. This gave rise to significant uncertainty. In fact, the report found that “at the time of award, barrier requirements for the first three projects were in flux and changed from 18-foot to 30-foot wall panels the same day that USACE awarded the initial contracts.” The GAO warned that using UCA awards is “potentially risky for the government because contractors have little incentive to control costs, as the government normally reimburses contractors for all allowable costs incurred during the undefinitized period.” As the report ultimately warned, “by focusing on expediency in contracting, the government risks paying higher costs.”
The failure to clearly define contract requirements and associated costs inevitably increases the risk of downstream contract performance disputes. For example, in its February 2021 decision in North America Construction (1993) Ltd. v. Yukon Energy Corporation, the Supreme Court of Yukon dealt with a payment dispute between parties that failed to properly define their terms before commencing a generating station contract. As the Court stated, “this case demonstrates the perils of parties to a complex construction contract relying on ongoing negotiations while the contractual obligations are being fulfilled, to finalize pricing, design and scheduling.” This failure to establish clear contract terms caused multiple downstream disputes and ultimately resulted in protracted litigation.
In fact, after the Yukon Energy Corporation paid the contractor over $8 million in initial payments ($6.7 million) and trial damages ($1.7 million), the Yukon Court of Appeal reduced the trial damages award to $340,000 but sent four outstanding payment issues back to the lower court for a retrial. The resulting retrial considered a complex series of contract interpretation and evidentiary issues that ultimately resulted in a near set-off of the outstanding claims and counterclaims. After the retrial, the contractor was awarded an additional $65,000, or less than 0.01 percent over and above what it had already been paid. In summary, rushing to contract performance without clearly defining contract requirements and related costs exposes contracting parties to significant risks of future disputes that may require a disproportionate amount of time and costs to resolve when compared to the time it would have taken to establish clear terms in the first place.
Given their inherent risks, rushed awards serve as red flags for increased audit scrutiny. For example, in its September 2021 report entitled The Use of the Emergency Contracting Methodology by Public Bodies 2015-2019, Jamaica’s Integrity Commission found that while the use of direct awards for emergency purposes was decreasing across Jamaican government entities and only represented about 4 percent of the total value of contract awards over a five-year period, some outlier institutions continued to rely on emergency direct awards for over half of their total contract spending. For example, the report found that the Jamaica Constabulary Force awarded “70 contracts using the emergency contracting methodology that amounted to $1,305,246,246.49 or 78% of the total contract value awarded by the Constabulary during 2015.” Furthermore, the report found that for “the calendar years 2016 and 2019, the National Health Fund used the emergency contracting method to procure goods, works and services which amounted to 55% and 65% of the total annual contract value respectively.”
Noting that “competition sustains the integrity of the procurement process and reduces the likelihood of corrupt practices”, the Integrity Commission warned that “anti-competitive methods such as Emergency Contracting are only encouraged if the need for same is great.” Moving forward, it recommended that “procuring entities ensure that all procurement undertaken via the emergency contracting methodology fits squarely within the ambit of the scope and purpose for the use of the procurement method.” It also recommended that these emergency contract awards commence within specified timeframes to resolve the emergency “in the shortest possible time” to avoid protracted emergency sole-sourcing.
Similarly, in its March 2021 report entitled Special Report of Investigation Conducted into the Registration of Intelcan Technosystems Inc. with the National Contracts Commission (NCC) and the Implementation of the Contracts for the Design and Construction of Air Traffic Control Towers at the Norman Manley International Airport (NMIA) and the Sangster International Airport (SIA), Jamaica’s Integrity Commission found that the Jamaica Civil Aviation Authority (JCAA) misused emergency contracting procedures in the award of a contract for the construction of new airport control towers. As the report detailed, new airport construction had adversely impacted airport sightlines and prevented air traffic controllers from directing planes to and from certain terminal gates. The JCAA relied on urgency rationales to support the direct award of the construction contract for new control towers to a Canadian company.
However, the report found multiple irregularities in this rushed direct award process. In fact, while the government had initially estimated that the rushed project would take only 18 months to complete, the Integrity Commission found that the design and construction of the air traffic control towers spanned approximately eight years. The lack of post-award urgency undermined the credibility of the government’s original emergency award rationale. As the report stated, this delay raised “serious questions as to whether the project was handled with the level of seriousness and urgency which it purportedly deserved.”
Furthermore, the Integrity Commission found that the government officials who were responsible for the direct award had misrepresented the context of that award by falsely claiming that they had received an unsolicited proposal from the Canadian company when in fact they had actively sought the company’s proposal to facilitate the award. The report also found that contrary to value-for-money requirements, the government failed to properly consider other quotes that were submitted for the construction of the control towers and failed to document the basis upon which those competing proposals “were deemed unsuitable.”
The Integrity Commission also found that prior to receipt of the purportedly “unsolicited proposal”, the government officials breached conflict rules by accepting free travel and accommodation to Cuba to meet with the prospective contractor to inspect some of its previously built control towers. The report concluded that the acceptance of the invitation to travel to Cuba was “unethical and unprincipled” since it could be viewed as an attempt to favourably influence the government’s contract award decision. This conflict brought the integrity of the decision into question.
The Integrity Commission ultimately determined that the award of the emergency contract was not in compliance with applicable statutory requirements since it was “not awarded in a manner which could be deemed as having been impartial and on merit.” The report also found that the award failed to follow proper approval procedures since it was never reviewed or approved by the government’s Procurement Committee before it was awarded.
Moving forward, the Integrity Commission recommended that the JCAA adopt proper procurement planning procedures to avoid the need to rush a procurement process. With respect to the conflict issues, the report also recommended that future proposals be evaluated in an unbiased manner and that JCAA officers “cease and desist, from accepting travel, meals, entertainment, gifts or anything of material value, from bidders or prospective bidders, suppliers, contractors or consultants engaged to undertake contracts.” As this case illustrates, rushed sole-source deals raise audit red flags that can expose decision-makers to serious after-the-fact scrutiny.
Similarly, in its April 2021 report entitled The contract awarded to the JCL and MHC Consortium by the St Vincent de Paul Residence for the management of four residential blocks through a negotiated procedure, Malta’s National Audit Office (NAO) found that St Vincent de Paul Residence (SVP) improperly relied on urgency as a justification for bypassing an open tendering process and directly negotiating and awarding a facility management contract for a yet-to-be-constructed 500-bed extension to a long-term care facility.
The NAO rejected the urgency justification for the direct award of the facility management deal since the long-term facility was not yet built. As the NAO stated, “notwithstanding the reference to urgency, this Office maintains that, in this case, such urgency was certainly not justified as the blocks were to be under construction for at least 18 months, during which the SVP had time to procure the management services through an open procedure.” The NAO found that the rushed direct award justification was “illegitimate, since no real urgency existed that merited the procurement that involved hundreds of millions of euros and bound Government for a lengthy period.”
The NAO therefore concluded that the relevant government bodies “acted in breach of legislative provisions when requesting or sanctioning recourse to a negotiated procedure for the management of the new blocks at the SVP on the basis of urgency.” It warned that this breach of the Public Procurement Regulations could possibly lead to the invalidity of the procurement, particularly when noting that the award committed the government to the expenditure without the required budgetary clearance being sought from the Ministry of Finance or approval from Cabinet or the Parliamentary Secretaries responsible for the SVP. As this case illustrates, the award of rushed sole-source contracts can attract significant scrutiny since direct awards often serve as a red flag for even more serious procurement irregularities.
For example, in its April 2021 decision in The State v. Joel Luma, the Papua New Guinea National Court of Justice found the Secretary of the Department of Works guilty of the criminal offence of abuse of office in connection with a series of expedient sole-source decisions. Under his official powers, the accused was authorized to approve the expenditure of Department monies up to K300,000. The evidence showed that in 2009 he approved eight unwritten contracts for pothole patching material, valued at under K200,000 each, for a total K1,561,945. In 2010 he then approved another three similar contracts at similar values for a total of K574,000. Finally, in 2011, he executed 16 contracts at a total value of K4,309,000 that he justified as being awarded pursuant to a certificate of inexpediency. In total, as the Court summarized, the accused approved 27 contracts with the same contractor, Road Stoa Limited, on behalf of the Department, for a total value of K6,445,145.
As the Court detailed, the procurements “did not take place in the normal manner” since they were awarded without the use of a tendering process. Further, no applications were made to the Central Supply and Tenders Board to authorize the use of a certificate of inexpediency to support the sole-source awards for the pothole patching materials. Furthermore, the Court found that the sole-source deals were made at grossly inflated unit costs of between K300 and K330 per bag, while the same materials were available from local suppliers for between K40 and K80 per bag. The State brought charges alleging that the Secretary’s direct awards were an abuse of office and in contravention of the Criminal Code.
In rendering its verdict, the Court noted that the Secretary was responsible for overseeing the Department of Public Works and was the “principal custodian of the State monies entrusted to his department to perform its function.” The Court also noted that the defendant was under a duty to ensure that “scarce financial resources were applied in accordance with established procurement processes for the provision of goods, works and services in the public interest.” The Court concluded that:
…the nature and extent of the abuse, by the most senior person in the Department, including the deliberate efforts to avoid the procurement process, the concealment and structuring of contracts, the unauthorised use of certificates of inexpediency, and the value of the contracts involved, was so serious, and fell so far below acceptable standards as to amount to an abuse of the public’s trust worthy of condemnation and criminal punishment.
The accused was therefore convicted of the offence of abuse of office.
As these case studies illustrate, rushed direct contract awards raise significant red flags due to their non-transparent, anti-competitive nature. In addition to raising value-for-money concerns, rushed emergency awards can also raise questions over whether the award decisions were tainted by conflicts or bias, or were the product of criminal activity. Given the above, purchasing institutions would be wise to carefully document their sole-source justifications and ensure that they are following appropriate due process procedures before rushing into their next emergency sole-source decision.
