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Posted By ACEC Texas, Wednesday, February 4, 2015

State contracting problems have been in the news lately – thanks to the Health and Human Services Commission – and there is a lot of discussion at the Legislature about the extent of the problem.   Is it widespread?  Or limited to this agency?  Due to a lack of oversight? What are the solutions?

Here’s our perspective on this:  The problems are not widespread.  Rather they are mainly associated with HHS (obviously), information technology procurement, and with overuse of purchasing cooperatives.  The Legislature can learn from the experience of the design and construction industry in dealing with purchasing co-ops and craft a solution that is appropriate to the problem.

The idea of purchasing cooperatives is rooted in the power of bulk purchasing.  If a group of governmental entities can find the best price on desks, computers, school buses, or other commodities through a master bid, why not make this price available to others?

Where this model breaks down is when it gets expanded to services rather than commodities, to site-specific or variable projects, or to large-scale projects rather than incidental ones. 

In the design and construction industry, this pre-pricing model showed up several years ago under the name of “job order contracting.”  The notion was that certain construction could be pre-priced (e.g., dollars per feet of sidewalk or per square foot of drywall, etc.) then procured on an “indefinite delivery/indefinite quantity” basis.  At the same time, purchasing cooperatives proliferated, set up by government agencies and associations, often seemingly to get the fees that came to middlemen as a percentage of sales.

Inevitably, of course, the combination of job order contracting and purchasing cooperatives led to abuse.  Cooperatives let select vendors lock up large sections of the state.  Local contractors often did not even know about projects or have an opportunity to bid. There was little transparency transparency on activities, or on where the money went.  Large purchases were done under master contracts with little involvement of governing boards.  One agency formed a private company to house its co-op, with its staff as directors, to shield transparency.  One school district built an entire new school with JOC.

But at least in the construction area, abuses led the Legislature to enact some reform.  Purchasing cooperatives cannot be used to procure architectural and engineering services.  Job order contracts are limited to maintenance, repair, or minor construction (not new buildings).   The term of the master contract is limited to two years.   A maximum aggregate contract price must be established when the proposal is advertised, and the governing body must approve any work authorization or task order that exceeds $500,000.   Any task order that requires engineering or architecture must have oversight of a design professional on the staff of or selected by the governmental entity.

What does this experience offer to the State’s current problems?  A lot, since the problems at HHSC seem mostly rooted in the inappropriate use of a purchasing cooperative.  Some the lessons learned in design and construction can be applied here.  First, services should be excluded; IT problems are probably similar to engineering and architectural problems in that they are not generic and are not really suitable to being pre-priced.  Limit the aggregate contract price.  Require approval of job orders.  Set a limit on the contract.  And mostly, provide transparency.

But the Legislature should resist the argument that this HHSC issue is symptomatic of broader problems. There is little evidence of this at this point.  In the design and construction industry, the State executes hundreds of millions of dollars in design contracts and billions in construction contracts – all competitively procured, all publicly noticed, all with conflict of interest provisions, all with oversight, all with procedures to enforce accountability.  There are occasional problems, but they are dealt with expeditiously.

We hope the Legislature will take this opportunity to further reform and limit purchasing cooperatives, and shine the light of day on them, without creating more solution than there is problem.

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