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Procurement Code Training April 16, 2013

Procurement Code Training April 16, 2013. Separating Cost In RFP & Cost–Benefit Analysis. Definitions. “Public Entity” means Any state government entity or a political subdivision of the state including: A procurement unit;

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Procurement Code Training April 16, 2013

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  1. Procurement Code TrainingApril 16, 2013 Separating Cost In RFP & Cost–Benefit Analysis

  2. Definitions “Public Entity” means Any state government entity or a political subdivision of the state including: A procurement unit; A municipality or county, regardless of whether the municipality or county has adopted this chapter or any part of this chapter; and Any other government entity located in Utah that expends public funds.

  3. Definitions "Procurement Unit" means:(i) a legislative procurement unit;(ii) an executive branch procurement unit; (iii) a judicial procurement unit; (iv) an educational procurement unit; (v) a local government procurement unit; (vi) a local district; (vii) a special service district; (viii) a local building authority; (ix) a conservation district; (x) a public corporation; or (xi) a public transit district.

  4. Definitions Procurement UnitEducational Procurement Unit Executive Branch Procurement Unit Judicial Procurement Unit Local Government Procurement Unit

  5. Definitions “Educational Procurement Unit" means:(a) a school district;(b) a public school, including a local school board or a charter school;(c) Utah Schools for the Deaf and Blind; (d) the Utah Education Network; or(e) an institution of higher education of the state.

  6. Definitions “Executive Branch Procurement Unit” means: Each department, division, office, bureau, agency, or other organization within the state executive branch, including the division [of Purchasing] and the attorney general's office.

  7. Definitions “Judicial Procurement Unit" means:(a) the Utah Supreme Court; (b) the Utah Court of Appeals; (c) the Judicial Council; (d) a state judicial district; or (e) each office, committee, subcommittee, or other organization within the state judicial branch.

  8. Definitions "Local Government Procurement Unit" means:(a) a county or municipality, and each office or agency of the county or municipality, unless the county or municipality adopts its own procurement code by ordinance;(b) a county or municipality, and each office or agency of the county or municipality, that has adopted this entire chapter by ordinance; or(c) a county or municipality, and each office or agency of the county or municipality, that has adopted a portion of this chapter by ordinance, to the extent that the term is used in theadopted portion of this chapter.

  9. 63G–6a–707(5) Separating Cost In RFP Evaluations

  10. 63G–6a–707(5) Separating Cost (5)Except as provided in Subsection (6) or (7), each member of the evaluation committee is prohibited from knowing, or having access to, any information relating to the cost, or the scoring of the cost, of a proposal until after the evaluation committee submits its final recommended scores on all other criteria to the issuing procurement unit.

  11. Separating Cost 1. Helps Prevent Procurement Fraud 2. Helps Defend Against Protests 3. Helps Ensures Fairness In The RFP Process

  12. Procurement Fraud Purchasing Agent Abused Position of Trust The AG announced that a purchasing agent for Corrections has been indicted for using his position to steer state money for his own financial gain. The purchasing agent faces charges of conflict of interest, accepting gratuities and fraud. The purchasing agent developed a personal financial relationship with a vendor that won a multi-million dollar statewide contract for firearms/ammunition. The purchasing agent was a member of the five-person team that solicited, reviewed, and awarded the contract. He used the statewide contract to order approximately $250,000 per year in supplies from the vendor. The vendor wrote checks payable to the purchasing agent totaling over $80,000 for the purchasing agent’s personal benefit.

  13. Procurement Fraud County employee pleads guilty in bid-rigging scandal A former County employee pled guilty to charges of bid-rigging and embezzlement. He and three other employees were rigging the county’s contracting system in order to funnel more than $8 million in work to shell companies they created. They would create fake bids from other contractors so that the companies they formed could win the contracts. The division chief oversaw the majority of the contracting process, which is why his scheme went undetected for so long. Prosecutors said, “This individual was given a lot of liberty and was in charge of supervising himself.” The other three men involved in the scam face similar charges and are set to appear in court later this year. All four are also facing a civil lawsuit brought by the County.

  14. Procurement Fraud – Favoritism What is A Favored Vendor? • Occurs when the procurement process is structured such that a favored vendor is unfairly awarded a contract (Anticompetitive) • Procurement agent or management receives bribe/kickback • Procurement agent or management steers contract award to a firm of a family member, friend, or favorite vendor • Cost of the bribe/kickback is usually included in cost of service • Bid rigging is usually involved (Manipulate procurement process) • Involves collusion between the vendor and the purchasing agent or other person in authority – (“This job/contract is yours”)

  15. Procurement Fraud – Undue Influence What Is Undue Influence? • Advance communication of bidding/RFP Process • Bid rigging/collusion with someone in authority inside the public procurement unit • Management overrides the normal procurement process • Management insists on rushed purchases, shortened public notice, “emergency” procurements, etc. • Efforts are made to reduce # of legitimate competitors

  16. Procurement Fraud – Undue Influence The Procurement Process Can Be Unduly influenced By Unethical: • Procurement Officers • Management (politicians) • Vendors Undue Influence • Overt: direct actions taken to manipulate the process • Covert: leaking information to favored vendors giving them an unfair advantage over competitors Indirect Undue Influence • Management uses their position to influence others involved in the procurement process. (“I want you to score firm X high”)

  17. Procurement Fraud – Steering What is Steering? • Person in authority inside the public procurement unit structures the process to ensure that favored vendor is awarded the contract • Normal procurement process is bypassed and manipulated to steer contract to favored vendor • Steering can occur at various stages of the process: Pre-solicitation stage Submission stage Solicitation stage Evaluation stage

  18. Procurement Fraud – Favored Vendor Mayor of Detroit: Indicted on Racketeering, Extortion & Accepting Bribes • Held up a $12-million sewer contract until a contractor agreed to pay favored vendor $350,000 for work though favored vendor did no work on the project. • Schemed to steer contracts and emergency orders to favored vendor in connection with a $19.8-million water main replacement contract. • Rigged a water main contract so favored vendor’s team would win. • Rigged award of $21-million security contract to make sure favored vendor's company would win. • Tried to force an official overseeing the demolition of Tiger Stadium to give the contract to favored vendor, even though he wasn't low bidder. When that failed, retaliated against the official by having him fired.

  19. Procurement Fraud – Pre-solicitation • Promise to favored vendor that they will get the contract • Specification fraud • Specifications unique to favored vendor’s product/service • RFP is overly specific • Only the favored vendor can possibly meet requirements • RFP is unclear (intentionally vague and fuzzy) • Specific details are leaked only to favored vendor • Bid splitting • Splitting large purchases into small purchases in order to avoid bidding requirements = direct award to favored vendor

  20. Procurement Fraud – Solicitation Goal = Eliminate Competition • Receiving bids from fictitious vendors • Solicit bids from unqualified vendors • Shortened standard bid notification time • Advance notice and other information to favored vendor • Vendors take turns winning • Lose bids of other qualified companies

  21. Procurement Fraud – Submission Bid and RFP Fraud • Acceptance of late bids/proposals • Falsifying date bids/proposals received • Opening competitors bids/proposals and leaking price and other information to favored vendor

  22. Procurement Fraud – Evaluation Evaluation Stage Fraud 1. Blackball legitimate competitors • Scoring competitors artificially low • Make false statements about competitors 2. Inflate scores of favored vendor 3. Collaboration between evaluation committee members • Block voting for favored vendor 4. Management overrides evaluation committee • Management nullifies committee’s recommendation without justification 5. Bribery/kickbacks to evaluation committee members

  23. Separating Cost Prevents Procurement Fraud Favored Vendor Undue Influence Steering Pre-Solicitation Fraud Solicitation Fraud Submission Fraud Evaluation Fraud

  24. 63G-6a-2302 Duty to Report Factual Information to Attorney General If a procurement unit has reason to believe that a person has engaged in a violation of Section 63G-6a-2304.5, collusion, or other anticompetitive practices relating to a procurement or a potential procurement, the procurement unit shall transmit a notice of the relevant facts to the attorney general. 63G-6a-2304.5 Gratuities, Kickbacks, and Unlawful Use of Position or Influence

  25. Separating Cost Helps Prevent Procurement Fraud Separating Cost Stops: (1) Favored Vendor Bias (blackballing, favoritism, conflicts of interest) (2) Bid Rigging (3) Scoring Manipulation - Steering Contract Awards (4) Undue Influence and Collusion (5) Other Anticompetitive Practices Bid Rigging is a form of fraud in which a government contract is promised to one party even though for the sake of appearance several other parties also present a bid or response to an RFP. This form of collusion is illegal.

  26. Separating Cost Helps Prevent Procurement Fraud Separating cost dramatically reduces the possibility of favored vendor bias, undue influence, steering, collusion, bid rigging and other illegal forms of procurement fraud because 20% to 40% of the total points (cost) are removed from the influence of unethical procurement officers, managers and evaluation committee members.

  27. Separating Cost Helps Prevent Procurement Fraud Separating Cost Helps Keep Ethical Procurement Officers – Ethical Honest Managers – Honest Fair/Just Evaluation Committee Members – Fair/Just

  28. Separating Cost Helps Prevent Procurement Fraud Separation of duties is a fundamental “Best Practice” in fraud prevention • New Utah Code requires cost to be evaluated separately by an independent person (separate) from the evaluation committee • The evaluation committee’s scoring of technical criteria will now be untainted by the influence of cost • Qualifications will be scored strictly on each vendor’s qualifications – not whether one has a higher or lower cost • Scope of Work will be scored strictly on the performance of each vendor’s product or service – not whether one has a higher or lower cost

  29. Separating Cost Helps Defend Against Protests Why So Many Protests Involving RFPs ? Michael Asner: “Cost is a significant, critical, and sensitive issue. In RFPs, the award is made on the basis of best score; that is, best fit with all the requirements, including cost. It is never made solely on the basis of cost, so the winner is invariably not the least-cost proposal. Hence, the value of the contract is an easy target for the disgruntled. In times of budget constraint and cutbacks, it’s easy to politicize the process. In developing the RFP, always assume that your decision will be challenged and prepare to answer questions such as: “Why did you select that proposal when the second-place one was almost as good and cost $200,000 less?” The Request For Proposal Handbook, 2nd Edition Chapter 7: The Building Blocks of the Evaluation Process, page 401

  30. Separating Cost Helps Defend Against Protests 1. Limits the evaluation committee’s influence over the total number of points awarded (Standard: 70% pts technical, 30% pts cost) 2. Because cost is not known by the evaluation committee, the committee’s scoring of technical criteria is not influenced by knowing the costs associated with each proposal 3. Technical experts on the evaluation committee need only concern themselves with conducting a side-by-side comparison of the of relative strengths and weaknesses of each technical criteria outlined in the RFP

  31. Separating Cost Helps Defend Against Protests Best Practice Michael Asner: “Cost is almost always isolated from the technical and management parts of the proposal and submitted as a separate document. In many jurisdictions, the inclusion of any cost figures in the technical or management proposal is grounds for declaring the proposal non-compliant and eliminating it from further consideration. In this way, the evaluation team, which has been formed to deal with functionality and other issues, is not tainted by knowing the costs of various proposals.” The Request For Proposal Handbook, 2nd Edition Chapter 7: The Building Blocks of the Evaluation Process, page 401

  32. Separating Cost Helps Defend Against Protests Evaluation CriteriaFirm “A”Firm “B” Min 5 Years Experience 5 years + 5 years + Completed 3 Similar Projects Yes Yes Management Plan Yes Yes Complete Project by August 1st Yes Yes Performance Rating 4.5 4.5 Price $1 million $900,000

  33. Separation of Cost Helps Defend Against Protests Evaluation CriteriaFirm “A”ScoreFirm “B”Score 5 Years Experience 5 years + 5 5 years + 4 3 Similar Projects Yes 5 Yes 4.5 Management Plan Yes 5 Yes 4 Complete by Aug 7st Yes 5 Yes 4.5 Performance Rating 4.5 5 4.5 4 Price $1 million $900,000

  34. Separating Cost Helps Defend Against Protests Question Why Did You Score Firm “A” Higher In Each Of The Technical Categories? Answer Because Firm “A” Had The Lowest Cost

  35. Separating Cost Helps Defend Against Protests Evaluation Criteria outlined in the RFP did not indicate that “Experience”, “Completion of Similar Projects”, “Management Plan”, “Schedule” or “Performance Rating” would be evaluated based on cost. Instead, the RFP indicated that each of these criteria would be evaluated strictly on their own merit. Attorney General’s Office In this case, cost cannot legally be used to evaluate and score other selection criteria. Doing so is an anticompetitive practice and a violation of the State’s Procurement Code that cannot be defended in event of a protest.

  36. Separating Cost Helps Ensure Fairness In The RFP Process Complaints About The RFP Process “Public Entities Award RFP Contracts To Their Favorite Vendor – Then Make Up Phony Scores To Justify It.” “The RFP Process Is Unfair – Scores Are Manipulated By Management To Awarded To Favored Vendors.”

  37. Separating Cost Helps Ensure Fairness In The RFP Process “Best Practice” = Cost Scored Separately by Formula NASPO: “Typically, the procurement officer evaluates proposal prices separately. That official may use an objective formula to determine the points to be given each offeror based on the total points assigned to price or cost in the evaluation. The formula generally will grant the lowest-priced proposals the total points for cost.” National Association of State Procurement Officials State & Local Government Procurement – A Practical Guide, p. 137

  38. Separating Cost Helps Ensure Fairness In The RFP Process State Purchasing Standard Cost Formula Cost Points x (2 - Proposed Cost/Lowest Proposed Cost) Note: Other approved costs formulas may be used provided the formula is clearly specified in the RFP.

  39. Separating Cost Helps Ensure Fairness In The RFP Process Cost Formula 1. Proposal with the lowest cost receives 100% of the cost points.  2. All other proposals receive a percentage of the total cost points allocated by formula. 3. Proposals with cost more than double the Lowest proposed cost receive zero Points. 

  40. Separating Cost Helps Ensure Fairness In The RFP Process RFP Scoring Criteria Technical EvaluationCost Formula Experience 20 pts 30 Pts References 20 pts Meet Scope 30 pts Total 70 pts+ 30 pts = 100 pts

  41. Separating Cost Helps Ensure Fairness In The RFP Process Step #1: Evaluation Committee Scores RFP Technical Criteria and Turns In Scores Technical Evaluation Firm “A” 65 pts (18 pts Experience, 19 pts Reference, 28 pts Scope) Firm “B” 60 pts (16 pts Experience, 17 pts Reference, 27 pts Scope) Firm “C” 58 pts (16 pts Experience, 17 pts Reference, 25 pts Scope)

  42. Separating Cost Helps Ensure Fairness In The RFP Process Step #2: Agent or Technician Computes Cost Scores Using on Formula Firm “A” $800,000 30 points = low cost proposal Firm “B” $900,000 26 points 30(2-$900,000/$800,000) 30(2-1.13) 30(.87) = 26 pts Firm “C” $1,610,000 0 pts = twice low cost

  43. Separating Cost Helps Ensure Fairness In The RFP Process Step #3 Technical Scores and Cost Scores Are Added Together Technical Cost Scores + Scores = Total Firm “A” 65 pts + 30 pts = 95 pts Firm “B” 60 pts + 26 pts = 86 pts Firm “C” 58 pts + 0 pts = 58 pts

  44. 63G–6a–707(7)Separating Cost – When Not Required (7)An issuing procurement unit is not required to comply with Subsection (5) if, before opening the responses to the request for proposals, the head of the issuing procurement unit or a person designated by rule made by the applicable rulemaking authority: (a) signs a written statement: (i) indicating that, due to the nature of the proposal or other circumstances, it is in the best interest of the procurement unit to waive compliance with Subsection (5); and (ii) describing the nature of the proposal and the other circumstances relied upon to waive compliance with Subsection (5); and (b) makes the written statement available to the public, upon request.

  45. 63G–6a–708 Cost-Benefit Analysis

  46. Cost – Benefit Analysis What Happens When Highest Scored Proposal Isn’t The Low Cost? Technical Cost Scores + Scores = Total Firm “A” 65 pts + 26 pts = 91 pts Firm “B” 60 pts + 30 pts = 90 pts Cost Firm “A” $900,000 Cost Firm “B” $800,000 Difference: $100,000 (12.5%)

  47. 63G-6a-708Cost-Benefit Analysis (1) If the highest score awarded by the evaluation committee, including the score for cost, is awarded to a proposal other than the lowest cost proposal, and the difference between the cost of the highest scored proposal and the lowest cost proposal exceeds the greater of $10,000 or 5% of the lowest cost proposal, the issuing procurement unit shall make an informal written cost-benefit analysis that:

  48. 63G-6a-708Cost-Benefit Analysis (a) explains, in general terms, the advantage to the procurement unit of awarding the contract to the higher cost offeror; (b) includes, except as provided in Subsection (1)(c), the estimated added financial value to the procurement unit of each criteria that justifies awarding the contract to the higher cost offeror;

  49. 63G-6a-708Cost-Benefit Analysis (c) includes, to the extent that assigning a financial value to a particular criteria is not practicable, a statement describing: (i) why it is not practicable to assign a financial value to the criteria; and (ii) in nonfinancial terms, the advantage to the procurement unit, based on the particular criteria, of awarding the contract to the higher cost offeror;

  50. 63G-6a-708Cost-Benefit Analysis (d) demonstrates that the value of the advantage to the procurement unit of awarding the contract to the higher cost offerorexceeds the value of the difference between the cost of the higher cost proposal and the cost of the lower cost proposals; and (e) includes any other information required by rule made by the applicable rulemaking authority.

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