What is a No Bid Contract?
The most common procurement method in the public sector is competitive sealed bidding. Under this method, state and local governments accept competitive bids from contractors, and then award the contract to the lowest responsible bidder. But there are instances in which the authority granted under Turnkey contract legislation allows a governmental entity to forego this method of awarding contracts in favor of a negotiating and awarding contract without soliciting competitive bids.
Bid law authorizes procurement methods that deviate from the open and free competition that is the cornerstone of our procurement laws. Just as there are instances in which it is appropriate for a governmental entity to use a procurement method that deviates from competitive bidding, there are also situations in which such entity would be justified in awarding a contract without using the competitive process.
The Turnkey concept has been used for a wide variety of projects. A few examples include:
Depending on the circumstances, a no bid contract may be appropriate for:
The decision to use a no bid contract is most often difficult. A governmental entity must weigh the efficiency and economical benefit of foregoing a competitive procurement process in light of the strong policy in favor of open and free competition. The general rule is that a government must advertise its need for products or services and award that contract to the lowest responsible bidder. But the following situations may justify setting aside the normal competitive process:
Closed contracting is therefore a technique designed to grant exceptions to the normal competitive process. Close contracting is the procurement method that allows a governmental entity to award a no bid contract to a contractor without a competitive procurement process. The authority under closed contracting is sometimes explicitly granted by statute or implemented through an executive order. A governmental entity may also issue a no bid contract as a part of a program that grants extraordinary authority. Most commonly , this type of authority is found in the procurement and construction of capital improvement projects but may also be applied to the procurement of information technology.
A no bid contract is one that is awarded without a competitive procurement process. This means that a governmental entity and contractor arrive at an agreement without advertising or soliciting bids from other contractors. A governmental entity may set aside a competitive procurement process and reach a no bid contract with a contractor under two potential scenarios. Both require that the governmental entity have preexisting authority under law to enter into the no bid contract. In the first scenario, the noncompetitive contract is a result of a statute that requires that the contract be awarded in a manner other than by competitive bidding. In the second scenario, the governmental entity that enters into a no bid contract must have pre-existing power that grants the governmental entity the extraordinary authority to negotiate a contract without soliciting competitive bids.
There are also a few types of no bid contracts. Some no bid contracts are the result of statutes that explicitly authorize a governmental entity to enter into a contract without a competitive procurement process. When warranted, a no bid contract may also be the result of a statute granting extraordinary authority to a governmental entity to enter into a no bid contract. In either scenario, a governmental entity must still comply with the law applicable to closed contracting, including obtaining the necessary approval for proceeding with a no bid contract. Finally, in some instances, specifically under Turnkey contract statutes, there may be a different process for entering into a no bid contract, such as through negotiation.
Legal Foundations and Governing Laws
The legal framework surrounding no bid contracts is often decided on a case-by-case basis, but a number of broad-ranging rules and regulations do govern how and when no bids should be used. The Federal Acquisition Regulation (FAR) is the central rulebook that all federal government agencies must follow when issuing acquisitions. FAR includes numerous references to no bid contracts, most notably in Part 16.1 "Selecting Contract Types," and in Subpart 42.15 "Contract Clauses." Several states have their own procurement regulations, which involve additional rules and regulations for determining when no bid contracts can be issued.
An often-overlooked regulation related to no bid contracts deals with the timely issuance of the contract. FAR Clause 52.245-2 "Government Property" states that the contracting officer must issue a written final determination for any no bid contracts within six months after the contract termination date. The ability for the contracting officer to issue a "termination for convenience of the government" clause is governed by FAR 49.01, which gives federal agencies the ability to terminate a contract for any reason. Subpart 47.1, titled "Transportation," deals with the regulation of federal government transportation, and governs scenarios where the government cannot or does not wish to continue using the supplier’s services.
More recently, as part of the Trump Administration’s ambitious infrastructure proposals, the use of no bid contracts has been expanding. Specifically, the new proposed rules, which are undergoing federal comment review and debate, involve strict criteria that public works projects must meet in order to qualify for design and build contracts. In short, these proposed changes require that simpler and less routine infrastructure projects must be solicited through the use of no bid contracts. While this is a somewhat minor proposal, it will almost certainly have a significant impact on how federal infrastructure funds are distributed.
No bid contracts are a common feature of virtually all procurement systems, both public and private. What is perhaps most interesting about these "no bid" contracts is how they are routinely misconstrued. A common misperception is that if the bidding process results in a price that is extremely high, then the public sector can simply employ the Exhibit 1 method of discounting. In other words, with these contracts, an individual officer or director listed in the statute may issue a termination notice without prior approval from a superior. This, however, is not how the no bid process is supposed to work. The set of rules required to issue a simple termination should never be more stringent than what is required for a bid that has undergone extensive review and evaluation. No bid contracting builds upon the procurement contracting rules rather than modifying or changing them.
Benefits of No Bid Contracts
No bid contracts are very efficient and those efficiencies benefit everyone involved. As stated above, the ability to avoid the formal bidding process paired with the ability to contract for a longer grant of time make no bid contracts a go-to in municipal procurement. In situations where speed is important, no bid contracts shine. By their nature, these types of agreements allow for a quicker turnaround time between the award as well as the execution. In that instance, the municipality is freed from protracted bidding process and burdensome appeals. That breath of fresh air is even better when awarded on a tight timeline. Not only does a no-bid solicitations speed up the process but it also lightens the load of administratively responding to proposals. Because competition is slim with these types of contracts, the number of responses to proposals decrease. Lesser responses save the municipality time and money that would be spent reviewing proposals, especially when those proposals are overly elaborate and thus costly for the bidders.
Criticisms and Controversies
The use of no bid contracts has been a source of controversy and criticism since their inception. Opponents argue that these arrangements limit transparency, and can lead to favoritism while excluding low-cost bidders from competition. For instance, in the 2000 litigation between BellSouth Cellular Corp. and Pine Belt Cellular on an amendment to the Mississippi Code allowing two "technically sound" bidders to be declared the winners of all licenses, the argument was that there could be no true competition between the two. Similarly, one of the cases out of the D.C. Circuit involved the FBI’s request for proposals in 1995 for an information systems infrastructure totaling more than $1 billion. The FBI awarded the project to lockheed Martin under a no-bid contract, citing national security concerns. However, the Court ruled that the FBI had not provided factual support for its decision, stating that "[i]n the absence of any clearly enunciated reasons by the agency, this court will not guess at what the agency feels constitutes national security." (Civil Action No. 95-0274).
Aside from L3 technologies, the other main company that has received recent no bid contracts are Lockheed Martin and BAE systems. In May 2011, the U.S. Army awarded Lockheed Martin a contract worth at least $1 billion. However, the same week as the award, the Government Accountability Office issued a report saying that the Army had provided the company with too much flexibility in the performance requirements. This led some members of Congress to ask the Army to cancel the contract and open it to outside competition. A month later, a vote against terminating the contract failed.
Based on the current contract and amendment expiration dates, under the Open World contract and amendment extension, the no bid contracts to L3 communications and BAE Systems are set to expire in April 2013. However, the services that these companies provide are so necessary that Congress may very well consider renewing these contract extensions for an extended period of time.
Sectors and Illustrations
No bid contracts are commonly used in the following industries: For example, the City of Richmond, Virginia received significant public backlash when it awarded a six-year no bid contract to Ernst & Young in 2015 to develop and enforce the city’s new taxi laws, as the deal was provided without any other competitive offers. In the 2014 Request for Proposals ("RFP"), Ernst & Young emerged as the sole bidder, after convincing the city that it was the best option to provide consulting, complaint tracking, and enforcement services for the new taxi laws. No bid contracts are also employed by the Department of Homeland Security (DHS) when providing translation services . The DHS enters into omnichannel agreements with two separate companies that decide on the allocation of translation requests, which have been overbilled and lead to various complaints. In 2001, the Department of Health and Human Services (HHS) awarded a no bid contract to Accenture to modernize the Federal Information System for the Health Insurance Portability and Accountability Act. However, consultant allegations and cost overruns led to its demise and the contract was re-bid. GovExec reported in 2010 that the Department of Defense (DoD) awarded contracts worth $660 billion without competition from 1992-2008. The largest was the award of the Joint Strike Fighter program to Northrup Grumman in 2002, worth $5 billion.
Best Practices for Implementing No Bid Contracts
Once you are clear on the reasons for engaging in a no bid contract, it is important to set the parameters to ensure that the objective is met, without leading to inappropriate behavior.
- Follow Procurement Policies. For public entity contracts in California, it is important to comply with local bidding policies. For example, some jurisdictions mandate that no bid contracts be ratified by the governing body. Also, public entities are required to make findings that compliance with the regular competitive bidding process would be undesirable under circumstances specified in statute. Public entities should not solely rely on these codified findings but rather should focus on compliance with the policy goals of the local agency.
- Prepare a Summary. A written summary should be prepared in advance of entering a no bid contract, or soon after if the decision to enter the contract is made quickly. The summary should explain the reasons for and benefits of the no bid contract. This summary should be appropriately tailored to the type of contract, e.g. whether a procurement, professional services, sole source contract, public works contract, etc.
- Compliance. The requirements of the contract should be followed. For example, if a public agency contract, the policy regarding obtaining ratification from the governing body should be followed.
- Centralize Administration. If possible, a central repository for all no bid contracts, not only those related to goods and services, can be very useful for program administrators. It can also assist outside stakeholders when looking for information about no bid contracts that may be of interest.
The Future of No Bid Contracts
As businesses continue to seek ways to maintain compliance while also improving their bottom line, it is likely that the trend toward no bid contracting will become more prevalent in the future. However, this future landscape will be vastly different from the current environment.
From a regulatory perspective, the impact of the Federal Acquisition Streamlining Act of 1996 (FASA) remains an open question, as it has impeded needed regulatory changes since its passage. The U.S. Department of Defense (DoD), several states and even foreign governments have adopted guidance authorizing no bid contracting, and much of this guidance has been in effect over multiple years. In particular, DoD has incorporated no bid contracting procedures for small business enterprises into the Defense Federal Acquisition Regulations Supplement (DFARS), and such procedures appear positioned for continued expansion. Additionally, unlike the Department of Homeland Security Small Business Program Office, other federal agencies have yet to demonstrate opposition to the practice, and some have begun incorporating expanded procedures into their small business programs.
From an industry perspective, there will be a shift toward greater acceptance and use of no bid contracting. As public entities increasingly outsource mandate compliance, a majority of the personnel involved will be from the private sector. With the right incentives, these individuals may determine that no bid contracting is the most efficient way to meet compliance demands. Further, as more private sector compliance professionals become accustomed to no bid contracting, public entities will be unable to rely on the lack of private sector awareness of no bid contracting to impede its proliferation.
Finally , increasing privatization of industrial compliance requirements through internationally recognized standards will create greater acceptance for no bid contracting. The International Organization for Standardization (ISO) is the largest producer of ISO compliance standards in the world. A growing number of nations are utilizing ISO standards as national standards, and international ISO conformity assessment practices are universally recognized. There are also a number of privately published ISO and industry standards (e.g., ASTM, ISO 14971, IEC 60601, ISO 13485) that are being utilized by national agencies as part of their national regulatory system. The ISO standards are representative of the general trend of organizations to establish codes and standards as a means to ensure uniformity in goods and services. Industry is also increasingly establishing code and standard compliance requirements as a means to streamline efficiencies and reduce costs. In the absence of actual law, few regulatory agencies have the personnel or budgetary resources to avoid maintaining outdated laws that still appear sanctioned by the private sector. Therefore, codifying this privatization effort through law will continue to be a major challenge to curtailing the use of no bid contracting.
These factors suggest that for the foreseeable future, no bid contracting will be available to support all types of compliance. While legislative efforts seem at odds with recent regulatory approaches, private sector adoption of compliance-related no bid contracting will minimize political pressure on Congress to rescind or alter FASA. The only major challenge will be ensuring that regulatory agencies are equipped with sufficient resources to enforce ISO, higher industry standards and statutory regulatory requirements.
As a result, it will be incumbent upon auditors, regulators and industry specialists to ensure that no bid contracting is used in a manner consistent with the original intent of 40 U.S.C. ยง 549.
