Contracting for Best Value: A TCCRI Policy White Paper

Contracting for Best Value: A TCCRI Policy White Paper

Executive Summary

In the 2012-2013 fiscal biennium, Texas state agencies and institutions of higher education will be responsible for over $170 billion in state and federal funds. Many of these expenditures will be delivered through contracts for service from a variety of private sector employers: construction firms, pharmacies, managed care organizations, technology companies, engineers, accountants, architects and all manner of suppliers. According to the most recent LBB State Contracting Report, at the close of FY 2010, the state had 4,771 open contracts worth $1 million or more.

The resulting products and services procured by state contracts touch every government service and ultimately every individual. Government moves onward; citizens
are paid benefits, school children are educated, highways are built and the DPS vigilantly patrols them. All the while, few Texans grasp the importance of state contracting in the delivery of services, much less how effectively state agencies contract for services.

To attempt to ensure that the state gets the very most out of the funds it expends to serve Texans, the Legislature and state agencies have promulgated a regulatory framework governing procurement and related contracting activities. The regulatory framework includes a definition of best value and provides state agencies with broad authority to structure procurements to deliver results that benefit taxpayers.

“Best value” can be defined in many different ways depending on the eye of the beholder, but generally, it speaks to guaranteeing the state gets the best service it can for a fair price, considering both short- and long-term impact, the quality of goods and services purchased, the ability of a provider to deliver on time and under the terms of a contract, and many other factors. Taking a low bid sometimes ensures best value. But sometimes, to quote the old axiom, the state gets what it pays for—and may end up with a contract that is lacking in terms of quality and dependability.

Often, low price is confused with value and higher prices are confused with overcharging. But low prices can also represent an inferior product or service; while high prices can be the value the market sets for a superior product or service. Despite state law demanding best value, practice often demands low price, causing, at times, contract manipulation and project failure.

Failures, of course, are what make headlines. On October 28, 2008, Governor Rick Perry suspended a $900 million contract with IBM because of its apparent failure to back up critical state data. That suspension was eventually lifted, but the state’s relationship with the vendor continued another three years with varying degrees of success before the contract was ultimately cancelled and re-bid to select a new service provider.

Such high profile examples often lead to conclusions that procurement reform in the form of more prescriptive requirements and rules are the panacea that will ensure the state is contracting for best value. As a result, over time, implementation of the state’s procurement and contracting practices have become more compliance and process driven based on the erroneous assumption that if all of the rules and processes are followed it will ensure that citizens receive the best value.

Prescriptive regulation tends to have the opposite effect, and implicit in the assumption is that if public employees merely follow the rules, the same result will be achieved each time. However, the success of the procurement is more dependent upon the skills and abilities of the state employees who implement

the statutes and the quality of the contractor, not necessarily the rules and processes themselves, which have tended to take precedence.

One factor that impacts the state’s ability to obtain the best value is that the skill sets of procurement and contracting professionals have not kept pace with the increasingly complex services and technology needed to conduct the state’s business. The skill sets required to develop effective criteria for determining best value for these complex services are very different than the skills required to follow administrative processes focused on compliance with rules and regulations.

As a result, despite the statutory flexibility to consider factors other than price in making procurement decisions, price is still the primary criteria used to determine best value. Procurement decisions tend to focus on compliance-driven factors: terms and conditions versus qualitative best value factors such as key performance requirements and how they are measured.

What does the state of Texas do to ensure best value when making large contract awards? What can be done better? This paper will address those questions and provide some suggestions for improvement.

Download the Contracting for Best Value Policy White Paper