Finance and Administration Personal Service Contracting PSC Negotiations April 2011

1. Finance and AdministrationPersonal Service ContractingPSC NegotiationsApril 2011

2. Agenda • Laws & Policies • Definition of PSC and MOA • Role of the LRC Government Contract Review Committee (GCRC) • Proof of Necessity (PON) • PSC Process Overview • Critical components of a PSC • EO1/LOI (Letter of Intent)

3. Agenda Competitive Exemptions Start Dates Importance of eMARS How to Stay Out of Trouble! PSC Questions PSC Negotiations Questions

4. KY Procurement Law KRS 45A Model Procurement Code (MPC) Drafted by ABA as a result of numerous public purchasing scandals: Awards with no competitive process. Using sole source when competition exists. Declaring emergencies when none exist. Unduly restricting requirements to favor one vendor. Became law in 1979

5. Statutes and Policies KRS 45A.690 Definitions KRS 45A.695 PSC Procedures KRS 45A.705 Government Contract Review Committee (GCRC) FAP 111-43-00 Personal Service Contract FAP 111-44-00 Memorandum of Agreement GCRC Policies: http://www.lrc.ky.gov/Statcomm/Contracts/homepage.htm

6. Personal Service Contract - PSC Personal service contract" means an agreement whereby an individual, firm, partnership, or corporation is to perform certain services requiring professional skill or professional judgment for a specified period of time at a price agreed upon. It includes all price contracts for personal services between a governmental body or political subdivision of the Commonwealth and any other entity in any amount. KRS 45A.690(1)(g)

7. Professional Services Examples Legal Services Auditing Services Medical Services Training Services Consulting Services

8. Memorandum of Agreement - MOA Memorandum of agreement" means any memorandum of agreement, memorandum of understanding, program administration contract, interlocal agreement to which the Commonwealth is a party, privatization contract, or similar device relating to services between a state agency and any other governmental body or political subdivision of the Commonwealth or entity qualified as nonprofit under 26 U.S.C. sec. 501(c)(3) not authorized under KRS Chapter 65 that involves an exchange of resources or responsibilities to carry out a governmental function. It includes agreements by regional cooperative organizations formed by local boards of education or other public educational institutions for the purpose of providing professional educational services to the participating organizations and agreements with Kentucky Distinguished Educators pursuant to KRS 158.782 KRS 45A.690(1)(d)

9. PSC – MOA Exemptions Agreements exempt from the definition of a PSC and MOA are listed in KRS45A.690(1)(d) and KRS 45A.690(1)(g). Examples: Agreements between KYTC and political subdivisions for road related projects. Agreements between state agencies and the Auditor of Public Accounts. Some agreements between state agencies and state universities (45A.690(1)(d)4.

10. PSC’s Must go through competitive process (RFP) unless prior exemption approved by FAC. KRS 45A.695(3) Must be filed with GCRC prior to the effective date. KRS 45A.695(2) No work can be done until filed with GCRC. KRS 45A.695(1) May not extend past the end of the biennium in which it is entered. Policy Statement 99-4.

11. MOA’s Are used to establish a contract with a public entity. KRS 45A.690(1)(d). Shall be filed with the GCRC prior to the effective date. KRS 45A.695(2). May not extend past the end of the biennium in which they are created unless there is statutory authority to do so; or by exemption granted by the GCRC. Policy Statement 99-4.

12. Government Contract Review Committee Committee Jurisdiction: Pursuant to KRS 45A.690 to45A.725, the committee shall review:1) personal service contracts and price contracts whereby the contractor is to perform any professional service for a state agency; 2) memoranda of agreement, memoranda of understanding, program administration contracts, interlocal agreements to which the Commonwealth is a party, privatization contracts, or similar devices relating to services, between a state agency and any other governmental body or political subdivision of the Commonwealth that involves an exchange of resources or responsibilities to carry out a governmental function.

13. GCRC Specifically, the committee shall: Examine the stated need for the service; Examine whether the service could or should be performed by state personnel; Examine the amount and duration of the contract or agreement; and Examine the appropriateness of any exchange of resources or responsibilities

14. GCRC Senator Vernie McGaha Co-Chair Representative Dennis Horlander Co-Chair Sen. Julian Carroll Rep. Brent Housman Sen. Carroll Gibson Rep. Brent Yonts Sen. Paul Hornback Rep. Jesse Crenshaw Staff: Kim Eisner kim.eisner@lrc.ky.gov Matt Ross matt.ross@lrc.ky.gov Rebecca Brooker rebecca.brooker@lrc.ky.gov

15. GCRC Each personal service contract, tax incentive agreement, and memorandum of agreement shall be filed with the committee prior to the effective date and shall be accompanied by a completed proof of necessity form as established by the committee by promulgation of an administrative regulation, or equivalent information if submitted electronically KRS 45A.695(2)

16. Proof of Necessity The proof of necessity form shall document: (a) The need for the service or benefit to the Commonwealth of the tax incentive agreement; (b) For personal service contracts and memoranda of agreement, the unavailability of state personnel or the nonfeasibility of utilizing state personnel to perform the service; (c) The total projected cost of the contract or agreement and source of funding; KRS 45A.695(2)

17. Proof of Necessity (d) The total projected duration of the contract or tax incentive agreement; (e) Payment information, in detail; (f) In the case of memoranda of agreement or similar device, the reason for exchanging resources or responsibilities; and (g) Such other information as the committee deems appropriate. KRS 45A.695(2)

18. GCRC Policies Policy Statement #98-1 Hourly Rate v. Travel Expense Policy Policy Statement #99-1 Legal Services: Duties and Maximum Rate Schedule Policy Statement #99-2 Appraisal Services: Duties and Maximum Rate Schedule Policy Statement #99-3 Auctioneer Services: Duties and Maximum Rate Schedule Policy Statement #99-4 Multiyear Government Contracts Policy Statement #99-5 Auditing Services; Duties and Maximum Rate Schedule Policy Statement #00-6 Personal Service Contract Amendment Policy

19. GCRC Disapproval If the contract is disapproved all contract activity must stop immediately. The agency may request the Secretary of the FAC to determine if the PSC shall: (a) Be revised to comply with the objections of the committee; (b) Be canceled and, if applicable, payment allowed for services rendered under the contract or amendment; or (c) Remain effective as originally approved. The Secretary of the Finance and Administration Cabinet shall notify the committee of the action taken within ten (10) days from the date the PSC was reviewed by the committee. KRS 45A.705

20. PSC Process - RFP Request for Proposal (RFP) Begins at the agency level with the creation of a Request for Proposal (RFP) in the state’s electronic procurement system. FAP 111-43-00-01(a). All RFPs for PSCs, including those less than $10,000, shall be submitted to OPS for review and approval prior to issuance, other than A&E. The RFP shall be submitted at least 7 days prior to the intended RFP “let date” (published date), and a “close date” a minimum of 7 calendar days after the “let date”.

21. PSC Process - RFP All RFP’s shall include Reciprocal Preference and Preferences for a Qualified bidder or the Department of Corrections, Division of Prison Industries. KRS 45A.490 – 494; KAR 200 5:400; KRS 45A.470; KAR 200 5:410. Agencies shall make cost the primary evaluation factor in the awarding of the contract, whenever appropriate. The scoring criteria shall be communicated to the prospective offerors in the RFP. Upon approval by OPS the RFP will be posted to the Vendor Self Service website, pursuant to the “let date” entered on the RFP.

22. PSC Process – Award and Approval FAP 111-43-00-01 Upon completion of RFP process the Agency: “…shall award a contract electronically from a bid evaluation in the state’s procurement system.” Shall provide the justification for award in a Determination and Finding document. Shall print the contract and obtain vendor and agency signatures. Shall submit the electronic contract to FAC via eMARS for review, approval and filing with the GCRC.

23. PSC Process – Filing with GCRC PSC’s in Final phase in eMARS by the last business day of the month are placed on the GCRC meeting agenda for the following month. No work may begin until the PSC is filed with the GCRC. KRS 45A.695

24. Critical PSC Components It Must Be Written To Be Enforced FAP 111-43-00-01(d) Terms and Conditions Scope of Work Period of Performance Pricing Negotiated Items

25. Critical PSC Components Applicable Boilerplate Language Including: Funding Out Provision Authorized to do Business in KY Reduction in Contract Worker Hours

26. Critical PSC Components Campaign Finance 45A.110(2) 45A.115 Violations of KRS 45A.485 Access to Records 200 KAR 5:314; 45A.150 Payment Language 45A.695(7) Cancellation Clause 45A.695(1) Invoicing of PSCs 45A.695

27. EO1/Letter of Intent (LOI) Letter of Intent (LOI) is a result of Gov. Beshear’s Smart Government Initiative (SGI). Implemented February 7, 2011. Intended to ensure PSC’s are established only when necessary for services that cannot reasonably be performed by any other state agency or university. More oversight is provided in the procurement of PSCs through the LOI process and a review of RFPs for professional services by FAC. Approval of an EO1/LOI must be obtained prior to the PSC contracting process.

28. EO1/LOI EO1’s for PSC’s less than $10,000 are reviewed and approved at the agency level. Agency shall file a LOI for PSC’s equal to or greater than $10,000 with the FAC, OPS no less than 2 weeks prior to the intended RFP issue date.

29. LOI Purpose and Justification Must contain: Description of Needed Service Why service cannot be provided by a state agency Estimate of work involved Estimate of contract cost per year – including anticipated amendments Contact person if other than the requestor

30. Competitive Exemption Requests Competitive Exemption Requests include: Sole source; Not practicable or feasible to bid; Renewals; Time and Balance extensions Submitted to FAC, OPS for review and approval in the “For Agency Use Field” on the EO1/LOI.

31. Competitive Exemption Requests PSC’s less than $10,000: Add to “For Agency Use Field” on EO1. Email to FAC, OPS – Don Speer or Rose Caudle FAC will enter document comment for the approval.

32. Competitive Exemption Requests Sole Source-Justification for the sole source; Not Practicable or Feasible-Explanation why bidding is not feasible; Renewal–Current contract number, language from original RFP allowing renewals. Time and Balance Extension–Explanation why the contract must be extended beyond the original expiration date.

33. Emergency Start Date Request 45A.695(1) “Except as provided in subsection (8) of this section, no one shall begin work on a personal service contract”……..”until notification of the personal service contract is filed with the committee” 45A.096 – “emergency condition…… would seriously threaten the functioning of government, the preservation or protection of property, or the health or safety of any person” Submitted to FAC OPS for review and approval on Letter of Intent Not permitted for MOA’s.

34. Retroactive Start Date Request Required when an agency allows a vendor to begin work prior to the filing of the PSC with the GCRC even though an emergency condition did not exist Closely scrutinized by GCRC Submitted to FAC OPS for review and approval on Letter of Intent Not permitted for MOA’s

35. Stay Out of Trouble! Know when work can begin. Avoid Legislative Claims. Know there is no minimum $ for PSC’s. PSC’s less than $10,000 are reported for informational purposes. Allow sufficient time for FAC review and approvals. Limit Sole Source and Not Practicable to Bid requests to true sole source and not practicable situations. Understand that failure to plan or act does not constitute an emergency.

36. Penalties Any willful violation of KRS 45A.690 to 45A.725 shall be a Class A misdemeanor. KRS 45A.990(4) Any employee or any official of the Commonwealth of Kentucky, elective or appointive, who shall take, receive, or offer to take or receive, either directly or indirectly, any rebate, percentage of contract, money, or other things of value, as an inducement or intended inducement, in the procurement of business, or the giving of business, for, or to, or from, any person, partnership, firm, or corporation, offering, bidding for, or in open market seeking to make sales to the Commonwealth of Kentucky, shall be deemed guilty of a Class C felony. KRS 45A.990(6)

37. PSC Questions?? Kathy.robinson@ky.gov 502-564-7544 Cassandra.weiss@ky.gov 502-564-5952 Finance and Administration Cabinet Office of Procurement Services Room 096, Capitol Annex Frankfort, KY 40601

38. Personal Service Contract Negotiations April 2011

39. PSC Negotiations All agencies who enter into personal services contracts, including sole-source contracts, should negotiate fair and reasonable compensation with the vendor, prior to actual contract signature and award

40. PSC Negotiation Process The general process for competitively bid personal services contract is as follows: • The agency must negotiate with the best evaluated (highest scoring) vendor first. • If negotiations are unsuccessful with the highest scoring vendor, then the agency may discontinue negotiations with that vendor and move on to the next highest-scoring vendor. • However, the agency cannot go back and re-engage in discussions with a vendor with whom negotiations have been discontinued, so this decision should not be taken lightly. • The agency must include unsuccessful and/or successful negotiation outcomes on the Determination & Finding.

41. PSC Negotiations – Budget Info • As a general best practice, agencies should not disclose the maximum budgeted amount during initial negotiations, because the tendency will be for vendors to go with the maximum amount proposed. • This is important, regardless of whether the source of funding is state, federal or other, because state agencies have an obligation to be fiscally responsible and negotiate best value for any public expenditure of funds. • KRS 45A.010(2)(f) requires that agencies provide for increased economy in state procurement activities by fostering effective competition. The practice of disclosing the budgeted amount upfront without any attempt at negotiations defeats the purpose of conducting a competitively negotiated procurement and is in conflict with 45A.010(2)(f).

42. PSC Negotiation Topics • As a matter, of law, the agency may discuss anything in the RFP or the specific vendor’s response about which it has concerns, but it cannot provide a vendor with specific information about any other vendor’s proposals. • In other words, the agency may generally indicate that other vendors have submitted a bid response, but cannot discuss the details (i.e. how many other vendors bid, the names of the other vendors, or the specific solution or price proposed by another vendor).

43. PSC Negotiations Contract Negotiations are not required to be conducted face-to-face, but will depend on practical circumstances, such as the actual dollar value of the underlying procurement, the complexity of the items being negotiated, and the timeframe under which the agency is operating. A negotiation may be conducted over the telephone if the agency wishes to do so.

44. PSC Negotiation – Vendor Refusal If a vendor refuses to negotiate, then the agency must determine whether it is in the best interests of the agency to continue with contract award to that particular vendor; or to discontinue negotiations with that vendor and move to the next if appropriate.

45. PSC Negotiations – Price Increases The price which a vendor proposes in their RFP response is considered as part of the evaluation process, but simply establishes a ceiling for negotiation and not a floor (so price negotiations typically focus on a reduction in price and not an increase). 45

46. PSC Negotiations – What to Ask For The agency should first ask a vendor to propose a lower price and task the vendor with the primary responsibility for coming back to the agency with a proposal for price reduction. However, if this approach is unsatisfactory, or if the agency is in a time-crunch, the agency may simply choose to ask the vendor to reduce their price by a certain amount or percentage. 46

47. PSC Negotiations Agencies should attempt to negotiate, even when the highest scoring vendor’s price is within the agency’s budget. Simply asking the vendor to come down in price based on reduced agency budgets, etc. may result in unanticipated cost savings. 47

48. PSC Negotiations –Established Rates Certain professional services, such as legal, have pre-defined rates which are typically “not to exceed” rates, so the agency may choose to negotiate for and pay a lower rate, but it may be harder to do so for such public and pre-defined rates. 48

49. PSC Negotiations Agencies are encouraged to have a procurement lead and a program lead on the negotiations team. The procurement lead should discuss the roles and responsibilities upfront and go through the following tips with the program lead, before the negotiation session is scheduled. General Tips for Negotiations: Be willing to negotiate in the first place Set realistic goals for yourself Don't get emotionally involved Don’t be rushed into making a decision Never be the first person to name a figure Don't act too interested (give the impression you’re willing to walk away) Agencies may consider not having legal counsel in the initial negotiation session (which typically involves the scope of work and price). Vendors tend to get more defensive and less likely to negotiate if legal counsel is involved upfront. However, the procurement lead could tell the vendor beforehand that, to the extent there are legal concerns about terms and conditions, etc., these will be handled in a follow-up session involving each side’s legal counsel. 49

50. Negotiation Questions ??