Mayor and Council



   For the meeting on:

  December 17, 2012
   Department:   Finance
   Responsible staff:  Gavin Cohen, Chief Financial Officer
  phone: (240) 314 - 8402
  GCohen@rockvillemd.gov


Subject
City Contracting

Recommendation
Staff recommends that the Mayor and Council receive the presentation on City Contracting and offer guidance or direction as necessary.

Staff recommends that the City ordinance not be amended to establish a section on local preference, but that other steps be taken as described in this report to support local businesses.

Discussion
The City's procurement process is based upon the principle of open and fair competition. Open and fair competition saves the City and its taxpayers money, improves vendor performance, curbs fraud, provides accountability, and instills confidence in the City and the public about the integrity and cost effectiveness of public procurement. Competition also ensures that all vendors desiring to conduct business with the City are given a fair and reasonable opportunity to do so.

The Rockville City Code Chapter 17 entitled "Purchasing" regulates City of Rockville procurements and establishes uniform procurement procedures for all commodities and services for the City. State and federally funded procurements may also set forth additional requirements. This report provides an overview of the City's procurement process and includes a discussion of contracting out City services versus providing them in-house.

Procurement Methods
Selecting the correct procurement method is one of the most critical aspects of the procurement process. Procurement methods are determined by the purchasing staff after considering a range of factors including the degree of price competition, the type and complexity of the requirements, the urgency of the requirements, the estimated cost of the acquisition, the period of performance, and history of the acquisition.

The primary contracting methods used by the City include:

Small Purchases

  • Individual purchases under $3,000
  • Competition not required
  • Award if the price is considered to be reasonable
  • Payment method generally via City issued purchase card
Informal Solicitation
  • Informal competitive process for purchases up to $30,000
  • Request for Quotation (RFQ) method
  • Streamlined process with condensed timeline
  • Solicitation advertised on City website
  • Vendors solicited via eMaryland Marketplace
  • No public bid opening
  • Process is decentralized – requesting departments process solicitation
  • Award to responsive, responsible bidder submitting lowest price
Competitive Sealed Bidding
  • Formal competitive process for purchases exceeding $30,000
  • Sealed bids - Invitation For Bid (IFB) method
  • Requirements are specific, clear and complete
  • Solicitation advertised on City website
  • Vendors solicited via eMaryland Marketplace
  • Sealed bid and public bid opening
  • Process centralized utilizing experienced, certified procurement staff
  • Award to responsive, responsible bidder submitting lowest price
Competitive Sealed Proposals
  • Formal competitive process for complex purchases exceeding $30,000
  • Sealed proposal - Request for Proposal (RFP) method
  • Requirements are highly complex technical products and professional services
  • Solicitation advertised on City website
  • Vendors solicited via eMaryland Marketplace
  • Respondents propose best solution
  • No public opening and all responses are kept confidential until award
  • Award by evaluation committee with oversight by procurement staff
  • Proposals are subject to negotiation
  • Award based on evaluation criteria established in RFP

Cooperative Procurement
  • Cooperative contracts are based on common requirements of multiple governments
  • Cooperative purchasing contracts include bulk commodities with standard specifications, such as cleaning supplies, gasoline, and heating fuel, as well as information technology and consulting services
  • Aggregated volume creates significant price benefits
  • Reduces processing time, administrative overhead, and other costs
  • Types of cooperative purchasing include: true cooperative, piggyback contracts and third party aggregators (i.e., Baltimore Regional Cooperative Purchasing Committee (BRCPC), U.S. Communities Government Purchasing Alliance)

Emergency Procurement
  • Authorized where there exists a threat to public health, welfare or safety and where a delay would significantly injure City financially or otherwise
  • Compelling urgency may preclude full and open competition
  • Limited to the procurement of only the types/quantities of items necessary to avoid or to mitigate serious damage to public health, safety, and welfare
  • Competition obtained, as practical

Sole Source
  • Unique supplies or services available from only one or a limited number of sources
  • Competitive bidding is considered unless the existence of limited rights in data, patent rights, copyrights, or secret processes make the supplies and services available from only one source
  • Negotiations, as appropriate, as to price, delivery, and contract terms

Types of Contracts
City contracts fall under one of three categories: firm-fixed price contracts, fixed-price contracts with economic price adjustments, and time-and-materials contracts.

Firm-Fixed Price
A firm-fixed price contract provides a price that is not subject to adjustment due to fluctuations in the contractor's cost. A firm-fixed price contract places responsibility on the contractor for the delivery of the product or the complete performance of the services in accordance with the contract terms at the bid price.

This type of contract places maximum risk and full responsibility for all costs and resulting profit (or loss) on the contractor. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties.

A firm-fixed price contract is appropriate for use when the extent and type of work necessary can be reasonably specified and the cost can be reasonably estimated, as is generally the case for construction or standard commercial products.

The basis upon which a firm-fixed price contract may be established includes:

  • Adequate price competition for the contract;
  • Comparison of prices in similar prior procurements in which prices were fair and reasonable;
  • Establishment of realistic costs of performance by utilizing available cost or pricing data and identifying uncertainties in contract performance; or
  • Use of other means to establish a firm price when a commonly used method is not available.

Fixed-Price Contract with Economic Price Adjustment
A fixed-price contract with economic price adjustment is used to protect the contractor and the City against significant fluctuations in labor or material costs or to provide for contract price adjustment in the event of changes in the contractor’s established prices.

There are three general types of economic price adjustments:
  • Adjustments based on established prices. Price adjustments are based on increases or decreases from an agreed-upon level in published catalogs or otherwise established prices of specific items.
  • Adjustments based on actual costs of labor or material. Price adjustments are based on increases or decreases in specified costs of labor or material that the contractor actually experiences during contract performance.
  • Adjustments based on cost indexes of labor or material. These price adjustments are based on increases or decreases in labor or material cost standards or indexes that are specifically identified in the contract such as such as the Consumer Price Index (CPI) or Producer Price Index (PPI).
Time-and-Materials
A time-and-materials contract is used when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence.  The contract includes a ceiling price that the contractor exceeds at its own risk. A time-and-materials contract provides for acquiring supplies or services on the basis of direct labor hours and the cost for materials. The hourly rates specified in the contract include wages, overhead, general and administrative expenses, and profit. Additional costs may include subcontracts for equipment, supplies and incidental services for which there is not a labor category specified in the contract as well as other direct costs such as travel, printing, or postage.
Commodity Price Shifts
Equitable price adjustment clauses are utilized for City contracts if there is a possibility of significant economic fluctuation during the contract term. The use of a price adjustment clause allows companies to submit bid prices free of the contingencies that would otherwise be included to compensate for potential economic fluctuations.

Contract price adjustment clauses are based on objective criteria and are not subject to a negotiation process, except for under unique circumstances when it is not possible to utilize one of the price adjustment methods below. Price adjustments are generally applied on an annual basis or at the beginning of each renewal period.

The Consumer Price Index (CPI) is the most common type of price adjustment clause. The Consumer Price Index program produces monthly data on changes in the prices paid by urban consumers of a representative basket of goods and services. CPI adjustments are included in many City contracts, such as office supplies, janitorial services, and consulting services.

The Producer Price Index (PPI) is a measure of the price of a basket of goods that are important components of the production costs faced by producers. Examples of goods that are contained in the PPI include the raw materials, like metals, oil and grains. The PPI is used for certain commodity contracts and in instances when the contractor does not have control over the wholesale price of the desired product. For example, in an asphalt contract, the asphalt price is adjusted by the PPI because the contractor does not have control over changes in petroleum prices. While the CPI and PPI are the most commonly used types of price adjustment clauses, other methods may be used when the CPI or PPI are not applicable.

Multi-Year Contracting
Multi-year contracts are used when staff determines that long-term, uninterrupted services are required to meet City needs, estimated requirements are reasonably firm and continuing, and a multi-year contract serves the best interests of the City by encouraging effective competition or otherwise promoting economies in City procurement. The multi-year solicitation document sets forth the terms of the contract, the amount of supplies or services estimated for the proposed contract period, and the process for contract extensions.

Continuation of multi-year contracts is subject to availability of funds each fiscal year, and each solicitation covering a multi-year period contains an availability of funding clause.

The benefits of multi-year contracting include:
  • Lower costs
  • Greater standardization
  • Reduction of administrative burden in the placement and administration of contracts
  • Substantial continuity of production or performance
  • Stabilization of contractor work forces
  • Avoidance of the need for establishing quality control techniques/procedures for a new contractor each year
  • Broadening the competitive base with opportunity for participation by firms not otherwise willing or able to compete for lesser quantities

Multi-year procurements may be contracted for in several ways. A contract for one year with the option to renew or extend has the effect of extending contract performance, at the City’s sole discretion, beyond the original contract performance period. This requires an affirmative act by the City to exercise the option and binds the contractor to performance in future years or option periods. Contracts with optional extension periods are useful for maintenance or support services. The contractor’s performance can be evaluated by the City in the first contract year and a determination made if exercising the option to extend is in the best interests of the City.

By contrast, a multi-year contract can be written that obligates the City, subject to availability of funds, over consecutive fiscal years without requiring a renewal option provision. The contract is cancelled automatically if funds are not appropriated or otherwise made available to support continuation of performance in any fiscal period succeeding the first; however, this does not affect the City's rights under other termination clauses in the contract.

Protecting the City's Interests
The objective of the City procurement process is to facilitate each department’s mission, while protecting the interests of the City and its taxpayers, and promoting fairness in the vendor community. The City accomplishes this objective through the use of knowledgeable professional staff as well as contractual protections.

Certified Professional Staff
The City Purchasing staff supports the National Institute of Government Purchasing (NIGP) Code of Ethics and adheres to their philosophy of protecting the public trust. The Purchasing Division consists of five staff members; four have obtained professional certification and one staff member is working towards certification. Purchasing staff demonstrate good stewardship and best practices in the purchase of goods and services through fair competitive processes in accordance with applicable regulations.

Contract Protection
The solicitation documents provide a framework of acceptable protections for the City balanced against the needs of vendor. Below are some of the major elements of contract protection for the City.
  • Termination for Default -The termination for default clause allows the City to terminate contracts, in whole or in part, at any time and at its sole discretion, if the contractor is in breach of any provision and has been provided a "cure" period. This clause is a discretionary right and is exercised after determining it would be in the City’s best interests to do so. The termination for default clause also holds the contractor liable to the City for costs to the City in excess of the defaulted contract price.
  • Termination for Convenience - The termination for convenience clause allows the City to terminate contracts, in whole or in part, at any time and at its sole discretion. This clause is not based on default by either party and states that the City is liable only for payment of goods delivered and accepted or approved by the City prior to the effective date of the termination.
  • Liquidated Damages - The liquidated damages clause states a dollar sum in a contract to be paid as ascertained damages for failure to perform in accordance with the contract. The damage figure stipulated must be a reasonable estimate of the probable loss to the City and not calculated simply to impose a penalty on the contractor.
  • Indemnification and Hold Harmless - The indemnification and hold harmless clause is a protection against loss or liability resulting from third party claims. Contractors are required to indemnify or hold the City harmless from any damages and costs associated with third-party claims.
  • Certificates of Insurance - Insurance certificates ensure that the contractor has the financial capability to defend the City from lawsuits and to pay claims where liability exists while continuing to perform services. The City requests "additional insured" status on all polices as it offers protection under the contractor’s insurance policies if the City is named in a suit against a contractor. The standard types of insurance coverage and certificates of insurance generally requested from contractors doing business with the City include Commercial General Liability, Commercial Automobile Liability, Umbrella Policies, Professional Liability, and Workers’ Compensation Insurance.
  • Bonding - For construction contracts exceeding $25,000, the contractor must meet the minimum City requirements for bid guarantees (bid bond), performance bonds and payment bonds. Bonds are a vehicle in which the Surety guarantees that the contractor named in the bond will perform the obligation stated in the bond on behalf of the City. If a contractor fails to perform or fails to make payment to its subcontractors, the contractor and the Surety are jointly liable.
  • Confidentiality and Non-Disclosure of Proposals - To protect the interests of the City, information submitted by bidders under the RFP process along with information submitted during the evaluation committee selection process is kept in confidence by the City until after award. Maintaining confidentially in the process ensures that the parties outside the evaluation committee cannot influence the outcome and also protects the City’s position during negotiations.
  • Additional Protections - Some additional administrative and contractual elements protecting the City’s interest include warranties and guarantees, governing law, partial payment, withholding retainage, authority to suspend or debar contractors, and dispute resolution.

Local Preference
There has been an increased interest by the Mayor and Council to support local businesses and to promote the Rockville Chamber of Commerce “Bid/Buy Rockville” campaign. Implementing a local preference would require a change to the City ordinance. The City is committed to doing business locally whenever possible. When local businesses provide the most cost efficient solution to meet City needs, the citizens and taxpayers benefit in two ways: they get the best value for their dollars, and more of the dollars are recycled within the community. The City’s overall policy is to ensure that local businesses are given full information about the City’s needs, are treated fairly, and are given every opportunity for genuine competition on a level playing field.

Local vendor preferences are usually enacted to give some form of monetary advantage to a local vendor. The National Institute of Governmental Purchasing (NIGP) defines local bid preference as “procurement laws mandating that bid prices for a preferred class of bidders be given special considerations when comparing their bid prices to other bidders not in the preferred class, i.e. local vendor may be given a bid preference over non-local vendors.”

In practice, this means that, if a local vendor submits a bid that is not the low, responsive, responsible bid, the local vendor’s bid price will be reduced by some mechanism for bid comparison purposes. The actual contract award amount is whatever the local vendor had submitted as its bid price, which would be an additional cost to Rockville taxpayers. An example of a 5% bid preference is shown in the table below. In this example, Rockville taxpayers would pay an additional $20,000 because of the 5% local preference law.

TABLE 1. EXAMPLE OF A 5% BID PREFERENCE
Bidder
Amount Of Original Bid
With Local Preference
Adjusted Bid Amount
Result
Bidder #1
$1,980,000
No
Adjustment
$1,980,000
$20,000 Preference Cost to City
Bidder #2 Rockville Firm
$2,000,000
$100,000
Adjustment
$1,900,000
Rockville Firm Wins
Bidder #3
$2,300,000
No
Adjustment
$2,300,000
City Pays $2,000,000

Several major professional organizations that deal with governmental procurement have analyzed the advantages and disadvantages of local preferences and have taken the position that providing preferences is not cost-effective. Such organizations include: the National Institute of Governmental Purchasing; the International City and County Managers Association; the Governmental Finance Officers Association; and the Council of State Governments. According to NASPO (National Association of State Procurement Officials') (1999), “there is no substantial body of data” to suggest the gain for the preferential group is worth the cost incurred by taxpayers, including the losses due to restricted competition. An NIGP (National Institute of Governmental Purchasing, Inc.) Resolution advocates the use of the free and open competitive process for public procurement and states in part, “….the National Institute of Governmental Purchasing, Inc. is opposed to all types of preference law and practice and views it as an impediment to cost effective procurement of goods, services, and construction in a free enterprise system.” See Attachment C for further reading on this topic.

Maryland law does not generally authorize State procurement officers to favor resident vendors over non-resident vendors in awarding procurement contracts. Additionally, federal regulations prohibit the granting of federal funds, such as CDBG, to entities that have local preference policies used in bidding procedures. With a “Local Preference” policy, the City may not be able to continue participating in many State contracts and thereby would not be able to take advantage of the combined and leveraged spending of other large political subdivisions and group purchasing cooperatives. This would force the City to issue many more bids and would likely increase costs due to reduced purchasing power.

Summary of Advantages and Disadvantages of Local Preferences
Advantages

  • Encourages businesses to stay or relocate to City
  • Creates jobs in the short-term
  • Represents commitment to local business
  • Creates incentive for new business development

Disadvantages
  • Increased cost and decreased competition
  • Potential for reciprocal action by other jurisdictions (Rockville firms would be at a disadvantage when bidding in other jurisdictions)
  • Increased administration to oversee policy
  • Goes against public purchasing principles of equity, impartiality, open competition and best value

Supporting Local Businesses Without an Ordinance Change
Establishing a local preference ordinance would show local businesses that the City supports them; however, there are other ways the City can show support for local businesses without risking the disadvantages that may come with a local preference ordinance. The City can support local businesses without a cost to taxpayers and without changing the law.

The best way to help local firms is to give them the skills, opportunities, knowledge, and resources they need to compete well in the public procurement environment. That translates into actions including: (1) working with the Chamber of Commerce and Rockville Economic Development Inc. to offer regular training to local businesses and local workers about how to do business with the City, including information on how bidding works and where to find contracting opportunities with the City and with neighboring cities and counties; (2) easing bonding requirements when possible by not requiring performance or payment bonds when those bonds are not required by statute; (3) making smaller projects available to local businesses when possible so they can build experience and a good track record; (4) encouraging local businesses to register with the State’s eMaryland Marketplace, which connects them to public contracting opportunities throughout the State of Maryland; and (5) reorganizing the City's website to make bidding opportunities easier to find and to provide links to the resources mentioned above.

The Purchasing Division, in coordination with the Neighborhood Resources Division, is currently developing and will be presenting an informational session for Rockville businesses to discuss how to do business with the City. The Purchasing Division has also periodically met and worked with the local Chamber of Commerce to review City processes and procedures and will continue to do so.

These actions support local workers and businesses while ensuring the City does not lose sight of its primary procurement goals: promoting fairness and transparency, encouraging healthy competition, procuring quality goods and services, and being good stewards of the taxes received by the City used to pay for these goods and services.

It is recommended that the City continue to endorse outreach programs whereby local businesses would be encouraged to participate in the City's procurement process. If a local preference ordinance is to be further considered, a more detailed analysis would be required to assess the potential benefits and overall impact on costs. Additional details requiring further investigation include: how to define local, which type of preference will be given, determining if the City will allow a preference for subcontracting, legal review of changes to the City Ordinance, budget impact, and program staffing levels.

The Use of Contractors to Provide City Services
City programs and services can be provided solely with employees, contracted out, or provided through a combination of the two. Currently, the City contracts out for services when it is efficient and effective to do so. The decision to contract out a program or service is determined at the department level. There is no formal citywide system in place for evaluating whether to contract out a program or service. Each department evaluates its capacity to provide the service and will add capacity through a contract if needed.

There are both advantages and disadvantages to contracting out programs and services, specifically:

Advantages
  • Ability to control service delivery costs
  • Access to greater range of expertise
  • Introduction of competition
  • Smaller government
  • Increase in flexibility to set workloads – peak/off-peak
  • Reduced overhead
  • Flexibility to change vendors
  • Promotes public/private cooperation

Disadvantages
  • Displacement of public employees
  • Increased chances of corruption
  • Illusory competition
  • Loss of government control over operations and results
  • Loss of institutional memory
  • Getting “locked-in” to a particular vendor

The most common approach used by the City is a combination approach that provides a standard level of services through staff and augments those services with contractors when needed. This approach provides flexibility to the City to provide services to residents and City staff while being able to expand service levels or provide more technical support as the need arises. Some examples of services the City provides through a combination approach are printing services, legal services, software application support, street signal maintenance, janitorial services, mowing, and construction plan review.

In a few cases, the City contracts out a City service in its entirety. Recent examples include the maintenance and operations of the RedGate Golf Course and the operations of the Town Square Garages. Contracting these services gave the City access to a wider range of expertise and allowed the City to better control costs.

In other circumstances, the City may determine that a greater level of control over operations is warranted, and, as a result, may bring a service in-house. A recent example was the creation of the Department of the City Attorney. Instead of fully contracting out for legal services, the City now provides the majority of legal services through in-house staff and contracts out for specialized and highly technical legal services.

Opportunities to Reduce Costs by Contracting Out
Contracting out services is often done to reduce costs and gain access to a greater range of expertise. However, for this to be successful a number of conditions need to be met. Organizations should consider four questions when determining if contracting out is appropriate:
  1. Does sufficient competition for the service or program exist in the private market to ensure the City has a selection of vendors from which to choose?
  2. Are there clear results for the service or program that the City can easily measure and establish performance metrics that vendors must maintain?
  3. Does the City need to control the process of how the service is provided to residents?
  4. Are there sufficient in-house resources to manage the contract?

It is not uncommon for a government entity to outsource services only to find that potential cost savings are mitigated by the need for additional costs associated with procuring, managing, auditing, and possible litigation of contracts. It is important that these costs, as well as all avoidable costs, be properly analyzed prior to any decision being made to contract out services. Also, if how the service is provided is just as important as the end product, the service or program may not be an optimal candidate for contracting out. If the City has to limit private vendors to providing a particular service in a particular way, it may severely impact the ability to deliver cost savings.

The most important aspect of assuring success of any decision to contract out programs and services is that the Mayor and Council champion such an approach. Due to the implications to current employees and the overall morale issues involved with layoffs, any decision to contract out current services and programs would need to be strategic, analytical and objective with appropriate goal setting and transparency to ensure success. This would then be closely followed by buy-in from residents, City management, and vendors.

It is recommended that a comprehensive review of City services be completed by the Mayor and Council and possibly residents to determine services that do not necessarily have to be provided by the City government. Staff can then review these services for possible cost-saving or contracting opportunities and present these as options during the FY 2014 Budget Process.

Attachments A and B provide further reading on contracting out services.

Mayor and Council History
In preparation for the FY 2014 budget season, the Mayor and Council directed staff to prepare several off-budget worksessions to begin in October 2012. This is the sixth in the series of several worksessions intended to provide information for the Mayor and Council and assist with the development of their budget priorities as we enter into the FY 2014 budget process.

Meeting Date
Agenda Item
October 15, 2012 State of the FY 2014 General Fund Budget
City Employee Compensation
November 5, 2012 Capital Improvements Program (CIP)
November 19, 2012 Biennial Budgeting
December 3, 2012 Reducing the City Budget, What it Means to Cut Costs
December 17, 2012 City Contracting
January 7, 2013 Costs and Revenues Associated with New Development

Fiscal Impact
There is no direct fiscal impact as a result of this item; however, any direction from the Mayor and Council will be incorporated into the FY 2014 budget preparation process.

Next Steps
Staff will incorporate the direction from the Mayor and Council into the FY 2014 budget preparation process.

Attachments

Attachment A - Pros and Cons of Outsourcing

Attach A - Outsourcing Pros and Cons.pdfAttach A - Outsourcing Pros and Cons.pdf

Attachment B- Outsourcing Analysis

Attach B-Outsourcing Analysis.pdfAttach B-Outsourcing Analysis.pdf

Attachment C - NASPO Local Preference

Attach C - Naspro Report.pdfAttach C - Naspro Report.pdf

Department Head:



Gavin Cohen, Chief Financial Officer
Approved on: 10/22/2012

City Manager:

Barbara B. Matthews, City Manager
Approved on: 12/11/2012