Every year, the government buys a lot of stuff. Light bulbs, computers, vehicles, bridges — almost everything a public agency owns or operates, it bought at some point (or at least bought the parts). And it’s not just material goods. Government entities of every shape and size also contract with thousands upon thousands of service providers to do everything from accounting to drafting up zoning plans. In doing so, they spend trillions in taxpayer dollars.
This is all a way of saying that procurement matters. At SEPTA alone, hundreds of millions of dollars are spent on procurement with hardly a peep. The media only take notice when something goes wrong: a corrupt official hoping to get rich quick, a lawsuit over an allegedly improper bid award, or the discovery of a defect in the delivered goods that wreaks havoc.
SEPTA faced that last example over the summer, when a small crack was found on nearly every one of its 120 Silverliner V railcars. The defect shut down the entire fleet of relatively new trains, disrupting Regional Rail service for months.
It wasn’t the first problem SEPTA had with its $274 million contract for the new railcars. The manufacturer, South Korea’s Hyundai Rotem, finished the project three years late. Delays, in fact, are a frequent headache in procurement. The agency got bogged down with SEPTA Key, the $140 million fare system upgrade that will one day replace tokens and tickets. Completion of the new payment technology is three years late and counting. Over in New Jersey, PATCO’s $194 million project to completely overhaul its own fleet of 120 railcars is years behind schedule.
While tardy deliveries and tawdry workmanship draw headlines, most procurements occur with relatively few problems. Some even do better than anticipated: SEPTA expected to spend about $10 million more than the $56 million it ultimately cost to replace the Crum Creek Viaduct on the Media/Elwyn Line.
Set aside both the good and bad outliers, however, and procurement is still a long, confusing process designed to address the problems of yesteryear. Its flaws are arcane and its fixes unclear. Combine it with a long-entrenched set of bidders, builders and consultants who earn their livings from mastering procurements, and this baroque process won’t see reform anytime soon.
Procurement is a long, confusing process designed to address the problems of yesteryear.
The idea that it’s bad for government officials to get rich off their posts is a relatively new one in political history. When Robert Morris — financier of the American Revolution and signer of the Declaration of Independence, the Articles of Confederation, and the Constitution — oversaw the creation of the Continental Navy, he made sure to set aside a 2.5 percent commission on all of its shipbuilding and outfitting expenses. “I have much in my power or under my influence both Public & private, and my desire and design is to serve justly & faithfully every interest I am connected with & at the same time as I take the trouble my Friends can’t begrudge paying so small a consideration,” Morris wrote to a friend in 1776.
A century later, little had changed. Philadelphia’s City Hall began construction on July 4, 1874. It took 20 years to build and cost $25 million — $15 million more than the original estimate, thanks in large part to fat patronage contracts doled out by the city’s entrenched Republican machine. (Although some historians contest the extent to which patronage played a role.)
A few years later, muckraking journalist Lincoln Steffens would write: “All our municipal governments are more or less bad, and all our people are optimists. Philadelphia is simply the most corrupt and the most contented.” Steffens, and others like him, ushered in the Progressive Era and with it a new morality against using public office as a stepladder to higher socioeconomic strata. Soon, politicians were punished for backroom deals as a host of ethics laws transformed how government did business.
This was the time that gave rise to rules like the lowest-qualified bid (sometimes known as the lowest-responsible bid), an objective standard for awarding government contracts to whomever promises the lowest cost — assuming the bid in question was qualified/responsible, i.e. a legit estimate by a company that could actually pull it off.
Corruption still exists, it’s true, but now it’s the exception instead of the rule. Still, the system is far from perfect. Procurement rules add layers of bureaucracy, and as the contracts get bigger, the red tape grows longer. Whereas a private entity might hire the “best” company around to do some work — paying a little more than what a cut-rate competitor might charge, perhaps — most government agencies have long, legally entrenched processes for working with contractors that, if not followed to the letter, could result in lawsuits.
As contracts get bigger, the red tape grows longer.
Procurement comes in all shapes and sizes, but generally there are two basic types: bids and RFPs.
Bid procurement is the more straightforward. A government entity puts out an Invitation to Bid — basically, a formalized advertisement saying it wants to buy a specific good or service. Bids are how public agencies buy the basics: paper, pens, janitorial services, etc. SEPTA solicits bids on every picayune service and good, like Hot Water High Pressure Washers Mounted on Tandem Axle Trailers, Magnetically Encoded Transit Passes, and Landscaping.
Private companies respond to the invitation, usually with a round or two of questions-and-answers with a procurement officer. Then it’s time to submit sealed bids. In doing so, the companies pledge to follow the terms of the agency’s standardized contracts, often with little or no chance to negotiate different terms.
Neil Patel, SEPTA’s director of procurement, walked SPOKE through the transit authority’s procurement process. While different laws apply and details vary, the process at SEPTA is generally the same as that of any other government entity.
The bids are all opened at the same time, according to Patel, and the “lowest responsible and responsive bidder” wins. Bids are considered irresponsible when the government, for whatever reason, thinks they are total bunk. That might mean the price seems too good to be true, or the company in question has no experience delivering the particular good or service. For the most part, however, the lowest bid wins.
That, of course, puts considerable pressure on companies to underestimate the cost of doing business. At the same time, standardized contracts often allow for extra payments for unforeseen circumstances or work outside the scope of the bid invitation. Combined, it’s a recipe for cost overruns.
All of the problems that bog down bid procurements can go double for RFPs, or Requests for Proposals. Larger or more unique procurements tend to use RFPs, which require more rounds of back-and-forth with interested contractors. “We use RFPs primarily for professional, technical, and rolling stock acquisition,” Patel said. For SEPTA, that means major vehicles like buses and trains (but not the pickup trucks used by maintenance crews), tunnel construction, bridge engineering, and station architecture.
The process comes in many flavors. Usually, an RFP procurement begins when the agency publishes a Letter of Intent, which advertises the opportunity to potential suppliers or service providers. Sometimes, between the letter and the actual FRP, there is a Request for Qualifications (RFQ), which asks private companies to prove that they have what it takes to fulfill a proposed procurement. With an RFQ, companies essentially apply for the chance to reply to the RFP. The larger and more unusual or complicated a project is, the more likely it will have an RFQ.
Throughout it all, the agency will hold open-house meetings with potential contractors to discuss technical specifications and answer questions. At SEPTA, the process is formalized and run through a procurement department, meaning that private companies can’t just call up a given project’s lead engineer and ask about it. The added bureaucracy is there in part to ensure that all potential bidders get the same information, which is usually published on SEPTA’s website. This formality helps prevent lawsuits from losing bidders, who may try to use a technical slip-up to force the process to start over.
The RFP itself will come with a set of technical specifications developed by SEPTA and, often, a team of outside consultants. The specs can run hundreds, even thousands, of pages. (The SEPTA Key specs consisted of more than 900 pages.) Competing companies review the specs and go through more rounds of questions, which often result in revisions to the RFP. (SEPTA Key’s RFP had 26 addenda.) Finally, the companies submit their proposals, which are then reviewed by SEPTA — and its consultants, if it has any — for technical merit and price.
On most projects, the cheapest proposal is the winner. But architectural and structural engineering projects funded with federal dollars fall under the Brooks Act, which requires the agency to value technical scores over price. SEPTA has to try negotiating a contract with the top-scoring bid first, and can only move on to the next-highest bid if negotiations fail.
“This was one of the first times in 25 years that the board, not a selection committee, made that end decision.”
The Brooks Act doesn’t cover vehicle purchases, which allowed SEPTA’s board of directors to contract Hyundai Rotem to build 120 new Silverliner V railcars in 2004. Hyundai Rotem had never worked in the U.S. before, making the company unfamiliar with railroad regulations and supply chains. Its proposal came in with the lowest technical rating out of four bids submitted, but it also came in the cheapest. Perhaps more importantly, Hyundai Rotem promised to build the railcars in Philadelphia. In the end, the board picked the cheaper option that created hundreds of solid union jobs, despite technical concerns.
Most of the time, according to one knowledgeable industry source, it isn’t the board of directors that makes this decision, but rather a selection committee of staffers and consultants. “This was, to my knowledge, one of the first times in 25 years that the board… not a selection committee… made that end decision,” the source said, speaking anonymously to protect his company’s relationship with the government.
Hyundai Rotem finished its delivery three years late, in 2013. Three years after that, cracks were discovered on 95 percent of its railcars. According to the industry insider, such problems should be expected whenever an agency prioritizes price over technical merits.
Concerns that corrupt officials could waste taxpayer dollars ended up wasting taxpayer dollars.
In total, just the process of awarding a contract can take anywhere from a few months to years. (The SEPTA Key contract was awarded more than three years after its RFP.) SEPTA has tried to reduce the long times, Patel said, by sequestering the technical committees overseeing large orders. According to Patel, removing the teams from their quotidian duties to focus solely on procurement reviews managed to shave months off of some orders.
Still, rigid anti-corruption laws mean layers of bureaucracy and inflexibility, creating all sorts of market inefficiencies. The complexity and length of the technical specifications create large barriers to entry, limiting the number of firms that can compete. The same goes for rules that give preference to businesses owned by women, minorities or veterans — arguably a valid means to a worthy end, but one that results in higher procurement costs.
In 2008, the Pennsylvania Department of Transportation (PennDOT) tried to speed up the process by combining two steps, asking firms to submit bids for design and construction at the same time, a process known as “design-build.” That differs from the usual “design-bid-build” process, where there are two separate procurements for a project’s design and its construction. In design-build, an agency asks architects and engineers to form joint ventures with contractors and submit one bid.
Not only would a single bid save considerable time, but it also would relieve PennDOT from having to mediate disagreements between designers and builders. Supporters say design-build ultimately saves money and finishes projects faster than traditional methods.
But PennDOT was promptly sued and, in 2011, an appellate court ruled that its design-bid policy violated the state Procurement Code by giving the authority too much subjective leeway in awarding contracts. In other words, concerns that corrupt officials could waste taxpayer dollars ended up wasting taxpayer dollars.
Thanks to a law change in 2012, PennDOT has managed to pull off some innovative ways to improve efficiency. In late 2014 it used a public-private partnership to bid out the replacement of 558 bridges at once, allowing the winning firm to cut costs in the design and purchase of bridge components.
Yet government procurement in Pennsylvania remains a lengthy slog. Given the number of local and national politicians who have faced corruption charges in recent years, a lengthy slog may be better than the alternative. The downside is that SEPTA, PennDOT and other agencies can, at best, make only marginal improvements here and there.
Meanwhile, equipment problems will continue. In early February, SEPTA had to pull dozens of trains out of service after finding cracks on two railcars on the Market-Frankford Line. The agency is currently evaluating how many defects it will have to fix.