January 15, 2013
by By Rosslyn Young
Many in the procurement field may think that public and private purchasing operate in two relatively distinct and separate worlds. While the public sector may seem hamstrung by myriad rules and legislation, private purchasers may appear free to operate in a more free environment that allows for a greater variety of ways of doing business, including bidding.
But is this really the case? The perception certainly gives rise to several questions. For instance, what is the biggest difference between the public sector and the private sector when it comes to competitive bidding? As well, what are the advantages of competitive purchasing that the private sector can take away from the public domain? Is there anything of commercial value that the private sector can take away from these requirements?
With these questions in mind, Purchasingb2b checked in with legal expert Rosslyn Young, a commercial lawyer at The Procurement Office whose practice focuses on procurement and competitive purchasing, to provide some perspective on the issue. Read Young’s response on common questions related to the difference—as well as the similarities—between public- and private-sector bidding.
There are several key differences between the bidding process for private corporations and enterprises and public institutions such as schools, hospitals and government agencies. The first difference is that most public sector entities are compelled to openly compete purchases that are valued over a certain amount because of trade treaties, statutes and government policy. Private sector entities can typically choose to employ competitive purchasing only when it makes sense from a business perspective and, when they do so, can run invitational rather than open, public bidding processes.
The other big difference is the level of judicial scrutiny. Regardless of whether an entity is private or public, if it chooses to enter into a bidding contract (Contract A), then it opens itself to judicial scrutiny through lost profit claims for alleged breaches of the tendering process rules. However, in the public sector, even when a public sector entity chooses to run a competitive process outside of Contract A using a non-binding format, they are subject to possible challenges through judicial review, which is the court’s residual power to scrutinize government decisions under administrative law. While there are business pressures that dictate how a private sector entity manages a competitive process, if the process is properly constructed outside of Contract A then the scope of potential legal risk—though not completely extinguished—is greatly reduced.
The value of competition
Competitive purchasing offers several advantages that the private sector can take away from the public sector. Perhaps the biggest advantage is the harnessing of market competition through competitive bidding. While the private sector has the luxury of choosing the most efficient way to select vendors in each situation and is not compelled to open a process to full competition, there are significant advantages to considering a range of vendors through a competitive purchasing process. For starters, competitive purchasing enables the discovery of a wealth of different and diverse suppliers that a purchaser may not have known were available to provide a service. While posting an RFP on a public posting site may not be viable in all situations for a private sector entity, publicly issued Request for Expressions of Interest (REOI), Request for Information (RFI) or Request for Supplier Qualifications (RFSQ) can be useful tools to conduct market research and find qualified suppliers in the marketplace. After a company has identified suppliers it can then enter directly into negotiations with the most qualified supplier or issue an invitational RFP.
Another big advantage of running a competitive purchasing process is that vendors have incentive to “put their best foot forward.” The efficiency of the vendor selection process can be greatly increased when suppliers know that they have one shot to prove to the purchaser that they are better than their competitor. And, of course, competitive purchasing facilitates getting the best price because of the competitive tension it creates between suppliers to offer the best price.
Public sector institutions have to consider a great deal when they spend public money: they are tangled in a web of trade treaties, legislation and government directives, many of which are drafted as quick-fix reactions to spending scandals rather than thoughtful governance codes aimed at balancing accountability and efficiency. However, there are some processes from the public sector that are worth considering and adapting for private sector use.
Many public sector entities have to fully disclose all of the evaluation criteria as part of their solicitation documents regardless of the format used. If private sector entities choose to use a Contract A bidding process, they must also disclose how they intend to evaluate bids as a matter of contract. However, if a private sector entity chooses to run a flexible, non-Contract A tender, then they are under no legal obligation to disclose all of their evaluation criteria.
That said, there are valid business reasons why a private sector entity would want to borrow a page from the public sector and disclose their evaluation criteria regardless of format. For example, disclosing the evaluation criteria allows proponents the opportunity to provide exactly the solution or service that the purchaser is looking for and the result will be better proposals that will reveal the best supplier. This also drives internal discipline during the planning stages of an evaluation process and avoids protracted post-bid debates over the criteria that will inform the selection of the winning vendor.
Out in the open
There are other processes worth transplanting from the public sector to the private sector, such as increased transparency during a competitive purchasing process. To a large extent, the public sector’s procurement processes are a matter of public record because of the scope of public access laws. Further, many governments self-impose an obligation to provide debriefings to unsuccessful proponents. While a private sector entity may not want to subject itself to that level of openness, increased transparency with suppliers, through such means as clear, transparent evaluation methodologies and supplier debriefings, is a good idea. It improves relationships with the vendor base and, in cases where a supplier is dissatisfied with the outcome of a competitive process, allows them a constructive opportunity to discuss the process without resulting in a formal legal challenge.
This leads us to one final question: what lessons can the private sector learn from the public sector on how to minimize risk during the competitive purchasing process?
Canada leads the world in litigation in the area of tendering and most of the case law involves the public sector, so there are lots of lessons to be learned. The main reason why there is so much litigation is because the Canadian courts created the concept of Contract A bidding process back in 1981, which gave dissatisfied bidders a cause of action for breach of contract for even minor variances from the established process.
One simple way to avoid the threat of so much litigation—while still gaining the benefits of a competitive purchasing process—is to avoid the creation of Contract A by using properly drafted tendering templates and not requesting irrevocable bids or bid security. While there are some limited circumstances where market forces may require that a purchaser be able to hold a bidder to its price, most purchases are generally better managed through a flexible, non-Contract A vehicle, such as a non-binding Request for Quotations or a
Negotiated Request for Proposals. We generally advise both our public and private sector clients to move away from formal tendering to less risky non-Contract A
processes through properly constructed procurement templates. So, to the extent that a private sector entity chooses to
employ competitive purchasing as part of its business processes, perhaps the most
important thing to remember is to use a flexible, non-binding format, which provides the benefits of a competitive process, while avoiding the legal risk of a formal bidding process.
Rosslyn Young is a commercial lawyer whose practice focuses on procurement and competitive purchasing. She can be reached at firstname.lastname@example.org.
Do you have a legal question related to procurement you’d like one of our experts to answer? Email the editor at email@example.com.