\ Public Prerogatives in Public Contracts
The purpose of this research is to examine the process of contracting for goods and services in the public sector. Of particular interest are the prerogative of public performance, contract changes, contract default, contract termination, and the role of contracting in the public sector.
Contracting in the Public Sector
Contracting in the public sector is a part of the purchasing function. Purchasing always involves the acquisition of goods and services. In the public sector, purchasing almost always involves the acquisition of goods and services by an organization, for consumption by the organization, in the servicing of its client group. In private-sector organizations, this purpose is also present. In these organizations, however, goods and services are more often acquired as a means of supporting a production process, as opposed to organizational consumption.
The external environment of an organization provides its reason for existence. Therefore, the purchasing function is intimately involved with the capacity of the organization to fulfill its mission, whether that mission is the servicing of welfare clients, or whether it is the manufacture of automobiles. The external environment of a public sector organization, in addition, involves both the general public, and the political funding authority for the organization. Prudent and effective use of the financial resources made available to the organization is essential to the maintenance of harmonious relations with these latter groups.
The organizational purchasing function is integral to the effective use of an organization’s financial resources. Contracting is integral to the effective discharge of an organization’s purchasing function. It is, thus, essential for a public sector organization to both develop and maintain high levels of productivity in its purchasing function.
Purchasing, including contracting, is one of the most critical of the functional areas in a public sector organization. At a time when great public attention is devoted to the escalating cost of care in non-profit hospitals, the increasing difficulties involved in the funding of publicly-supported education, and a host of other cost related concerns in the delivery of public sector services, the major components of increasing costs in these activities and in all other public-sector organizations are personnel costs and material/equipment costs.
In part, the twin problems of improved personnel efficiency, and more efficient purchasing and contracting in the public sector can be effectively attacked through efforts on the part of public-sector management to improve the efficiency and the effectiveness of the purchasing and contracting function in their organizations. Purchasing and contracting efficiency may even be used as a means of optimizing personnel costs, in those instances where the contracting out of services is both possible and efficient.
The Role of Purchasing and Contracting in Organizations
Major organizations, whether in the public or in the private sector, exercise financial control over their activities through the process of budgeting. Critical to effective budget management is the control of expenditures and the efficient use of available financial resources. The activities of the organizational purchasing and contracting function are directly related to each of these aspects of effective budget management. Peter Drucker noted that a budget, and, thus, those activities involved in effective budget management is, “above all, a managerial tool.” Thus, it can be reasonably inferred that the purchasing/contracting-related activities of an organization are legitimate concerns of organizational management.
It therefore, follows that the productivity of the organizational purchasing and contracting function and (particularly in public-sector organizations) the adherence to all legal constraints pertaining to these activities are also legitimate concerns of organizational management. Therefore, too, activities, policies, and procedures which impact these factors are legitimate managerial concerns. The use of formalized procedures in the conduct of the organizational purchasing and contracting function, and the effective orientation of personnel assigned to purchasing/contracting-related duties are two such activities and procedures which hold the potential for significant impact on the productivity of the organizational purchasing and contracting function, and on the compliance rate with respect to legal constraints on the conduct of public sector purchasing activities.
An organizational tenet essential to the efficient discharge of the purchasing and contracting function is that of centralization. In the context of public sector purchasing and contracting, centralization refers to the authority for the exercise of procurement responsibilities. Centralization of procurement authority does not mean, however, that the contracting functions should be centralized.
In another context, purchasing/contracting is one of the seven basic functions which must be performed within an organization, and it is closely interrelated with each of the other six functions. For an organization to function effectively, therefore, each of these functions must be performed efficiently. If the purchasing and contracting function within an organization is a failure, there is a high probability that the overall organizational objectives will not be attained.
Contract: A Definition
A contrast is an agreement between two or more parties, in which each party agrees to perform specified acts, in specified ways, within a specified time frame. It is important to note that a contract binds all parties to it. No one party to a contract has greater contractual prerogatives yhan another, unless such prerogatives are written into the contract. This character of a contract is as binding on public sector organizations, as it is on private-sector organizations.
Concerns related to contract performance, changes, default, termination, and similar considerations are all facets of contract management. The basic managerial functions which must be performed with respect to organizational purchasing and contracting are planning, policy and procedure development, human resources management, organization of the purchasing function, development of operational controls, and monitoring of purchasing and contracting actions within the context of applicable legal constraints.
Planning for purchasing and contracting involves the setting of objectives. These objectives can be incorporated into formalized, standardized procedures which guide the performance of the personnel within a purchasing/contracting department. Policies and procedures developed for the operation of a purchasing department may be effectively communicated to departmental personnel through orientations, and they may be reinforced through their incorporation into formalized, standardized operating procedures for the department.
The use of formalized, standardized procedures can be equally effective for purchasing/contracting organizations in which buying activities are organized along project classifications, or for organizations in which the buying activities are organized along product or service classifications.
Several of the ways in which purchasing and contracting efficiency is facilitated by the use of standardized, formalized procedures have been discussed above. There are, however, additional advantages in this context. First, the use of standardized procedures can promote procedural continuity over time; a particularly significant advantage in organizations with high personnel turnovers.
Secondly, the use of standardized procedures facilitates the rapid and effective training of personnel newly acquired by an organization. Effective training is important for both the short- and the long-term effectiveness of an organization. The more quickly newly acquired personnel can become fully effective in their organizational tasks, the less costly their acquisition will be to the organization.
The use of standardized procedures by public-sector organizations, “when reduced to writing, provide a means of controlling . . . operations. Procedures should be viewed as total systems and plans.” Written procedures provide an established method for handling situations which frequently arise. Their existence and use reduces the need for supervisors to continually explain what should be done in frequently experienced situations.
In the late 1970s, the city of Raleigh, NC developed and implemented a system of standardized procedures, which were also incorporated into a set of instructions for the use of city personnel in the performance of their daily duties The Raleigh public administrators noted that the procedures were particularly effective as guidelines for newly acquired personnel.
The use of standardized procedures also permits an organizational management to decentralize the routine decision-making process, without deterioration of the centralization of procurement responsibility. This procedure tends to create and maintain a sense of security among employees, while, at the same time, freeing managers and administrators from the necessity to supervise routine activities; thereby permitting them to devote more time and effort to higher level activities. This latter factor means that the productivity of higher level personnel is also improved through the increase in the productivity of lower level purchasing/contracting personnel.
The standardization of purchasing procedures is an excellent way to provide for some decentralization of the purchasing decision-making process without decentralizing ultimate authority, including the contracting function. Flexibility, however, must be built-in to such procedures, if they are not to be perceived by users as a straight-jacket. Further, the use of standardized procedures are truly productive for an organization, only if they lead to productivity improvements, and to attitude improvements on the part of the users. It is easy to see that objectives for standardization which are not well thought out and developed could lead to the attainment of either productivity improvements, or attitude improvements, without attainment of the other, or they could lead to neither. In such instances, it is likely that any improvements achieved would be short-term in character.
Contracting for Goods and Services
A combination of societal and economic factors led to an increase in the delivery of public services by private-sector organizations in the early- and mid-1980s. The issue of privatization of services, often refereed to as the contracting out of services, is of great significance, as it involves the quality of public services, the level of public services, fiscal policy, fiscal management, the rights of public employees, the status of organized labor, and the concepts of equality and equity.
In the post-World War I period, scandals and corruption in the delivery of public services by private-sector organizations led to demands for improved services and improved efficiency through public delivery of such services, and, by the 1960s, virtually all public services in the United States were delivered by public organizations. In the late 1980s, this situation is changing.
A variety of societal and economic factors coalesced in the late-1970s and early 1980s, and led to demands for changes in the way in which public services are delivered. Whether this is true or not, there was a widespread public perception that the delivery of services by public organizations was inefficient. Rising tax burdens led to such actions as Proposition 13 in California, look-alike actions in other states, and reductions in federal tax levels. Reduced taxes meant reduced public revenues, which, in turn, meant increased pressure on public organizations in the delivery of mandated services. One response by government was a return to the practice of contracting out of services.
The practice of contracting out services by public organizations gained public acceptance in great part because the practice was strongly supported by the popular Reagan Administration. The practice gained acceptance from public administrators which would permit their organizations to operate within budget constraints.
The practice did not, however, receive unanimous approval. Many individuals and organizations, both inside and outside of government, felt that service quality deteriorated in the wake of privatization. Others felt that any cost savings resulting from privatization were only transitory. In this context, it was pointed out that privatization is often characterized by low entry prices, which gradually increase, as public organizations lose their capacity for service delivery. It was also noted that public organizations often failed to consider the costs of contract preparation, negotiation and monitoring when assessing the benefit-cost relationships of privatization. The controversy, together with the significant increase in public-sector contracts, placed added pressures on public-sector contract-compliance officers.
Decision makers and vendors often argue that public services are improved through the contracting out of such services. Employees and organizational clients, however, often indicate that the quality of services delivered deteriorate, when delivered through private contractors.
The findings of the literature review with respect to the level of services delivered were similar to those related to the quality of services delivered. Decision makers and vendors indicate strong levels of agreement that the level of public services delivered does not deteriorate through the contracting out of such services. Organizational employees tend to be somewhat non-committal on the topic. The clients of public-sector organizations, however, feel that service levels deteriorate more under privatization than does service quality.
Decision makers and vendors indicate strong levels of agreement that cost effectiveness is improved through the contracting out of services. Organizational employees, however, indicate that cost effectiveness deteriorates through the privatization of public services.
Only the decision makers indicate that privatization results in increased efficiency. All other groups, most especially clients, feel that efficiency decreases as a result of privatization.
Decision makers and vendors indicate strong levels of agreement that the statue of employee unions us unaffected by privatization of services. Union representation and organizational employees (especially) feel that the status of unions does deteriorate under privatization.
Negotiating Contract Prerogatives
Public sector organizations receive no special prerogatives in public contracts, unless those prerogatives are negotiated into the contract language. One approach to this problem is to enter into negotiations well before the eventual vendor of goods or services has been deteriorated. This approach strengthens the hand of the public-sector contract negotiator, through the creation of alternatives, and through exposure to a variety of negotiating tactics.
One procedure which is highly valuable for the public-sector organization is the request for proposal. This procedure permits a public-sector organization to set forth its needs in the terms it understands–the tasks which need to be performed, or the goods which need to be acquired. Vendors then must respond to the request for proposal with specifics in terms of product, support, maintenance, and financing, which indicate exactly how the task requirements would be fulfilled.
It has also been suggested that the parties to a proposed contract prepare for contract negotiations by determining ahead of time essential points of agreement and minimally-acceptable resolutions to these points. Where necessary or desirable, a public-sector organization may also employ the service of a professional consultant in the negotiation of contracts. When consultants are used, their independence must first be determined.
The evaluation of vendors is often more difficult for the public-sector organization than is the evaluation of either goods or services the vendors are to provide. In the context of vendor evaluation, it is often advisable for the public-sector organization to rely on external consultative assistance.
Many contract specific problems may be expected to arise with respect to public-sector contracts. These problems may relate to performance, default, change, or any of a number of other situations. The most significant cause for the development of such contract-specific problems are the following:
1. Failure on the part of public-sector contract negotiators to insure that the acceptance tests and specific implementation timetables are included in contracts.
2. Failure to insure that contract specifications adequately provide for the needs of the acquiring organization.
3. Failure on the part of the public-sector contract negotiators to learn of and to demand the financing alternative of greatest benefit to the acquiring organization.
The list of contract-specific problems illustrates the contention of many writers that legal counsel is essential in such negotiations. For example, with respect to foreseeability, a court may not require that an acquiring party actually foresaw future problems involved in contract negotiations, but only that they had the necessary reason to foresee.
The purpose of this research was to examine the process of contracting for goods and services in the public sector. Of particular interest are the prerogatives of public-sector organizations, with respect to contract performance, contract changes, contract default, contract termination, and the role of contracting in the public sector. It was determined that public-sector organizations enjoy no particular prerogatives in public contracts, unless such prerogatives are negotiated into the contract language.