1999 September and November Report of the Auditor General of Canada
30.1—Selected Case StudiesThese case studies were selected from the sample of 50 contracts that were audited for this chapter. They were selected to provide examples of the different types of problems we observed in contracting practices. They are not intended to be representative of the contracting practices in the departments from which they were drawn.
Problems With Challenges to Advance Contract Award Notices
National DefenceIn assessing the qualifications of a challenger, the Department appears to have required a higher standard of proof than required of the chosen supplier.
In 1998, National Defence issued a request for proposals for the services of an information technology professional. It received several responses and judged that none met the requirement; letters to that effect were sent to the bidders. Normally in these circumstances, a department would re-examine its requirements to determine if they were too stringent and, if not, would ask the bidders if they wanted to correct the deficiencies in their original bids and bid again. If it received positive responses, it would tender the requirement again. Instead, because of perceived time constraints the Department approached one of the bidders and, after determining that it had remedied the deficiency in its bid, offered it a contract on a sole-source basis. An ACAN was posted in July 1998; on 30 July a challenge to the ACAN was filed. The Department reviewed the challenge and concluded that in two areas the challenger lacked the required minimum of four years' experience. The Department notified the challenger that the challenge was not valid, and awarded a contract for $348,820 to the selected supplier.
Our review of the selected supplier's qualifications led us to conclude that its proposal was deficient in the same two areas as the rejected challenger's. It had provided a statement that the person it proposed to supply met the requirements. However, it appears that the Department did not scrutinize the individual's resume as thoroughly as that furnished by the challenger. Clearly, in a competitive tendering situation all bidders must be assessed in the same way against the same standard. Apparently in this case, a more stringent assessment was applied to the challenger than to the chosen supplier.
National DefenceThis case raises the question of the standard a challenge must meet to be considered valid.
On 12 June 1998, the Department posted an ACAN for a $75,000 contract, indicating that it required a senior person to provide it with advice related, in part, to compensation issues. The ACAN contained a list of required qualifications and identified a supplier as the one uniquely qualified to meet its requirement. On 26 June, the Department received a written challenge from another supplier who indicated that it was capable of doing the task. On 3 July the challenger wrote to the Department again in support of its challenge. Its letter expressed surprise that the Department could not supply it with a statement of work (SOW) for the requirement, and continued as follows:
" ... an SOW would be very helpful to us to make sure that we clearly understand the requirement, anticipated deliverables, milestones and related issues. Without an SOW, we must select a CV from our firm, based on less than nine lines [emphasis in the original] of text provided in your ACAN. We do not consider this fair, since you have stated that you will decide whether to open this contract to competition, based on the relevance of the CV that we send you."On 10 July, the Department wrote to the challenger that, in its view, the ACAN contained all of the necessary information and that hence a SOW was not required. It advised of the areas, detailed in the ACAN, in which the resume of the challenger was deficient. The Department concluded, "Your response did not provide sufficient evidence which demonstrates the capability of your firm fulfilling this requirement."
Based on the material submitted by the chosen supplier and provided to us by the Department, we assessed the supplier's qualifications against those in the ACAN and we were unable to determine whether the supplier fully met the requirements. In our view, it was unreasonable to require the challenger to meet a higher standard of proof than was required of the selected supplier. This raises two questions: What standard of proof must a challenger meet? and What information is a challenger entitled to have in order to prepare a challenge?
Canadian International Development AgencyCIDA did not respond appropriately to a challenge of an ACAN and awarded a sole-source contract to the supplier with whom it had originally intended to contract.
On 30 July 1998, CIDA posted an ACAN announcing its intent to contract with a selected supplier to provide monitoring and evaluation services for agri-forestry projects in Kenya and South Africa. On 9 August, the Agency received a written challenge to the ACAN from a second supplier. The person who reviewed the challenge noted that it appeared to be "a very strong one." The Agency's response was to cancel the ACAN, in a notice posted 13 August. This step was taken correctly. The next steps should have been to communicate in writing to the challenger (as CIDA committed to do in its ACAN) that it considered the challenge valid, and to open the contract to competition by calling for tenders. The Agency took neither step.
Following the cancellation of the ACAN, the Agency re-examined its requirements and concluded that the work in South Africa could be done by other contractors whom it had already engaged. However, it still required a supplier for the work in Kenya. Rather than opening that requirement to competition, on 5 September the Agency let a sole-source contract for $29,960 to the supplier it had identified in the original ACAN, in the full knowledge that there was at least one other potential supplier. No ACAN was posted for the contract. The decision to sole-source a contract for $29,960 is technically permissible because CIDA has a higher dollar exemption for sole-sourcing.* However, the decision to proceed in this way violated the spirit of the regulations and was an inappropriate response to the intent of the original ACAN and to the valid challenge CIDA had received.
* In the contracting regulations CIDA is permitted to sole-source a contract valued at up to $100,000 if it is for an international project. However, as a matter of Agency practice this exception is to be invoked only rarely, and it was not invoked in this instance. The remainder of CIDA's operations are subject to the $25,000 limit that applies to all other departments.
Cases Related to the Use of Contracting for Staffing
National DefenceThe Department used contract staff to compensate for apparent delays in the normal staffing process, at substantial additional cost to the government.
In 1998, National Defence let a sole-source contract to a firm of informatics professionals to fulfil a requirement until permanent staff could be hired. The ACAN advertised that the services would be needed for up to six months, at an estimated cost of $118,000. The contract that was signed covered the 10-month period ending 31 March 1999; it was subsequently amended to change the value to $177,000 but with no change to the end date. The contract did not specify the rate that the firm was to be paid for the services of the individuals it provided. According to the submitted invoices, the daily rates ranged from $325 to $650 - the equivalent of between $70,000 and $140,000 per annum. We note that government employees in the Computer Science category at the CS 2 and CS 3 levels are paid between $53,000 and $77,000 per annum (including benefits) for similar work.
The Treasury Board Secretariat's Contracting Policy states:
Contracting for services has traditionally been accepted as an effective way to meet unexpected fluctuations in workload, to acquire special expertise not available in the Public Service, or to fill in for public servants during temporary absences in certain circumstances. At the same time, excessive or improper contracting for services can result in circumvention of person-year controls and government legislation, regulations and policies covering such matters as the merit principle and bilingualism.According to the Department, this contract was used as an interim staffing measure to obtain expertise that, while not readily available in the public service, could have been recruited if staffing had been authorized. We were advised that additional staff had been requested at first but that, because of what management claimed were long delays in the Department's internal staffing process, it became necessary to use contract staff to meet ongoing operational requirements. We were provided with neither documentation nor adequate explanations indicating why the possibility of using full-time or term positions was not pursued during this period. Furthermore, we calculate that in this case, the use of a contractor was significantly more costly than staffing.
As with most ACANs in our sample, we found problems with the justification for sole-sourcing. While the Department stated that the firm was the only one capable of meeting the requirement, it could not provide any evidence to support that position.
Canadian International Development AgencyAn unjustified sole-source contract was let in a way that created the appearance of an employer-employee relationship. Further, the payment rate in the contract was set without due regard to economy.
In 1998, CIDA needed financial management services to assist it in an information systems project. On 14 September 1998, it posted an ACAN indicating its intent to acquire the services of the selected contractor for a period of six to eight months. The posting closed on 24 September at 2:00 p.m. and a contract for $65,000 was let for a period of one year. As the ACAN had been posted for only 10 days, the contract could not be "deemed competitive"; and because it was an internal management project, CIDA's exemption for international projects did not apply. Moreover, the contractor had begun work on 24 September, before the ACAN posting closed.
The initial value of the contract was based on the assumption that the contractor would work half time over the contract period. However, his time reports indicate that he began working full time from the beginning of the assignment, and the contract funds began to run out with half a year to go. The contract was then amended to $130,000, to cover the balance of the year. The fact that the contractor began working immediately at double the "planned" rate of effort raises the prospect that this was the equivalent of a split contract. The Agency has no documented explanation for this.
The contract exhibits the characteristics of an employer-employee relationship. The contractor worked on government premises, used government facilities and followed a work plan that was determined by the needs of the government. He worked continuously for longer than 20 weeks, contrary to Treasury Board rules on the use of temporary help.
The contract did not represent due regard to economy. Ultimately, the contractor was paid $117,500 for a year's work - equivalent to the salary of a senior executive. The specialist staff at CIDA had recommended that the contractor be paid at the rate of a senior FI-4, which at that time would have been $359 per day, or $84,365 for the 235 days of the contract. That would have been close to the cost (including all benefits and payroll taxes) of hiring a senior FI-4 on a term basis for a year. Senior management overrode the recommendation and set the rate at $500 per day. We have seen no evidence that a term appointment to meet this need was even considered. The decision to contract instead cost the Crown $33,135.
Finally, the decision to sole-source was not justified; indeed, the documentation we reviewed made no assertion that it was. It simply stated that the contractor met CIDA's requirements and was available.
We have been informed by CIDA that management has examined this case and taken steps to prevent a repetition of these practices.
Industry CanadaThe Department used contractors continuously for a number of years to carry out a specific function, creating the appearance of an employer-employee relationship.
In 1995, Industry Canada awarded a competitive contract to a company to provide three to four clerical employees on a full-time basis. This was a continuation of a practice that had been going on for a number of years. Their job was to do routine checks on the integrity of data being input to one of the Department's information systems. The 1995 contract was for one year, with options to renew for two additional one-year periods. When the contract expired in 1998, the Department decided to award a new contract to the same company, for a maximum of one year. One of the Department's justifications for sole-sourcing was that the company was "uniquely qualified" because of its past experience. Another was that the quality assurance function that the contractor's staff had been working on was to be phased out, probably in less than a year. The Department said it would not be cost-effective to change contractors and train new people for such a short time.
We have two concerns. First, although a new contractor might have had to absorb some training costs in order to be competitive, this is a matter for the market to decide. It is not a sufficient justification under the Government Contracts Regulations for awarding a sole-source contract. Second, the Department hired full-time contract staff for four years - well over the 20 weeks allowed for temporary help - to do work on government premises, using government equipment, and in accordance with government-established procedures, creating the appearance of an employer-employee relationship. The Department has informed us that the contract ended on 30 September 1999.
Cases Related to the Quality of the ACAN
Human Resources Development CanadaTwo sole-source contracts, one retroactive and the other using an ACAN that did not accurately describe the nature of the work, should have been opened to competition.
In October 1998, Human Resources Development Canada (HRDC) awarded a contract to a communications company, retroactive to 1 April 1998. The company had carried out a pilot project to test a system that enabled clients to register electronically for Social Insurance Numbers. On the basis of the pilot, the Department later decided to contract with the company on a sole-source basis to operate the system in one province for 24 months.
The decision to sole-source this second contract was not justified under the contracting rules. Although HRDC has since told us that other communications companies would be capable of operating the system from virtually any call centre, at the time it justified sole-sourcing on the grounds that the company was "uniquely positioned". Clearly, the contractor was not unique, and the contract did not meet the Government Contracts Regulations conditions for sole-sourcing.
We also found that the ACAN posted for this contract did not accurately describe the nature and scope of the work. In effect, it restricted competition by discouraging other capable suppliers from mounting a challenge. HRDC acknowledges that the statement of work in the ACAN implied that the contract largely involved doing further work on the pilot project as well as related evaluation activities rather than the ongoing operation of the system - which it acknowledges could have been done by other companies. Accordingly, the ACAN did little to further the government's objective of achieving transparent, open and fair contracting.
The Department does not know whether it might have been possible to negotiate more favourable terms through competition.
National Defence and Public Works and Government Services CanadaA sole-source contract was issued that should have been opened to competition, and an ACAN was posted that did not meet requirements.
On 13 August 1998, National Defence sent a requisition to PWGSC to begin the process of setting up a sole-source contract of $141,220 for a consultant to provide a baseline review of support services at one of its bases. This was to be part of a review of alternative services delivery. The justification for sole-sourcing that was supplied to PWGSC (and subsequently posted in the ACAN) was twofold: the requirement was urgent, as the work had to be completed by mid-December 1998; and the chosen supplier was very knowledgeable and would do a good job. Neither of these reasons is recognized in the regulations as a justification for not opening such a contract to competition. While the deadlines appeared tight when the contracting process began, the selected supplier's initial proposal is dated 16 June 1998 - some two months earlier. These circumstances fall well short of those that warrant invoking the "pressing emergency" exception to the regulations. Moreover, although the Department states that the chosen supplier was well qualified, it did not claim that the supplier was unique.
Notwithstanding the absence of a sole-sourcing justification, the Department and PWGSC posted an ACAN on 8 September 1998 with a closing date of 17 September 1998.
On 17 September, a written challenge was received from a major firm, asking that the requirement be opened to competition:
We feel that based on the criteria used to determine this opportunity as an ACAN, we fully qualify to provide these services ... . We also believe that other firms possess the qualifications required to provide the services for this ACAN and, based upon the dollar value of the assignment, this should have followed a competitive procurement process.However, on 18 September, after receiving assurances that this contract represented only the initial part of a larger procurement and that the second part would be competitively tendered, the firm withdrew its challenge.
On 23 September 1998 the contract was awarded to the chosen supplier. National Defence has argued that the withdrawal of the challenge meant there was no "valid" challenge and that it was thus free to proceed. However, the withdrawal of the challenge did not alter the facts that there were other firms qualified to supply the services and that the justifications given for sole-sourcing did not support the posting of an ACAN in the first place.
Cases Related to Sole-Sourcing on the Basis of Prior Experience
Industry CanadaThe Department entered into a sole-source contract that created the appearance of contract splitting and other breaches of the contracting rules and that should have been opened to competition.
This contract is one in a series awarded to a company to provide computer-related support to Industry Canada. It was sole-sourced after an ACAN was posted indicating that the contractors had extensive experience and knowledge of the requisite business software, which enabled it to bridge two production environments. As well, it had expertise in planning and co-ordinating system migration projects for other departments. (We note that other firms had provided the same types of services.)
The evidence appears to indicate that the Department split the contract to avoid NAFTA-related rules. These rules require justification for sole-sourcing contracts of this nature if their value (including GST) is more than $72,600. We found that the requirement had initially been estimated at $110,000. When it was brought to the attention of the responsible manager that the value of the contract would make it subject to NAFTA and the Agreement on Internal Trade (AIT), the requirement was reduced to $65,000, plus GST - the value stated in the ACAN. This creates the appearance that the reduction was made to avoid the rules under NAFTA and AIT and not because the scope of the required work had changed. During 1999, the Department amended the contract by increasing the scope and duration of the work. At the time of our audit, the value of the contract had been increased to approximately $177,000 including GST. The contract ended in September 1999.
National Defence and Public Works and Government Services CanadaPWGSC acting on behalf of National Defence issued a sole-source contract that should have been tendered because the uniqueness of the selected supplier had not been established. The case shows the difficulties of negotiating a rate with a supplier once the ACAN has been posted.
In May 1998, PWGSC on behalf of and based on information supplied by National Defence let a sole-source contract of $128,400 for assistance in restructuring the corporate services function in a headquarters branch. An ACAN was posted for 13 days. The contract required the selected firm to supply the services of a specified individual for a period of six months. Through amendments, the contract was extended to cover an 11-month period; its value was increased to $176,550.
We found compliance problems with the contract. The Department used the uniqueness exception to justify sole-sourcing. It stated that there was no other firm with the same current, specialized, comprehensive base of knowledge and experience, but it was unable to provide us with any evidence to support that statement. While the Department's stated justification for sole-sourcing made a strong case for the selected supplier's qualifications, it failed to provide any evidence that there were no other suppliers equally capable. The statement of justification thus falls short of what is needed to demonstrate that the selected supplier is unique. Accordingly, sole-sourcing this contract was not in compliance with the regulations.
PWGSC, the contracting authority, had difficulty establishing a rate for the contractor. It noted that the firm was refusing to negotiate the rate, although under previous contracts with the Department it had been paid a much lower rate than it was asking for in this contract. Ultimately, National Defence as the technical authority took responsibility for the demanded rate and approved it. This illustrates the potential difficulty of establishing a contract's value without the market test that competition provides, particularly when the selected supplier is aware that management is on the record in the ACAN as considering it the only one capable of meeting the requirement.
In the course of our inquiries we became aware that, to assist management in business transformation work, the Department had established a competitive standing offer with a number of firms, including the selected supplier, all of whom the Department considered capable of performing the general type of work contracted for in this instance. In the standing offer, the rate quoted for a person at the level of the selected individual is approximately $100 per day lower than the rate ultimately agreed to by the Department.