California to Measure Cost of Strict Contracting Rules

Procurement officials try to gauge whether state's contracting terms and conditions inflate prices and cut competition.

by / April 22, 2008

California procurement officials recently launched an effort to measure the impact of tough contracting rules on the price of state IT projects.

Companies contend that increasingly strict terms and conditions built into state IT contracts -- which are designed to limit the state's risk in high-stakes projects -- limit the number of firms willing to do business with the state and raises the prices charged by those that are left.

In February, the California Department of General Services (DGS) decided to test that claim by asking bidders on large state IT contracts to submit two prices -- one for doing the job under the state's current contracting terms and another for working under the terms they would use for a standard commercial deal.

The DGS will use the data to determine if California's contracting rules inflate prices for state IT projects, and, if so, by how much. "We're doing this for all the integrated projects that we do, which probably average $5 million and above," said Adrian Farley, deputy director for the California DGS. "We probably have 20 to 30 of these projects per year."

The plan was welcomed by the Information Technology Association of America, an industry group representing high-tech companies.

"DGS has already announced various plans and process changes, which are both innovative and long overdue," said Carol Henton, the ITAA's vice president of state and local government. "The leadership DGS is taking is to be commended. As for their plans to accept two price bids from vendors, we are intrigued by this idea and think it has merit."

But attorney Robert Metzger, a Los Angeles-based government contracts specialist, said the DGS plan may do more harm than good by injecting uncertainty into the public procurement process.

"The problem with the state's initiative lies not in objective or premise. Rather, the flaw is that the state has acted without due regard for the limits of its power and without necessary clarity to communicate to vendors what to expect," Metzger said. "The state, undoubtedly, hopes that leading commercial IT firms now will be encouraged to offer innovative alternatives free of traditional, required elements. What they may experience, however, is that leading firms decide not to participate at all when they are unsure of requirements and cannot know the rules that govern the competitive process and selection decisions."

Since the plan was announced, the DGS has been updating active procurements, but vendors haven't submitted pricing under the new approach. Farley expects to start receiving dual-pricing bids within the next several months.

Farley said California procurement contracts contain 10 to 15 provisions that aren't commonly found in private-sector contracts. Most of the additional rules center on the amount of liability companies must accept when a government project runs into trouble.

"The questions are: What price premium are we paying for risk mitigation, and are there more cost-efficient measures to mitigate risk?" Farley said. "The information we collect will help us to put together a risk model so that from a cost-efficiency perspective, we can balance risk and cost."


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