This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
This section identifies the five inherent risk factors that impact public sector procurement projects. It also explains how failing to address these factors leads to overly optimistic planning assumptions and imposes unrealistic expectations on major project teams.
The Flawed Execution Fallacy and Systemic Structural Flaws
To better understand the systemic nature of the inherent risk factors, it is important to debunk the flawed-execution fallacy that views project failures as localized and random events that can be attributed to unanticipated incompetence at the project-team level, and entrenched inefficiencies in the institution’s procurement department and procurement procedures. While partially accurate, project-level incompetence and inefficient institutional-level project management mechanisms only account for about 40% of the inherent risk factors that plague public sector procurement projects.
Figure 6 – Flawed Execution Fallacy
To form a complete picture, public institutions must also address the other three systemic structural flaws that play a leading role in causing project failures. These include senior-level indecision and interference, and inadequate project resourcing, all of which undermine major public sector procurement projects.
Figure 7 – Systemic Structural Flaws
The following section provides examples of these systemic risk factors to illustrate the impact of each as a major cause of project failures in public procurement.
Figure 8 – Flawed Execution Fallacy and Systemic Structural Flaws
- Incompetence
Project-level incompetence is a significant risk factor in public sector procurement projects and is exacerbated by the inability of senior-level decision-makers to properly mitigate project failures when they are first discovered. For example, in its June 2018 report entitled Fraud Investigation of a Vendor Providing Life Safety Inspection Services to the City of Toronto, the Toronto Auditor General found major fraud in the City of Toronto’s fire safety inspection program. The Auditor General found that there were no reports available to confirm that the fire inspections were ever performed, as required under the contract. It also noted a “long history” of performance issues with the contractor in question and that the City awarded more work to that contractor notwithstanding those concerns. In fact, the report found that the City failed to respond to ensure that buildings were safe and in compliance with the Fire Code. The Auditor General concluded that these issues reflected broader systemic problems in the City’s management of life safety inspection services, noting “a lack of consistency and completeness in the work being provided by other City vendors conducting life safety inspections”, making it “evident that the City must provide clearer direction and conduct quality control tests of these vendors to verify that all vendors[’s] service meets Fire Code requirements.” This case study serves as just one of many that illustrate how project-level incompetence and the failure of senior decision-makers to appropriately mitigate project issues when they arise are significant contributing factors to procurement failures.
- Inefficiency
Institutional inefficiency is another major risk factor in public sector procurement. Yet, public institutions rarely apply useful performance metrics to their procurement processes that would help them identify process bottlenecks and enable them to address inefficiencies in a systematic manner. For example, in its January 2018 report entitled GSA Should Establish Goals and Performance Measures to Manage the Smart Buildings Program, the U.S. Government Accountability Office found that the federal General Services Administration (GSA) failed to establish performance benchmarks for its smart buildings initiative. As the audit noted, the failure to establish benchmarks undermined the ability to measure project success and, therefore, undermined public accountability for the program. As this report illustrates, public institutions need to establish accountability controls for their portfolio areas since the failure to do so can result in adverse audit findings.
Similarly, in its June 2018 report entitled DOD Should Develop a Strategy for Assessing Contract Award Time Frames, the U.S. Government Accountability Office (GAO) found that the Department of Defense (DOD) lacked baseline information to determine how long it takes to award its contracts, undermining its ability to assess any improvements in its contract award timeframes. The report also noted that timelines were impacted by internal prioritization and on the responsiveness of suppliers to post-bid information requests. The report concluded that the standardized collection of process timeframe information across the various departments of the military was an essential first-step to developing broader institutional strategies for streamlining the procurement process. As this report illustrates, collecting the necessary information about current practices is a prerequisite to empowering an institution’s ability to establish accountability controls and accelerate its tendering cycle.
- Indecision
Senior-level indecision is a serious risk factor for public sector procurement projects. For example, in its spring 2018 report entitled Replacing Montréal’s Champlain Bridge—Infrastructure Canada, the Auditor General of Canada determined that delayed decision-making resulted in $500 million in unnecessary maintenance costs for the improperly designed original bridge. The report also found that the government failed to properly develop a business case to justify the use of a public-private partnership (P3) model for building the new bridge. The Auditor General observed that the government’s failure to properly monitor life-cycle costs for the original bridge led to inappropriate planning delays and significant, avoidable direct and indirect costs. After delaying its decision to build a new bridge, the Auditor General then found that the government rushed to judgment in deciding to use the P3 model for its construction. In fact, the audit found that the business case supporting the P3 approach was developed two years after the initial decision to use the P3 approach was made, and that the P3 approach proved to be potentially costlier than more traditional procurement models.
By way of another example, in its December 2018 report entitled Metrolinx – LRT Construction and Infrastructure Planning, the Auditor General of Ontario found that Metrolinx, a provincial government agency responsible for regional mass transit planning and development, mismanaged the Eglington Avenue light rail transit project in downtown Toronto. The project used an Alternative Financing and Procurement (AFP) public-private partnership (P3) contract. As the report found, after-the-fact changes imposed by the municipal and provincial governments resulted in scope change and delay costs. Notwithstanding the fact that the AFP/P3 contract was designed to shift most of the project delay risks to the AFP consortium (in exchange for higher “risk premium” payments under the contract that were supposed to serve as “insurance” against future delay costs), the Auditor General found that Metrolinx subsequently agreed to pay the AFP/P3 consortium millions in questionable delay costs without any clear supporting documentation. As this case study illustrates, failing to provide an appropriate planning mandate undermines the ability to make stable and predictable long-term procurement planning decisions. This ultimately increases the risk of after-the-fact scope changes that result in avoidable project delays and cost increases.
These are just two of many examples of how indecision and changes to prior decisions result in significant cost increases and delays in procurement projects.
- Interference
Senior-level interference is a major risk factor in public sector procurement projects. For example, in its December 2018 report entitled Metrolinx – GO Station Selection, the Auditor General of Ontario found that the Ontario government and City of Toronto interfered in the train station expansion plans of Metrolinx, an independent provincial agency. As the report detailed, after an extensive planning process, Metrolinx recommended a series of new train stations, initially rejecting new train stations at the proposed Kirby and Lawrence East locations because the cost of those stations significantly outweighed their advantages. However, the audit found that the Ontario provincial government and the City interfered with those initial recommendations, resulting in Metrolinx adding those two stations. As the report noted, the proposed Kirby station represented a bad business case for the Ontario taxpayer. The audit also found that there was a weak business case for the proposed new station at the Lawrence East location. A newly elected provincial government then announced that it would revisit those prior decisions, thereby perpetuating the cycle of indecision and interference.
By way of another example, in its January 2018 decision in R. v. Livingston, the Ontario Superior Court of Justice found David Livingston, the former chief of staff to Ontario Premier Dalton McGuinty, guilty of unlawfully destroying government records. The controversy involved the deletion of records from computers in the Premier’s Office in the wake of the Premier’s resignation during an ongoing controversy over the government’s decision to cancel gas plant construction projects in Oakville and Mississauga, and attempts by the opposition to obtain records from the government in relation to those project cancellation decisions. As noted by the Ontario Auditor General in its October 2013 report entitled Oakville Power Plant Cancellation Costs, in 2010, due to resistance from the Town of Oakville, the Ontario government decided to cancel a contract for the construction of the gas plant in Oakville, Ontario that was awarded by the Ontario Power Authority (OPA) to TransCanada Energy Ltd (TCE) in 2009. After the cancellation, the government entered into settlement negotiations with the contractor over the termination and relocation of the project. As the Auditor General’s report concluded, the project cancellation ultimately cost taxpayers hundreds of millions of dollars. The Auditor General also found that the hasty termination of the contract compromised the OPA’s position in relation to its negotiation of cancellation costs. The Auditor General’s report found that the government had struck a deal with TCE to “lay low and not start litigation” in exchange for the government agreeing to waive its contractual protections with respect to the payment of cancellation fees. This interference in the original contract award decisions cost Ontario taxpayers hundreds of millions in otherwise avoidable costs.
These examples are just two of many on record that illustrate how senior-level interference undermines the successful execution of procurement projects.
- Inadequate Resourcing
Inadequate resourcing is a major risk factor in government procurement projects. For example, in its fall 2017 report entitled Report 1—Phoenix Pay Problems, the Auditor General of Canada found serious deficiencies in the government’s Phoenix project, a payroll modernization initiative. As this initial report concluded, the implementation failure had a significant adverse impact on government operations because the government was no longer able to reliably pay its staff. In its spring 2018 report entitled Building and Implementing the Phoenix Pay System, the Auditor General of Canada followed up on a 2017 fact-finding report and focused on the causes for the federal government’s failed attempt to deploy its new Phoenix payroll system. The Auditor General traced the root causes of the unsuccessful deployment to the project team’s failure to obtain an adequate budget for the large initiative, which resulted in a significant scaling back of system functionalities. As the Auditor General observed, the project executives did not assess the impact of scaled-down functionality before deciding to proceed with deployment. Instead, they planned to add missing functions after the system’s initial deployment. The Auditor General found that weak oversight contributed to the failure since there were inadequate checks and balances placed on the project team when it improperly prioritized its scheduling and budget objectives over broader operational objectives. Further, the audit stated that Phoenix executives failed to heed warnings that the system was not ready, proceeding to launch notwithstanding clear signs of pending system failure. As this case study illustrates, government institutions that fail to properly fund projects run the risk of launching runaway projects that fail to meet operational objectives while also costing more time and money in the long run.
Future Considerations: Building Winning Conditions
While public sector procurement projects may be subject to significant inherent risk factors, these challenges are not insurmountable. Rather, the inherent risk factors can be managed and mitigated through the creation of procurement governance frameworks that define roles and responsibilities across the organization to guard against inappropriate interference, while mandating strategic procurement planning to ensure that projects are properly planned and resourced. By addressing these systemic structural flaws, purchasing institutions will then be better positioned to increase their project success rates by also ensuring that their projects are appropriately staffed with competent project teams and supported by efficient procurement procedures that leverage appropriate project management disciplines. By embedding strategic procurement practices at the institutional governance level, public institutions can enable successful strategic execution at the project level.
