Designing an Effective Bidding and Monitoring System to Minimize Problems in Competitive Contracting

Executive Summary

Contracting out services to the private sector, a popular form of privatization, has emerged as a standard management technique for state and local governments in the United States and throughout much of Europe. Fully 99 percent of respondents to a 1987 state and local government survey by Touche Ross reported that they contracted out at least one service to a private firm.i Experience has demonstrated that contracting out can result in significant cost savings, efficiency improvements, higher quality services, and leaner, more manageable government.

Crucial to realizing these substantial advantages, however, is a well-designed contract bidding and monitoring system. Most of the problems that have arisen with regard to contracting out have been the direct result of poor bidding and monitoring systems. These problems?which include inadequate or low-quality service, waste of taxpayer money, kickbacks, corruption, and collusion?are rare. Over $100 billion a year of services are contracted out by state and local governments, yet in only a small percentage of cases do officials encounter major problems in contracting. Nevertheless, even the relatively few instances of inferior service quality, waste, or criminal and unethical behavior in contracting are sometimes enough to taint all contracting efforts.

Fortunately, none of these problems are inherent to the contracting process. By employing effective safeguards in the contracting program, contracting problems can be largely eliminated. The key to minimizing contracting difficulties is a strong, transparent bidding and monitoring system.

The bidding system should be designed to encourage competition, protect the agency, and clarify expectations for the winning contractor by explicitly spelling out the service specifications desired. As a rule, the bidding system should be open and competitive. Employees should be prohibited from having any financial interest in the contract and ex-public employees should be prevented from representing contractors before the public agency for a certain period of time. Furthermore, all bid awards should be widely publicized and a record should be kept of the search for contractors.

Also crucial is the design of the monitoring system. Monitoring is the chief means of safeguarding against contracting problems once the contract is signed and of ensuring that citizens are obtaining high quality services at competitive prices. Comprehensive monitoring systems include contractor reports, inspections, and citizen complaints and surveys.