Chapter # 9

PURCHASING

 

 

 

The goal of purchasing is to buy the right things at the best possible price in an approved manner. Successful purchasing generally results from formal regulations, regular procedures, and centralization. Appropriate regulations should be adopted by the governing body. Such regulations guide purchasing procedures and specify such details as the general duties of different officials (especially the purchasing agent); the dollar amount above which competitive bids are required (the bid limit); informal price gathering; conditions under which emergency purchases can be made; and disposal of obsolete equipment and materials. [1]

Management, purchasing, and public works

Challenges:

Benefits of Centralized Purchasing (Procurement)

 

Public Works should work with, and through purchasing officials, rather than around them.

Purchasing must provide goods and services on time and at lowest total cost.

Conflicts between PW and purchasing departments usually involve:

  1. Schedules
  2. Priorities
  3. Manpower
  4. Technical opinion
  5. Performance tradeoffs
  6. Administrative procedures
  7. Cost

Cooperative purchasing

Cooperative purchasing, in which several governments collaborate in making their purchases, has been increasing in recent years because it promises significant savings to small governments through large scale bulk purchasing. Community governments organize such efforts or avail themselves of state purchasing pools in which states allow local units to take advantage of bulk state purchasing. [1]

 

Planning and scheduling purchases

Opportunities for improving local government purchasing are:

 

Consolidating requirements for products and services

Advantages of buying in quantity are lower cost, reduced administrative time and cost.

User agencies must communicate to purchasing for requirements of repetitive and common use items.

Administrative regulations and policies will set dollar thresholds for level of competitive price quote procedure:

  1. Informal quotes, i.e. by telephone
  2. Formal quotes, i.e. written proposals from vendors
  3. Formal publicly advertised and sealed bids

 

Term contracting means "source of supply are established for a specified period of time, usually characterized by an estimated or definite minimum quantity, with the possibility of additional requirements beyond that minimum, all at a predetermined unit’ e.g. annual price agreements for asphalt, concrete, curb and gutter.

 

Term contracting benefits vendors and city by:

 

Emergency purchases should be avoided because they are costly and often are caused by poor planning.

 

Managing inventory

Current trends are getting away from maintaining warehouses and stores and toward relying on "stockless" term contracting, e.g. office supplies could be directly supplied by private suppliers such as Office Depot, canceling the need to store and dispense supplies for city stores.

If a city enters into inventory management and control it must ensure that a good database is in place that will:

  1. Ensure adequate supplies are on hand
  2. Ensure actual physical quantities on hand match the inventory records
  3. Flag understocked or overstocked items
  4. Purge surplus, excess and obsolete material

 

Conducting market research

Keeping abreast of the latest economic and product/services information is a joint responsibility of purchasing, user agency, and city’s economic analyst (if there is one). Information on market conditions for products and services can be obtained from a variety of sources such as:

 

Using value analysis (VA)

VA looks at:

  1. What is the function that must be performed?
  2. How are we performing it right now, at what cost?
  3. What are the alternative means of accomplishing the required function, and how much would each of these alternatives cost?
  4. Considering the cost of the current approach and the projected cost of each of the alternatives, which approach should we choose in order to perform the required function at lowest total cost?

 

Requirements analysis

This sets new and revised specifications and performance standards for products or services, e.g. raising fuel economy rating or specifying diesel vs. gasoline engines in fleet applications.

 

Life-cycle cost bid evaluations

This method incorporates total life- cycle operation and maintenance costs into the evaluated bid in addition to the "first cost" or purchase price, e.g. evaluating purchase of air compressor that considers projected fuel costs over the life of the unit (see good example in text book).

 

This methodology must be advertised and made known to bidders before bids are received. The evaluation bid price would be used for award purposes only.

 

Value purchasing bid evaluation

This method adds additional evaluation criteria to the bid proposal and is similar to life-cycle cost evaluation. Example:

EBP= Purchase price = P + FC - VNR

Where P= purchase price

FC= projected fuel cost

VNR= value of noise reduction

 

Bid requirements must be careful to specify measurable, standard criteria for level of noise reduction or any other non-purchase price criteria.

 

Value incentive contracting

Also know as "value engineering"; bids are received for a particular product but bidders may submit a revised proposal called a "value change proposal" VCP after award, wherein the product or method is improved. The city and the contractor share the savings (usually 50/50). The purchasing agency is under no obligation to accept the proposal. VCP is currently allowed by FDOT contracting on some projects such as bridges.

 

Make or buy decisions for services

These involve decisions on whether to procure services through in-house staff or from private contractors. Here is an idealized five step process:

  1. Define the service in terms of the city’s broad goals, its specific requirements, and how performance will be evaluated.
  2. Consider the pros and cons associated with procuring through both in-house and out-source methods.
  3. If in-house is feasible, develop in-house bid or proposal on behalf of the providing department.
  4. If contract delivery is feasible, develop solicitation document and obtain offers.
  5. Evaluate both in-house and best-qualified contract offer in order to select provider.

 

Give consideration to the following factors before making a final decision:

Are there legal constraints against bidding of in-house services—some groups may resist this?

Does the private firm have the ability to provide the requested service and is there interest in doing so?

Can the in-house service be defined and costed?

Can the city administer an outsource contract? Does it have the wherewithal and expertise?

 

Lease versus purchase decisions

This type of procurement is helpful when a city is experiencing difficulties in financial growth. It allows local governments to obtain capital equipment despite tight budgets. Figure 9-4 of the textbook gives list of considerations in lease/purchase decisions.

 

Scheduling

Establish a buying schedule, each year, with the purchasing entity, include this information:

 

Establishing contracts

The next step in procurement involves setting up contracts by developing bidder lists, obtaining proposals or bids, evaluating bids and proposals, and making the award.

Bidders list

Should any supplier be included in bidders list? Two different schools of thought exist:

Yes, include any bidder—maximum competition.

No, prequalify or screen bidders, keep lists down to manageable number.

 

In either school of thought, cities cannot preclude vendors who are not on their bidder list, from bidding.

Set up bidder list in accordance with a commodity coding system (i.e. NIGP software) that organizes products and services by class and item—this facilitates automation of the purchasing system.

Obtaining bids or proposals

Four methods of source selection are described in the following sections. A bid is an offer that is made, and accepted, essentially on the basis of comparative price. A proposal is an offer made by a vendor in response to a Request for Proposal (RFP). The city ranks the proposals based on differing price, quality, technical performance capability, and contractual factors.

 

Competitive sealed bids

Provides for the award of the contract to the lowest responsive and responsible bidder whose bid price is lowest. This method is very objective and easy to evaluate. Competitive sealed bidding:

 

Contracting for professional services

Most states mandate a "Brooks Act" approach of quality-based selection of engineers/architects. This process requires "short-listing" vendors based on qualification, then negotiating fees with the highest ranked vendors. NIGP and NASPO argue that price always should be considered up front, in conjunction with other stated evaluation factors in the award of all service contracts, including engineer-architect and other consultants.

Multistep competitive sealed bidding

Step one consists of one or more requests for information, or un-priced technical offers.

Step two involves only those bidders that submitted technically acceptable proposals in step one are invited to submit sealed price bids are their technical offers. The contract is awarded to the lowest responsive and responsible bidder.

 

Competitive sealed proposals

Reasons for going with sealed proposals:

  1. Contract needs to be other than fixed price.
  2. Oral and written discussions may need to be conducted with offerors concerning technical and price aspects of their proposals.
  3. Offerors may need the opportunity to revise their proposals, including price after discussions.
  4. Award may need to be based on a ‘comparative evaluation" that takes differing price, quality, and contractual factors into account.

 

Informal competitive bidding (small purchases)

Check permissible dollar volume threshold first then proceed with:

Telephone bids are quick and usually good.

Written bids (letter) are better—permits audit trail.

  1. Minimum information required when obtaining bids for small purchases:
  2. Name of firm quoting
  3. Name of individual furnishing quote
  4. Make, model, etc. of item
  5. Quantity and Unit price
  6. Payment terms
  7. Promised delivery date

 

Requisitions and specifications

Specs "tell" bidders what is required and the means by which the city determines whether they have received what was asked for.

Requisitions inform the purchasing entity of the user department’s product or services needed. User department’s requisition must be on time, accurate, and complete.

 

What is an efficient specification?

 

Model format for specifications:

  1. Scope and classification
  2. Applicable publications (e.g. ASTM, AASHTO, ANSI)
  3. Requirements
  4. Sampling, inspection, and test procedure
  5. Preparation for delivery
  6. Notes

 

Performance specifications are preferred over brand name (or-equal) or method specifications. The latter tend to lessen objectivity in evaluating bids, provide unequal access and opportunity among bidders, and discourage competition.

 

Evaluating offers and awarding contracts

Responses to invitations to bid should be awarded to the responsible bidder whose bid is lowest in price and responsive to the invitation for bid. Contracts made in response to a request for proposal (with or without subsequent discussion) should be made to the responsible bidder, whose offer is most responsive to the request for proposal, if price and other factors are consistent with the request for proposal.

 

Administering contracts

This is final step of procurement. It ensures that both parties live up to their contractual obligations.

Delivery and performance

Typical delivery terms:

Delivery point, time, and date

Liquidated damages for late delivery

 

Remedies to late delivery should be initiated carefully. Consider the following first before terminating a contract with a vendor:

 

Inspection and testing

Establish a policy and procedure for checking goods at the time of delivery. Perform tests in-house or hire independent laboratory to run tests, e.g. gasoline to check for correct blend. The following should be followed in inspection and testing:

  1. Contract terms and conditions and what tests will be performed.
  2. Specs should clearly identify the applicable test procedure.
  3. Inspection is expensive but is important if it involves protection of life and limb.
  4. Thoroughly document inspection and testing results.

 

Payment

Payment methods include:

Payment must be on time if the invoice is proper. A proper invoice means the vendor’s bill correctly reflects the level of completion and acceptance by the city. Always promptly notify the vendor when the invoice is not proper. In Florida, the Prompt Payment Act applies to vendors and cities to enforce fair dealings by both parties.

 

Conclusion

Work with purchasing departments, not around them. Public Works and purchasing should put aside self-interests and sit down to resolve common problems.

 

 

 

 

 

 

 

 

 

 

 

References:

1. James M Banovetz, Drew A. Dolan, John W. Swain, ed. Managing small towns and counties:

a practical guide. (ICMA, Wash D.C., 1994). pp 295-297

 

Questions

  1. What are two reasons for having a purchasing entity in city government?
  2. Why are so-called "emergency purchases" usually detrimental to public policy?
  3. A current trend in inventory management is that of turning away from maintaining _______ and ______ toward relying on "_________" term contracts. Also give an example of how this could be practiced.
  4. Explain the difference between the evaluated bid price and purchase price in life cycle cost evaluation process.
  5. At what point (before or after award) in the contracting process does the value incentive clause usually take effect? Do you think value incentive clauses could be abused to the detriment of the user agency? How?
  6. What in-house groups do you think would be most opposed to a requirement for preparing bids that compete with bids from private companies?
  7. Pre-qualification of bidders can be helpful in what ways? Name two.
  8. In competitive sealed bidding the award is based on what criteria?
  9. What could be a typical first submittal by bidders in a multistep bidding process?
  10. Explain the difference between bids and proposals.
  11. Name one reason written bids for small purchases are preferable over telephone quotes.
  12. Name at least three characteristics of an efficient specification.
  13. When timely delivery of products or services is critical, what condition or term in the contract could help ensure timely delivery?
  14. Why is it important to establish inspection and testing procedures, up front, before receipt of bids?
  15. Name three typical conflicts between purchasing and public works entities.