Competitive Bidding (1995)
Competitive bidding is being touted by governors and mayors across the country as a way to reduce costs and increase efficiency. In a new twist on the old theme of simply contracting out, public employees in many places are now being required to compete with private companies to win contracts to provide services. AFSCME does not endorse competitive bidding, especially the way it is done in many jurisdictions. The soundness of the concept is debatable, the sincerity of its proponents questionable, and the process rarely unbiased. However, when the only other alternative is certain job loss, we must ensure that the rules and procedures governing competitive bidding are impartial and fair, that decisions are based on sound statistical analysis, and that public employees are treated as equals in the competition.
When competitive bidding for trash collection began in Phoenix, public workers lost several competitions with the private sector before they were able to bring the work back in-house. Recently, after several years of in-house operation, a private contractor gained a new toehold by underbidding in one sanitation district. In Indianapolis, where joint AFSCME-management proposals have a good win rate, 20% of the bids end up going to contractors.
Leveling the Playing Field
When competitive bidding can’t be avoided, here are some ground rules to follow:
Access to Resources
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Insist That Bids Are Prepared by Joint Union-Management Teams
In response to our opposition to contracting out, an employer may suggest that the union submit a bid along with potential contractors. Resist this suggestion. The union is not a business with the resources and capital to take over an operation. Moreover, working independently, neither the union nor management will have the information to put together the most cost-effective bid. The commitment and backing of management is generally necessary for a bid to be taken seriously.
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Insist That Bids Are Prepared on the Employer’s Time With Appropriate Technical Assistance
Preparing a bid can take weeks or even months of work time. It will require not only the time of the affected employees and supervisors, but a variety of skills, knowledge, and specialized assistance from other in-house staff or outside consultants. Clerical help will also be required. It is the employer’s responsibility to make this assistance available.
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Training Must Be Provided To Those Submitting Bids
Employees should be offered training on the agency’s competitive process, including budgeting, cost analysis, and proposal writing. Practice in writing and analyzing non-binding bids is also helpful. If the employer is unwilling to provide adequate training, an experienced proposal writer can be assigned to the group submitting a bid.
In Massachusetts, Council 93 negotiated the creation of the Office of Competitive Bidding within the State Department of Mental Health. The office, overseen by a joint union-management board, hired a professional staff to prepare in-house proposals to compete directly with private mental health service providers.
Responsible Procurement Practices
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Contractors Should Be Required to Pay Fair Wages and Benefits
Unless contractors are required to pay their employees living wages and benefits, those who pay low wages and provide no health insurance or other benefits will have an unfair advantage. Taxpayers may well end up paying for those employees’ health care costs, or for food stamps, or housing subsidies. In addition, high turnover rates associated with low wages could lead to lower quality services. This issue has been addressed in several different ways:
Rhode Island’s law which requires contractors to pay the in-state prevailing wage including benefits for the type of work being contracted.
California’s statute which prohibits contracting based on savings due to “lower wages and benefits.”
Baltimore, Maryland, ordinance requiring all city contractors to pay a minimum “living wage” starting at $6.10/hour in 1996.
A law in Massachusetts which requires state contractors to pay the public sector entry level wage or the average private sector wage, whichever is lower. It also requires that health insurance be provided.
Phoenix Requests for Proposals (RFPs) for sanitation services which include a requirement that contractors provide health insurance to their employees.
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Contracting Must Be Restricted to Cases of Substantial Savings
In the competitive bidding process, a shift from public to private service delivery should occur only when a savings of at least 10% can be well documented. This margin acknowledges the many risks associated with contracting and the wide margin of error of many cost comparison studies.
The federal government, the state of Texas, Cincinnati, Ohio, and Washington, D.C., have adopted the 10% threshold. The state of Maryland requires a savings of at least 20% for any service contract costing up to $1,000,000.
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After a Series of Successful In-House Bids, The Process Should Stop
If one of the goals of competition is to determine whether the public sector is the most efficient provider, a series of wins should be sufficient to make the point. The bidding process takes time that could be used more productively.
After the Indianapolis public works department won a series of competitions for pothole repair, the city declared the department the most cost-efficient provider and has stopped putting the work out to bid.
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Bid Teams Should Have the Right to Bid on Any Public Work
Competition is a two-way street. If public employees are forced to compete against private contractors, those functions already performed by private contractors should likewise be subject to in-house competition.
In-house teams should also have the right to solicit work from other agencies.
The Portland, Oregon, Bureau of Water Works has a joint labor-management committee, including AFSCME Local 189, charged with developing methods to prepare in-house bids for construction work that has been contracted out. he Indianapolis sign shop has expanded its work to include making signs for other jurisdictions in the area.
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Hiring and Purchasing Practices Must Recognize the Demands of Competition
In a competitive environment, delays in hiring and purchasing can make the difference between keeping work in-house and losing it to contractors. Tighter staffing and inventories require organizational commitment to fill vacancies and orders rapidly. Otherwise, contractual levels of service may not be met. Purchasing practices may need to be revised. With tight cost competition, leasing specialized equipment is often more attractive than purchase.
A Safety Net: Just in Case
Even the most experienced competitors can lose. Therefore, safety nets are necessary to protect workers who may be displaced. The strongest protection, but the most difficult to obtain, is full employment security. Affected employees can be transferred into vacant positions. If necessary, they can be retrained for other jobs within the jurisdiction. When public work is not available, the contractor can be required to fill positions from among the displaced. In all cases, emphasis should be placed on maintaining existing wage and benefit levels and union recognition.
Washington, D.C., requires that any city employee displaced by contracting out be hired by the contractor and be paid wages and benefits comparable to those paid city employees for the same work.
The City of Phoenix has an informal no-layoff policy associated with its competitive bidding program. City workers whose jobs have been eliminated by losing a competition have been assigned to other city work.
Indianapolis included in its RFP for the operation of its waste water treatment plant a requirement that the successful bidder recognize and negotiate with the union. As a result, AFSCME now has an agreement with the contractor. AFSCME also negotiated a memorandum of understanding with the city providing employment guarantees.
The federal government’s Office of Management and Budget (OMB) Circular A-76 governing federal contracting procedures requires agencies to exert maximum effort to find available in-house positions for affected employees and to pay reasonable costs for training and relocation. Displaced employees also have first right of refusal for contracted jobs for which they are qualified.
The Competitive Bidding Process
Once the ground rules for participating in the bidding process are established, the bidding process itself begins. This process has four key steps: shaping the statement of work, preparing the in-house bid, calculating the total contracting cost, and comparing in-house costs with the total contracting cost.
Shaping the Statement of Work
The Statement of Work (SOW) defines the services to be provided and standards to be met. Whoever wins the contract, whether a private contractor or in-house staff, will have to provide the services specified in the SOW as it is ultimately presented in the Invitation for Bids (IFB) or Request for Proposals (RFP).
When possible, the union should be involved in drafting the SOW to insure that it accurately reflects the services being provided. Employees currently doing the work targeted for contracting should be consulted to clearly determine the services they now provide. The actual scope of services may be broader than those suggested by individual job descriptions.
Contracting can be used as a back door attempt to reduce the quality of services by intentionally narrowing the scope of work. Discovery of this may help to fight off the contracting effort altogether. A carefully written SOW will deter fly-by-night contractors from bidding and force contractors to compete on more equal terms with in-house staff.
Preparing the In-House Bid
The in-house bid should represent the union and management’s best effort in competing with the private sector. Management and labor should use the opportunity presented by the bid writing process to examine existing operations for ways to improve quality and efficiency.
Since the in-house bid represents a new way of working, the costs associated with the new approach need to be calculated. In many cases the calculations are similar to those used in costing a labor agreement. Old budget or expenditure reports may offer some useful cost information, but should never be presented as the bid.
The total cost of the in-house bid, which will be compared with the cost of contracting out, is the sum of two types of costs: direct and indirect. Direct costs are those items, like wages, benefits, supplies, materials, and printing, solely associated with providing the service. Only the wages and benefits of front-line workers and supervisors who provide the service should be included. Significant cost savings have occurred through reducing the number of supervisors as a result of work redesign.
Wages for vacant staff positions, or for employees who have not been replaced while on unpaid leave should not be included. Benefits should be based on an individual accounting for each employee, rather than a single benefit estimate for all employees.
Indirect costs, also called overhead costs, are associated with administrative and support services provided to more than one function. These costs are generally allocated among functions by a formula. Examples of indirect costs are payroll services and legal services.
The in-house bid should only include those overhead costs which would be eliminated, or “go away,” if the service were contracted out. Otherwise, the bid will overstate the amount of savings resulting from contracting. The allocation of overhead should be examined carefully. It should be kept at the lowest possible level.
Calculating the Total Contracting Cost
In order to determine whether cost savings justify contracting out, the in-house bid should be compared with the total cost of contracting out the service. The total cost of contracting is greater than simply the lowest contractor bid. It is determined by the following formula:
Total Contracting Cost =
Contractor Bid + Administrative Cost + Conversion Cost - New Revenue
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The Contractor Bid
The contractor cost is the total cost the contractor proposes to charge for the service. When there are multiple bids it will typically be the lowest acceptable bid submitted by a qualified contractor.
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Administrative Cost
The cost of administering and monitoring the contract should be added to the contractor’s bid. These costs generally range from 10% to 20% of the bid, with the high end applying to small dollar contracts and the low end applying to larger contracts.
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Conversion Costs
One-time costs associated with the transfer from public to private operation should also be added to the contractor’s price. These costs include payments to displaced workers, such as unemployment compensation, accrued annual and sick leave, and severance payments. Costs of training employees to take another position in government may also be included. Other conversion costs include fees for terminating leases, the cost of unused equipment and facilities, and the cost of preparing facilities or equipment for transfer to the contractor.
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New Revenues
Any new revenues the agency would receive as a result of contracting out should be deducted from the contractor’s cost. Likewise, proceeds from the sale of any equipment or facilities which will no longer be needed could be deducted. These revenues should not be counted unless it is certain that they will be received.
Comparing the In-House Cost With the Total Contracting Cost
Once the Total Contracting Cost and Total In-House Bid are determined, the cost savings associated with contracting out are calculated by subtracting the contracting cost from the in-house bid:
Cost Savings =
Total In-House Bid - Total Contracting Cost
The decision whether to retain work in-house will depend on the jurisdiction’s policy on mandatory cost savings. In jurisdictions without a minimum savings requirement, contracting out can occur whenever there are any cost savings, even if only one dollar. In jurisdictions that require a minimum level (generally 10%) of cost savings before switching to contractor-provided services, the cost savings must be compared to the in-house costs to see if they meet that level.
The Alternative: Redesigning Government
Competitive bidding is a risky and disruptive way to achieve cost savings. The best way to save money and achieve innovations in the workplace is to give front-line workers the flexibility, authority, and support to make decisions on the job, and to cut the wasteful layers of bureaucracy that separate front-line workers from decision-makers.
In many settings, however, competitive bidding to retain jobs may well become another front in the war against contracting out. Each time the public sector wins a competition, it provides direct evidence that public employees can provide high quality services more efficiently than the private sector.
For More Information...
If you need additional information on any of the issues discussed in this article, please contact the Department of Research and Collective Bargaining Services at 202/429-1215.