Low Dollar Value Contracting

Low Dollar Value Contracting (PDF, 1.3MB)

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• 1.0 Introduction
  • 1.1 The Office of the Procurement Ombudsman
  • 1.2 Purpose
  • 1.3 Scope of Work
  • 1.4 Audience
  • 1.5 Development Methodology
  • 1.6 Enquiries
  • 1.7 Acknowledgements
• 2.0 Low Dollar Value Contracting in the Federal Government
  • 2.1 Low Dollar Value Contracts
  • 2.2 Overview of the Environment
  • 2.3 Market of Suppliers
  • 2.4 Regulatory Framework
• 3.0 Procurement Methods for Low Dollar Value contracts
  • 3.1 Supply Arrangement
  • 3.2 Standing Offer
  • 3.3 Competitive Procurement
  • 3.4 Directed Contracts
• 4.0 Low Dollar Value Contracting in Federal Organizations—Key Observations
  • 4.1 The Approach to Low Dollar Value Contracting Differs Across Federal Organizations
  • 4.2 Mandatory Tools and Low Dollar Value Contracts
  • 4.3 Guidance for Low Dollar Value Contracting
  • 4.4 The Cost to Suppliers
  • 4.5 The Cost to Government
• 5.0 Summary of Key Considerations for Federal Organizations
  • 5.1 Defining the Requirement
  • 5.2 Estimating the Cost
  • 5.3 Identifying Organizational Constraints
  • 5.4 Considering the Supplier Market
• 6.0 Overall Conclusions
• Appendix A—Goods Decision Chart
• Appendix B—Services Decision Chart
• Appendix C—Risk Assessment of Procurement Methods
• Appendix D—Notes

1.0 Introduction

1.1 The Office of the Procurement Ombudsman

The Office of the Procurement Ombudsman (OPO) is a neutral and independent organization of the Government of Canada that works collaboratively with federal organizations and Canadian businesses to promote fairness, openness and transparency in federal procurement. OPO delivers on this mandate by connecting stakeholders, resolving problems, investigating complaints and sharing best practices.

OPO employees:^{Footnote 1}

• Review the practices of federal departments for acquiring goods and services to assess their fairness, openness and transparency and make any appropriate recommendations to the relevant department;
• Review any complaint respecting the award of a contract for the acquisition of goods below $25,300 and services below $101,100 where the criteria of the Canadian Free Trade Agreement would otherwise apply;
• Review any complaint respecting the administration of a contract for the acquisition of goods or services by a department, regardless of dollar value; and
• Ensure that an alternative dispute resolution process is provided, if the parties to the contract agree to participate.

In 2018, OPO launched its knowledge deepening and sharing (KDS) initiative to better understand the root causes of some of the recurring issues in federal procurement. Through the publication of studies, OPO intends to share its knowledge of federal procurement practices and provide meaningful guidance for federal procurement stakeholders.

1.2 Purpose

The purpose of this KDS study was to highlight key considerations and provide practical guidance that federal organizations can apply when deciding what procurement method to select for low-dollar value (LDV) contracts.

1.3 Scope of Work

This study examined LDV contracting in federal organizations and the costs of awarding such contracts, including the cost to suppliers. LDV purchases made through the use of acquisition cards were excluded from the scope of this study.

1.4 Audience

This study was developed for federal organizations engaged in the acquisition of LDV goods or services, and specifically for employees with delegated authority for LDV contracting. This study may also be of interest to Canadian businesses interested in selling goods or services to the federal government. The study assumed the audience was familiar with key procurement practices and vocabulary.

1.5 Development Methodology

Literature Review

OPO reviewed the regulatory and policy framework governing federal LDV contracting, as well as literature pertaining to the supplier market in Canada.

Interdepartmental Workshop with Federal Organizations

An interdepartmental workshop was conducted to gain a better understanding of LDV contracting from the perspective of federal government procuring authorities. The workshop included participants from eight federal organizations including chief financial officers, senior directors of procurement and senior procurement officers.

The following aspects of LDV contracting were discussed:

• Challenges and constraints faced by federal organizations in awarding LDV contracts;
• Key risks associated with various methods of procuring LDV goods and services; and
• Factors driving the selection of procurement methods for LDV contracts.

Questionnaire on the Cost of Low Dollar Value Contracting

Federal organizations were asked to complete a questionnaire on the cost of awarding LDV contracts under seven different procurement scenarios.

Interviews with Suppliers

Interviews were held with suppliers who have experience bidding on LDV contracts to solicit data on the effort and cost associated with pursuing LDV contracts. The interviews were completed following the interdepartmental workshop, and suppliers were invited to share their thoughts on the key risks associated with LDV contracting identified by federal procuring authorities.

1.6 Enquiries

Enquiries should be directed to:

Office of the Procurement Ombudsman
410 Laurier Ave. W., Suite 400
Ottawa, Ontario  K1R 1B7
Canada

Telephone:

1‑866‑734‑5169

Fax:

613‑947‑6211

Toll-free for hearing-impaired:

1‑800‑926‑9105

Email:

ombudsman@opo-boa.gc.ca

1.7 Acknowledgements

OPO would like to thank the participating federal organizations and suppliers for their contribution to this study.

2.0 Low Dollar Value Contracting in the Federal Government

2.1 Low Dollar Value Contracts

In the context of federal procurement, a LDV contract generally refers to any contract valued below $25,000 for goods or $40,000 for services (as per recent amendments to the Government Contracts Regulations). This amount includes the estimated value of the contract at the time of award as well as any foreseeable amendments and applicable taxes.^{Footnote 2}

2.2 Overview of the Environment

Data released by the Treasury Board Secretariat (TBS) in its most recent (2016) Purchasing Activity Report reveals that although LDV contracts represent less than 10% of total annual dollar value, such contracts represent the majority of contracting activity undertaken by federal organizations.^{Footnote 3} In 2016, federal organizations entered into 343,461 contracts, 92% of which were for less than $25,000 (not including purchases made using acquisition cards).^{Footnote 3}

2.3 Market of Suppliers

The market for LDV transactions tends to be dominated by small to medium sized enterprises (SMEs). In 2013, the Office of Small and Medium Enterprises (OSME) published a report that examined the participation of SMEs in federal procurement. According to the study, 80% of the contracts awarded by Public Services and Procurement Canada (PSPC) valued below $1 million were awarded to SMEs.^{Footnote 4} Of the 350 suppliers that participated in OSME’s study, 35% indicated they had been doing business with the federal government for less than 5 years.^{Footnote 4} These findings suggest LDV transactions represent a key point of entry for SMEs that do not have extensive experience doing business with the federal Government.^{Footnote 5} OSME further found 84% of the survey respondents had less than one full-time employee dedicated to finding federal government business.^{Footnote 6} Due to the limited capacity and contracting experience of this supplier group, it is crucial that Government of Canada procurement methods and tools be user-friendly and straightforward.

2.4 Regulatory Framework

The objective of government contracting is to acquire goods and services in a manner that enhances access, competition and fairness, and results in best value or, if appropriate, the optimal balance of overall benefits to the Crown and the Canadian people.^{Footnote 7}

The regulatory and policy framework for federal contracting allows federal organizations the flexibility to develop their own frameworks to govern LDV contracting.

The Government Contracts Regulations (GCRs), made under the Financial Administration Act, apply to goods, service and construction contracts entered into by most federal organizations. ^{Footnote 8} While Section 5 of the GCRs requires contracts be awarded through a competitive process, Section 6 allows some flexibility to this requirement in four circumstances including when the estimated expenditure does not exceed certain dollar thresholds.^{Footnote 9} This last aspect is what exempts federal organizations from the requirement to always award LDV contracts through a competitive process. However, the GCRs provide no further guidance specific to LDV contracting.

The Treasury Board Contracting Policy states that federal organizations can non-competitively award contracts below the dollar limits specified in the GCRs, but are expected to call for bids “whenever it is cost-effective to do so.”^{Footnote 10} Section 1.5 of Appendix J (Selection process and establishment of fees for consulting and professional services) notes that the cost to industry should be taken into account when considering the cost-effectiveness of a competitive approach, stating “[w]hen the expense of a proposal competition is not warranted, as when the contract is less than $40,000, a consultant or professional can be chosen based entirely on qualifications.”^{Footnote 11} Otherwise, the Contracting Policy is silent on any specific conditions under which federal organizations are to engage in “cost-effective” competitive LDV contracting.

Contracting Policy Notice 2007-04 does provide some additional guidance for federal organizations engaging in non-competitive contracting,^{Footnote 12} encouraging the use of departmental acquisitions cards for the purchase of LDV goods and services, when appropriate. Once again, the “when appropriate” conditions are left to the interpretation of individual organizations. In Policy Notice 2007-04, the encouragement to use acquisition cards is based on the understanding that the high cost of awarding federal contracts “far outweighs any economic advantage associated with competing… low-dollar-value buys.”^{Footnote 12} The 2016 Purchasing Activity Report reveals that the volume of transactions carried out through the use of acquisition cards is significant, amounting to over 1.8 million transactions with a total value of over $878 million.^{Footnote 13}

The dollar values up to which federal organizations can issue contracts without the approval of Treasury Board are identified in the Treasury Board Contracts Directive and can vary by organization. Within each organization, delegated authorities for both goods and services may be further restricted based on an organization’s assessment of its risks and context.^{Footnote 14}

As noted above, the regulatory and policy framework governing federal contracting provides limited guidance to federal organizations on whether to compete LDV contracts. The absence of clarity regarding what constitutes “best value” and “cost-effective” creates the opportunity for LDV contracting to be done differently across federal organizations, and increases the risk that such activity will be mismanaged.

3.0 Procurement Methods for Low Dollar Value contracts

There are several procurement methods available to federal organizations for awarding LDV contracts. Table 1 below rates the suitability of some common methods measured against high-level objectives, based on information provided by the federal organizations which participated in OPO’s interdepartmental workshop.

3.1 Supply Arrangement

A supply arrangement is a non-binding agreement between the federal government and pre-qualified suppliers to deliver various goods or services.^{Footnote 15} By agreeing to pre-determined conditions, supply arrangements establish a framework allowing for the processing of individual solicitations.^{Footnote 15} A supply arrangement can be used when, on a regular basis, organizations require the same range of goods, services, or both, but these goods and services cannot be adequately defined at the outset and the actual demand is not known in advance. When organizations have a specific requirement which is available through a supply arrangement, they must issue a second stage solicitation to some or all of the suppliers from the supply arrangement’s pre-qualified pool, using the selection methodology predetermined in each supply arrangement. The price for the good or service is finalised during the second stage when the government accepts a pre-qualified supplier’s proposal and signs a contract.^{Footnote 15} Since the requirement is not defined in full at the outset, supply arrangements can be helpful tools where a key objective of the procurement is to find an innovative solution to a problem or need.

All federal departments and agencies defined in Schedule I, I.1 and II of the Financial Administration Act are required to buy certain commodities using mandatory standing offers and supply arrangements established by PSPC. For example, for professional services contracts, the ProServices supply arrangement contains 13 streams covering 158 labour categories.^{Footnote 16} PSPC maintains a list of the over 4,000 supply arrangements that can be accessed through the Standing Offer and Supply Arrangement application (SOSA App).^{Footnote 17} Generally speaking, the supply arrangements available to federal organizations permit directing a contract for LDV requirements.

While supply arrangements are intended to impart cost savings and increase the efficiency of the procurement process, the large number of supply arrangements can make the process of identifying the appropriate one time-consuming and can delay contract award. In order to effectively make use of these supply arrangements, a baseline procurement knowledge and familiarity with the tool is required.

3.2 Standing Offer

A standing offer is a non-binding agreement between the federal government and qualified suppliers for the provision of specific goods or services under pre-established terms and conditions, including price.^{Footnote 18} Unlike supply arrangements, under a standing offer the price and terms of the contract are pre-defined and agreed upon, allowing for more timely contract award.^{Footnote 19} This procurement method allows federal organizations to go directly to pre-qualified suppliers on the standing offer, without having to initiate a competitive process.^{Footnote 19} When a need is identified, the organization issues a “call-up” against the standing offer, which creates the contract with the supplier.^{Footnote 20} Procuring authorities are required to use standing offers for the 10 commodities listed in Schedule 4 of the Treasury Board Contracts Directive,^{Footnote 21} including furniture, office supplies and devices, and clothing. PSPC maintains a list of over 2500 standing offers.

Standing offers are well-suited to deliver goods and services that can be precisely defined in advance and accurately costed in advance.^{Footnote 22} While minor customizations to the goods or services may occur in the negotiation of the call-up, substantial or material deviations from the good or service originally defined in the standing offer are not permitted. Identifying the appropriate standing offer that accurately represents the requirement is paramount to the effective use of such tools and upholding the integrity of the process used to establish the standing offer. While standing offers are intended to improve the efficiency of the procurement process, the large number and variety of standing offers in place can make the process of identifying the appropriate one time consuming. Much like supply arrangements, a baseline procurement knowledge is required in order to effectively make use of such tools.

3.3 Competitive Procurement

Competitive procurement involves soliciting bids from multiple suppliers. In the context of LDV contracting, several of the common methods have been summarized below.

Request for Proposal

A Request for Proposal (RFP) involves soliciting bids, in writing, by inviting suppliers to propose a solution to meet a requirement. Bids are evaluated against criteria established in the RFP and the supplier is selected in accordance with a predetermined methodology involving multiple factors (e.g. price, technical merit, quality, effectiveness of the proposed solution).^{Footnote 23} Since the procuring authority does not specify the inputs or methods of meeting the requirement in the solicitation, this method maximises the potential for innovation and is well-suited for the delivery of complex projects. The level of effort required on the part of suppliers to develop their proposals is increased under this method; as a result, RFPs are typically reserved for higher complexity contracts.

Request for Quotation

Another common method for competitive LDV contracting is the use of the Request for Quotation (RFQ), which involves soliciting bids in writing from multiple suppliers. RFQs are intended for well-defined requirements where the successful supplier can be determined on the basis of lowest price.^{Footnote 24}

Telephone Buy

Similar to an RFQ, the telephone buy (T-buy) method involves contacting multiple suppliers to request a quote by phone.^{Footnote 25} T-buying should be used only when the requirement is well-defined and the successful supplier can be determined on the basis of lowest price.^{Footnote 25} This method is not well suited where precision in the terms and conditions is required (e.g. technical, professional or specialized services), or where the contract is a mix of goods and services.

3.4 Directed Contracts

A directed contract involves awarding a contract to a supplier without holding a competitive process.^{Footnote 26} When entering into a directed contract, only one supplier is solicited at a time. Any communication with the supplier is confirmed in writing and clearly stipulates the intentions of the procuring authority. In each case, procuring authorities are required to justify the use of a directed contract and ensure appropriate documentation setting out the procurement strategy has been included in the procurement file.^{Footnote 27} The use of directed contracts can provide for a timely contract award and is consequently a cost-effective method of awarding an LDV contract.

4.0 Low Dollar Value Contracting in Federal Organizations—Key Observations

4.1 The Approach to Low Dollar Value Contracting Differs Across Federal Organizations

Over the last 20 years, LDV contracting has consistently represented over 90% of federal contracts awarded annually. The findings from the interdepartmental workshop revealed that the approach to managing this activity varied significantly across federal organizations. In several larger departments, LDV procurement was carried out in a decentralized manner, with responsibility delegated throughout the organization to program managers, i.e. not necessarily a person with procurement experience. This was thought to increase the potential for error, as such individuals awarded few contracts on an annual basis and were consequently less familiar with procurement rules and tools. In some organizations, additional controls such as the review of these transactions by a procurement team, were instituted to mitigate risks.

Participants further indicated a tendency to regard LDV contracts as low-risk due to the dollar value of individual contracts. Risk tolerance varied across federal organizations, resulting in different risk mitigation approaches. In one case, the responsibility for LDV contracting was retained by the procurement team, regardless of the dollar value or risk associated with the transaction. This approach was accompanied by challenges including lack of resources and an increased workload, particularly at fiscal year-end. In another case, the organization required all transactions below $10,000 to be carried out using acquisition cards. Other organizations developed internal processes for LDV contracting to manage the high volume and ease the burden on the procurement team.

4.2 Mandatory Tools and Low Dollar Value Contracts

The lack of a prescriptive regulatory and policy framework governing the award of LDV contracts allows organizations the flexibility to select the procurement method they feel represents “best value”. Workshop participants stated this flexibility was greatly reduced by the number of mandatory PSPC-established supply arrangements and standing offers. According to the SOSA App, there were approximately 7,400 active standing offers and supply arrangements.^{Footnote 28} Participants stated the large number of supply arrangements, as well as the numerous streams and sub-streams, increased the complexity and associated time and effort required to identify the appropriate tool. Since the use of such tools is mandatory for certain commodities, regardless of contract value, the time and effort associated with navigating these tools was thought to be cost prohibitive for LDV contracts.

For participants, the process associated with identifying the appropriate tool can lead procuring entities to select the wrong tool or attempt to make it ‘fit’ the requirement. In the case of standing offers, there are impacts on fairness, openness, and transparency if the procuring authority customizes the goods or services to be delivered upon contract award. It was thought to be common practice to engage in slight customizations, but judgment is required to determine at what level this compromises the intended use of the tool, the supplier pre-qualification process, and the overall integrity of the contracting process.

In light of this complexity, participants agreed that a baseline procurement knowledge is required in order to effectively use supply arrangements and standing offers. This poses an inherent challenge for LDV contracting as this activity is often delegated outside of the procurement team to program managers and administrators. The low frequency with which these buyers engage in contracting places greater importance on the usability of the tools and the clarity of instructions and available guidance. In 2016, an internal audit of LDV contracting was carried out at TBS. The audit found that despite adopting the Government of Canada’s contracting policies, TBS’s internal process was not supported by a sufficiently articulated policy framework specific to LDV contracting “particularly for non-expert contracting authorities.”^{Footnote 29} Individuals holding delegated contracting authority found the quantity and complexity of tools supporting LDV contracting to be overwhelming and lacking sufficient guidance. The audit further found that an in-depth understanding of contracting concepts and rules was required in order to effectively apply available tools and guidance.

4.3 Guidance for Low Dollar Value Contracting

Workshop participants found the absence of useful guidance for non-procurement specialists to be a risk for LDV contracting for all procurement methods. In most of the organizations surveyed, internal guidance specific to LDV contracting had not been developed, and this activity was governed by broader procurement policies. The guidance and training available for managers and supervisors was largely focused on financial considerations, such as managing a budget, as opposed to procurement rules.

PSPC’s SOSA App and Centralized Professional Services e-portal (the ePortal for Professional Services) each offer online training for users on how to navigate the applications.^{Footnote 30} As part of obtaining authorization to use PSPC’s Centralized Professional Services System (CPSS), users are obliged to complete training on how to use standing offers and supply arrangements, including “Procurement Basics for Professional Services (6901)” and “How to use PSPC's Professional Services Standing Offers under Common Business rules (6902).”^{Footnote 31} Training regarding the use of standing offers or supply arrangements, or LDV contracting more generally, is not a standard, government-wide pre-requisite to obtaining delegated authority for LDV contracting; neither is such training required for procurement specialists.^{Footnote 32}

4.4 The Cost to Suppliers

Based on the experience of the workshop participants, competitive processes for LDV contracts struggled to attract the number of suppliers required to achieve the cost savings typically derived from competition. Several participants indicated that they had received feedback from suppliers that the cost associated with responding to a solicitation was a disincentive to bidding. Consequently, competitively sourced LDV contracts were perceived by participants to be more likely to result in failed procurements, with no bidders responding to solicitations. This risk was rated by participants as both “high impact” and “high likelihood” for both supply arrangements and RFPs. Appendix C of this document provides the result of the risk assessment conducted by workshop participants. This was supported by feedback from suppliers who conveyed that their cost to respond to solicitations can be significant, depending on the nature of the service being requested and the size of the supplier’s organization. Data received from approximately 1,800 suppliers as part of PSPC’s 2018 Study of SME Barriers to Federal Procurement found an overwhelming consensus among suppliers that the current practices for bidding on federal opportunities were too complex, labour intensive and expensive.^{Footnote 33}

OSME’s 2013 study found that strategic considerations, such as finding further business opportunities and whether the contract aligned with the company's business strategy, were equally as important as the revenue from the contract itself in terms of motivating suppliers to bid.^{Footnote 33} This was supported by feedback received from the suppliers interviewed as part of this study who indicated they were unlikely to respond to competitive tenders for LDV contracts unless the contract represented a strategic opportunity for future contracts. Similar sentiments were voiced regarding contracts where there was an existing supplier in place, as suppliers felt it lowered their overall chance of being successful in a competitive process. As a result, suppliers indicated that the preparation of a proposal under a competitive process often involved a considerable investment of time to research whether there was an incumbent or whether the solicitation appeared to be tailored to a particular supplier.

This data draws attention to an important consideration, which is that the cost of responding to a competitive process borne by suppliers is included in the price submitted in the proposal, and is ultimately passed on to Canadian taxpayers.

4.5 The Cost to Government

There was a perception among workshop participants that the cost to government of running a competitive procurement for an LDV contract, relative to the value of the contract, was considerable. In order to validate this perception, data was requested and received from five federal organizations on the cost associated with several procurement methods available for awarding LDV contracts. Organizations were asked to identify the classifications and levels of individuals engaged in LDV contracting and the respective time each resource allotted to the procurement of a typical LDV contract according to three tiers of contract values, namely $1 - $10,000, $10,001 - $25,000, and $25,001 - $40,000.

The data revealed that the cost of awarding an LDV contract was relatively low in relation to the overall value of the contract, regardless of the method of procurement. On average, the most costly procurement method was the use of a competitive process for the award of a service contract outside of a supply arrangement, which was found to cost on average $862 - $1,232. The cost associated with each method increased with the dollar value of the contract, which may be a reflection of the complexity of the contract as well as the additional levels of approval required for higher dollar value contracts. The least expensive procurement method was found to be the award of a contract under a standing offer, which carried an average cost of $468 - $584. While the average cost associated with each of the procurement methods surveyed appears nominal relative to the value of the contract, when the large volume of LDV contracting is considered, the cumulative value of the cost differential between procurement methods is significant. Buyers should therefore take the overall cost to government in to consideration when determining which procurement method to use for a LDV contract.

In general, the cost associated with competing an LDV contract was found to be greater than directing the contract to a particular supplier, which was in line with the feedback received from federal procuring authorities. An exception to this was witnessed in three of the federal organizations surveyed, where the cost of directing contracts for goods not subject to a standing offer was found to be greater than running a competitive process. In such instances, the use of a directed contract required people, usually senior employees, to spend more time on the transaction. This had the effect of increasing the cost of procurement using directed contracts above the costs associated with a competitive process. As a result, the data appeared to reveal that, while the use of directed contracts was generally less expensive than competing an LDV contract, this was subject to the governance structure put in place for the use of the various procurement methods, and may vary across federal organizations.

It should be noted that the cost associated with the use of PSPC-established tools, such as supply arrangements and standing offers, was found overall to be lower than the cost associated with other methods. However, these figures do not take into account the cost to government associated with establishing these tools pre-qualifying suppliers and the operational cost incurred by PSPC in providing assistance to other federal organizations. As a result, the costs of using PSPC-established tools that were identified by workshop participants and reported in this study are lower than the actual cost to government of using these tools.

5.0 Summary of Key Considerations for Federal Organizations

As per recent amendments to the GCRs, procuring authorities have the flexibility to direct contracts below $25,000 for goods and $40,000 for services without soliciting bids. However, there are circumstances under which a competitive process for a LDV contract may yield benefits. The following section aims to identify several of the key considerations procuring authorities can take into account when determining how to award an LDV contract. These considerations have been organized into four key steps in Figure 1 below.

Figure 1: Four Steps to Determining the Optimal Procurement Method for Low Dollar Value Contracts

5.1 Defining the Requirement

While understanding the requirement is an important first step in identifying the optimal procurement method for any contract, it is particularly important in the context of LDV procurement as the obligation to solicit bids is tied to the estimated value.^{Footnote 34} A poorly defined requirement makes it difficult to accurately estimate the cost of the good or service and, in turn, select a procurement method that falls within the monetary thresholds. This can also increase the likelihood of future amendments, creating unnecessary complications and additional work should the amendments cause the contract value to exceed $25,000 for goods or $40,000 for services.

A clearly defined requirement involves communicating expectations of the what, where, when, how many, and to what standard the work must be performed, so that both parties to the contract can recognize successful completion of the work.^{Footnote 35} For service contracts, language specifying how the work is to be completed should be avoided to allow suppliers to apply innovative methods in their delivery.^{Footnote 36} Interviews with suppliers revealed that a large proportion of time spent preparing proposals was expended on communications with the procuring authority to better understand the requirement. It follows that the overall cost of procurement can be reduced by ensuring that the requirement has been clearly defined at the outset.

Procuring authorities should also review the procurement file of previously awarded contracts, in particular the purchase description/statement of work and the quantities and qualities required. A review of previous files can provide insight into whether the requirement has been adequately defined or whether the contract is likely to require follow-on work, which may increase the value of the contract beyond the allowable monetary threshold for non-competitive award.

5.2 Estimating the Cost

Properly estimating the value of the contract is crucial to making the correct decision about whether the contracting process requires competition. The exception provided in section 6(b) of the GCRs requires that the estimated expenditure not exceed the limits specified for goods and services if the organization wishes to award a contract without soliciting bids.^{Footnote 37} The Contracting Policy also advises procuring authorities to consider the life-cycle cost of a requirement and prohibits splitting requirements or amendments to avoid obtaining required approvals.^{Footnote 38} As a result, accurately estimating cost is an essential component in the selection of procurement method.

Figure 2: Key Considerations Regarding Contract Value

Consideration should be given to identifying any hidden costs that may cause the estimated value to exceed the procuring authority’s delegation for directing LDV contracts. These can include shipping and handling considerations, foreign exchange rates, customs and duties fees, as well as hidden pay per use fees. Since the value of the contract was found to be a key consideration among suppliers in their decision to bid on a contract, a review of previous procurements of similar requirements can be a useful indicator of the appetite within the market to respond to competitive processes for similar LDV requirements.

5.3 Identifying Organizational Constraints

Organizational constraints refers to any number of factors within the organization that can have an impact on contract award. The governance framework for contracting, and more specifically the delegated financial authorities, may influence the timeline of the procurement. In cases where there is an urgent or inflexible need for delivery, understanding how organizational constraints can influence contract award can be imperative to selecting the optimal procurement method. It is important to note, however, that poor planning which leads to an urgent requirement is not a justification for selecting a directed contract.

An early consideration should be whether the total estimated contract cost falls within the procuring authority’s delegation or whether it will trigger additional levels of approval. Some organizations institute restrictions based on the risks associated with the requirement. For example, higher levels of approval may be required for contracts with former public servants. The procuring authority must allow for the appropriate amount of time to ensure that all parties can exercise their assigned roles.

5.4 Considering the Supplier Market

Previous cases can be helpful in understanding the supplier market for a particular good or service. The commercial availability of goods is a useful indicator of the availability of suppliers who can satisfy the requirement. In cases where a commodity is offered from numerous suppliers, a competitive process may yield better value through competition among multiple bidders.

Feedback received from the supplier community revealed that the process for establishing standing offers and supply arrangements was costly to suppliers, and did not consistently result in benefits that outweigh such costs. While the cost to federal organizations of awarding LDV contracts was reduced through the use of standing offers and supply arrangements, the cost and impact to suppliers associated with these procurement methods should be taken into account by buyers when considering whether to use non-mandatory supply arrangements and standing offers.

5.4.1 Social Procurement

Social procurement involves using procurement to achieve strategic social, economic and workforce development objectives. The flexibility to direct LDV contracts creates a unique opportunity for procuring authorities to consider awarding contracts to suppliers in an under-represented group (e.g. women, Indigenous, minorities, persons with disabilities, LGBTQ2+), or to limit a competitive process to a subset of suppliers. The Contracting Policy provides high level policy coverage for federal organizations to engage in social procurement in stating that “the objective of government contracting is to acquire goods and services and carry out construction in a manner that enhances access, competition and fairness, and results in best value or, if appropriate, the optimal balance of overall benefits to the Crown and the Canadian people [emphasis added].”^{Footnote 39} According to feedback received by workshop participants, a key challenge with implementing social procurement has been the absence of a policy providing specific authority to incorporate such considerations into their procurement strategy.

6.0 Overall Conclusions

The following conclusions and appendices, should be taken in to consideration when determining whether to direct or compete LDV contracts:

1. LDV contracts make up roughly 92% of federal contracting activity. The policy and regulatory framework that governs this activity is limited to high-level guidance and offers significant flexibility for federal organizations to develop their own frameworks for awarding LDV contracts. In the organizations surveyed, guidance specific to LDV contracting had not been developed, and this activity is governed by broader procurement policies. Overall, the approach to LDV contracting was found to differ significantly across federal organizations.
2. In order to manage the large volume of LDV contracts, responsibility is often delegated outside of the procurement team to program managers or administrative staff. The low frequency with which these individuals engage in contracting increases the risk that such procurements will not be carried out in a fair, open, transparent, consistent or compliant manner. This places greater importance on the need for clear instructions and guidance.
3. Factors such as the procurement objective and nature of the requirement can influence the selection of procurement method. Depending on a federal organization’s objectives, there are distinct advantages to choosing one procurement method for an LDV contract over another. For example, methods of competitive procurement (e.g. RFQ) are more appropriate for well-defined, non-complex requirements, whereas other methods (e.g. RFP) are preferable for less-defined, higher complexity contracts.
4. Training specific to LDV procurement, or the use of supply arrangements and standing offers, is not a requirement in order to obtain delegated authority for LDV contracting. The guidance in each supply arrangement or standing offer assumes a baseline procurement knowledge and may not be appropriately aligned with the experience of individuals carrying out LDV contracting in the federal government.
5. The lack of capacity and contracting experience of small and medium sized suppliers doing business with the federal Government places greater importance on having user-friendly and easy to understand procurement tools and methods. Consideration should be given to the cost to suppliers, the characteristics of the market, and how the selected procurement method may impact the decision to bid.
6. The cost to government of awarding LDV contracts was found to be relatively low across each of the procurement methods examined. The most costly procurement method was found to be the use of a competitive process for the award of a service contract outside of a supply arrangement. While the use of directed contracts is generally less expensive than competing an LDV contract, this is subject to the governance structure put in place for the use of the various procurement methods.
7. When assessing the cost-effectiveness of a procurement method and whether it is likely to add value, consideration should be given to four key areas: defining the requirement; the estimated cost of the contract; organizational constraints; and the supplier market.

Appendix A—Goods Decision Chart

Low Dollar Value Contracting—Key Considerations for Awarding Goods Contracts

Appendix B—Services Decision Chart

Low Dollar Value Contracting—Key Considerations for Awarding Service Contracts

Appendix C—Risk Assessment of Procurement Methods

The following table presents the results of the risk assessment conducted as part of the interdepartmental workshop that was held to gain a better understanding of LDV contracting from the perspective of federal government procuring authorities. The workshop included participants from eight federal organizations including chief financial officers, senior directors of procurement, and senior procurement officers. Participants were asked to identify the key risks associated with procurement methods for LDV goods and services and to assess each in terms of impact and likelihood.

Date modified:

2021-05-14