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In past articles, I have talked about why government procurement may be paying more for the exact same goods and services that the private sector purchases.

There are numerous reasons why this observation may be true.

Among them are the following (in no particular order of importance):

• Since the driving rationale for government expenditure is the need to deliver some public service, rather than to earn a profit, government suppliers understand that as customers, governments are far less price sensitive than the public sector. As a supplemental factor, the high public and political profile of many government projects, particularly the most expensive projects, make government more susceptible to increase contract prices in order to keep work on schedule.
• The public nature of the government budgetary process very often means any interested supplier can determine the upset price for a proposed contract, long before bidding on that contract.
• It has been said “fair shopping” is the best protection the purchasing agent has against charges of fraud, incompetence, collusion with vendors and other malfeasance. However, the strong preference in the public sector for open competitions on the tender model leaves no or little opportunity to drive down supplier’s price. A supplier in a tender knows that it must beat the prices bid by its competitors. However, the price bid by the winning bid can very often be significantly above the minimum price at which the supplier would be prepared to supply. If governments wish to stay an open, competitive and fair process for the award of contracts, one option would be to use the tender as a process for identifying one or two suppliers with which the government will negotiate the final contract. Another appropriate response would be a shift toward more usage of reverse auctions as an alternative to traditional tendering. While a reverse auction is not suited to the purchase of all types of goods and services, it is ideally suited to the purchase of the types of fungible items which are usually purchased under true tenders.
• There are considerable reasons to believe that in a significant number of cases, the bids for government work are rigged among competing suppliers. The fact there have been so many prosecutions of highly reputable firms across North America – many of which are continental or international in their scale of operation and have subsidiaries active in Canada – suggests the problem of bid-rigging is a very serious one, posing a substantial threat to the integrity of the public procurement process. However, few municipalities seem aware of this risk, nor (from a review of publicly available purchasing bylaws and policies) does it appear that any have a formalized approach for dealing with it.
• Governments routinely ask for special rights that impose risk on the other party to the transaction, even though instances involving the actual use of such rights are exceedingly rare. For instance, governments routinely demand extended warranty coverage beyond normal terms provided in the marketplace. Governments demand protection against default in the form of bid, demand and warranty bonds and similar security to a far greater extent than the private sector. Such bonds involve a cost and it is municipalities that must pay.
• Government policies in relation to supplier selection often work against a systematic and consistent approach towards procurement. For instance, almost all municipalities and other governments are committed in principle to open procurement. If given effect in relation to the award of a contract, such preferences are inherently with the idea of open procurement.

Government contracts are generally short-term or are terminable on short notice. Contracts of this nature are likely to be priced aggressively by a supplier because they entail considerable risk of early termination. Short-term contracting exposes the municipalities to increased risk of liability over the contract award process and increases the cost of paperwork.