Take a Look at These Risk Management Tips and PROTECT YOURSELF from Trouble Down the Road

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1 IS YOUR PURCHASING PROCESS AIRTIGHT? Take a Look at These Risk Management Tips and PROTECT YOURSELF from Trouble Down the Road When your township goes out to bid for a new piece of equipment, document management software, or a paving project, does it have all its ducks in a row? Have you reviewed your procurement process to make sure it is not susceptible to corruption of any kind? Does it meet the smell test? If not, perhaps it s time to sit down, take a good hard look at closing up any holes, and institute a proper risk management strategy to maintain your township s integrity in the purchasing process. BY THE PENNBID TEAM 50 PA TownshipNews DECEMBER 2018

2 Risk has been defined as the possibility that something unpleasant or unwelcome will happen and also as a situation involving exposure to danger. Often, when townships think of the risk associated with their purchasing process, they have the impression that simply complying with the legal requirements will keep them safe. While that may be true from a purely legal compliance standpoint, this belief only represents the beginning of implementing a strategy that truly minimizes your municipality s exposure. Whether you re using electronic bidding tools or paper-based methods, your township can implement additional risk management strategies and policies that go beyond basic compliance and can help safeguard your procurement process. Under the microscope Risk management in the public sector differs considerably from that in the private sector. In private business, it s generally true that the bigger the risk, the bigger the reward, especially when financial gains are a driving force behind decisions. In the public sector, on the other hand, township officials are required to provide certain basic services while ensuring the health, safety, and welfare of constituents, a responsibility that makes the risk management balancing act a bit more complex. Add the fact that the entire decision-making process is done in public with public engagement and scrutiny and the need for a robust risk management program becomes quite clear. In addition, procurement in the public sector demands the highest integrity. The slightest error or inconsistency while going through the process may lead to accusations that can cause Township officials are always under the microscope of public scrutiny, especially when spending taxpayer dollars. This puts an added burden on them to have a robust risk management plan for procurement activities. significant and lasting damage to the township, its officials, and staff. Therefore, despite your township s best efforts, it could face questions about the transparency or integrity of its process. The best defense is a proactive approach that allows the board of supervisors to identify potentially high-risk elements, such as corrupt behavior, and quickly implement corrective measures. Analyze, assess, and mitigate Several obstacles affect risk management. One of the most prominent is failing to have a systemic approach or integrating it with other management processes. Some municipal officials incorrectly believe that risk management is automatically embedded in day-to-day decisions. Many times, this belief is accompanied by an absence of clear reporting to senior management and/or an audit committee. Additionally, when township officials have a general misunderstanding of the purpose and relevance of risk management, employees may view it simply as a compliance exercise. A weak or absent risk management process often spawns a lack of interest in or an awareness of risk. A sound approach to developing a risk management plan is to use the following three-step methodology: 1) Analyze Begin by identifying all the potential things that can go wrong and then estimate the probability of each happening. This can be a simple or formal process, but the key is to identify all the risks associated with any purchase or procurement contract. Developing and using a checklist to measure whether your procurement process complies with legal and ethical standards can be a great way to start. 2) Assess Next, evaluate the likely impact of each risk to the township and identify those that require actions. Keep in mind that highly predictable risks may have low impact and may not be worth taking action to control or avoid. On the other hand, some lowprobability risks can have a significant Procurement in the public sector demands the highest integrity. The slightest error or inconsistency while going through the process can lead to accusations that can cause significant and lasting damage to the township. DECEMBER 2018 PA TownshipNews 51

3 PROCUREMENT PROCESS impact, and preventive actions may be appropriate. 3) Mitigate Finally, once all the risks and required actions have been identified, develop plans and assign responsibilities to control and mitigate these risks. Remember that risks and consequences change over time, so assessments need to be done periodically. Whether issuing a request for proposal, invitation to bid, or request for qualifications/quote, townships must make sure to follow the correct procedures to mitigate their risk. Key procurement phases Now that you understand why risk management is important and how to go about identifying risks, consequences, and probabilities, let s break down the major phases of the procurement process, along with some points to consider: Internal processes Evaluate your purchasing process and the employees who oversee it. These operations should be well-organized with clearly established protocols that follow applicable laws and regulations. Monitoring, reporting, and having internal controls are important tools to promote adherence to requirements. Because public inquiries and Rightto-Know Law requests are common, transparency and clear documentation of all procurement steps are essential to dispel the perception of impropriety. Preparing procurements Preparing bidding and contract documents is often the most critical phase because these delineate the township s procurement needs for potential vendors. These documents should be comprehensive, transparent, and free from restrictions or conditions that would unduly discriminate against certain bidders or groups. The description of the goods or services being purchased, as well as the quality of performance (contractual needs and legal requirements), needs to be clearly stated so that vendors understand the deliverables and the evaluation process that will be used to select a successful bidder. Instead of just focusing on cost, townships should identify the requisite qualifications, experience, and performance standards they desire. Failing to include prerequisites can increase risks when a township attempts to disqualify a bidder based on unclear criteria. This can result in either added legal costs or substandard deliverables. Documents should also consider any unique requirements triggered by funding sources or other agencies involved in the project and supported with the correct procurement type, such as a request for proposal (RFP), invitation to bid (ITB), and request for qualifications and/or quotes (RFQ), among others. Advertising Making sure that potential bidders have timely and equal 52 PA TownshipNews DECEMBER 2018

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5 PROCUREMENT PROCESS Public agencies that score high marks... share three common attributes: fairness, transparency, and availability of a recourse mechanism. access to bidding documents should not be just a matter of meeting the minimal requirements prescribed by law. The manner and timing of advertising should take into account the nature of the goods or service being procured and the need to give the target audience adequate time to respond. A large, complex project, for example, may take more time for vendors to develop a bid. Therefore, the township should consider using the maximum advertisement period (typically 45 days under normal conditions per the Township Code). Likewise, failing to give reasonable notice for pre-bid meetings and other scheduling requirements could be viewed as exclusionary or favoring specific bidders and result in a challenge. Selection and award By determining in advance who will review the bids and proposals and the factors for making the award (i.e., scoring criteria, suitability of selected vendor, satisfaction of complete bid or proposal, timing of selection process, etc.), your township will greatly promote transparency and integrity of the process. If any bids or proposals are excluded or disqualified, having clear documentation up front that outlines the deficiencies that led to this decision is imperative to defending against a potential challenge. Public agencies that score high marks in the realm of procurement risk management share three common attributes: fairness, transparency, and availability of a recourse mechanism. When potential bidders know what is expected, how their proposal will be evaluated, and what they should expect from you, it s easier for them to accept and understand the outcome of your decision, whether it favors them or not. Post-award A township s procurement process should not end with the award of the contract. All procurements should be reviewed shortly after conclusion to determine if there were any issues or if improvements are needed. When your township follows up on the procurement during and after the delivery of the goods and services, it s not only ensuring that the vendor is complying with the requirements and expectations but also validating the risk management process. Heading off corruption We ve all heard stories of public officials from practically every type of agency who are caught stealing, cheating, or otherwise abusing the responsibilities entrusted to them by the public. The sad consequences of these events are that the agencies themselves pay the long-term price. Lost funds are rarely recovered, which results in incomplete or stalled projects, fewer public services, and increased legal expenses. The biggest impact of all, however, is the loss of constituent confidence and trust. When corruption happens in the public sector, it makes headlines and adds to the perception that local government officials are less than honest. Several studies, for example, have shown that the government procurement process is highly vulnerable to corruption. Risk management offers protection. According to studies, corruption in the procurement process generally occurs in one of three ways: Demand for payment This is when a government official demands a bribe or kickback from a potential bidder or a potential bidder offers a bribe in exchange for a contract or other privileges. Bid rigging This is when a government official manipulates the 54 PA TownshipNews DECEMBER 2018

6 even non-delivery of goods or services, which can indicate fraud and corruption. procurement process so that a specific bidder is awarded a contract, usually in return for a bribe. Fraud This is when a vendor or contractor exploits a corrupt relationship by inflating prices, billing for work not performed, failing to meet specifications, or delivering substandard products, usually to recuperate the costs of a bribe. At times, this involves the cooperation of officials, who knowingly or indifferently allow the fraudulent activities to occur. Recognizing red flags Corruption can happen at practically any stage of the procurement process. The World Bank has identified the following 10 common indicators, or red flags, of suspicious activities: Complaints from bidders and other parties, which may signal that additional due diligence and investigation are warranted. Multiple contracts below procurement thresholds, which may indicate that corrupt officials are using contractsplitting schemes to avoid higher-level reviews or competitive bidding. Unusual bid patterns, such as unexplained inflated bid prices, round or unnatural numbers, apparent rotation of winning bidders, and other irregular Township officials should learn to recognize signs that may indicate something is not right in the bid process. These red flags can help the township avoid stormy days ahead. activities, which could be a sign of collusive bidding by at least some of the vendors. Inflated agent fees or the unnecessary involvement of middlemen or third parties, which may be used to disguise corrupt payments. Dubious bidders who hide behind fictitious companies or consulting firms that submit unreasonably high bids, a practice that allows a real bidder to submit a higher-than-normal bid while giving the appearance of competitiveness. Rejection of the lowest bidder on unjustifiable grounds, which may indicate bid rigging. Sole-source awards given over and over to the same bidder, which should be scrutinized, especially if the requests are urgent and have no other legitimate purpose. Changes in contract terms and value between the selection and the signing, which, while sometimes unavoidable, may nevertheless indicate the need for more review. Multiple change orders after the contract has been signed, which can indicate collusion between the township and a vendor to increase the contract s value without delivery of additional products or services. Poor performance, deficiencies, or Putting it all together Establishing a risk management expectation for your township s procurement needs can yield meaningful results and possibly prevent the aggravation and costs of a worst-case scenario unfolding before your eyes. Taking the first step requires townships to be openminded to examining and improving their procurement process or at least testing it to see how bullet-proof the process is. To summarize the key points: Proactively seek out, identify, and manage potential risks. Understand and document your entire procurement process. Ensure that procurement documents clearly define performance expectations and evaluation criteria. Communicate, communicate, communicate. Remember that this is just a starting point and does not represent every issue or scenario you should be looking for in your procurement process. As a township official, you have places to turn to for help. Most solicitors are well-versed in this topic and should be able to provide guidance. Additionally, PSATS can help answer questions and connect you with the appropriate resources based on your individual needs. F * * * About PennBid: A PSATS-endorsed program, PennBid is the pinnacle benchmark e-procurement and electronic bid management program in Pennsylvania. Provided at no cost to public agencies or design/consulting firms, PennBid has opened doors for many to take advantage of electronic procurement tools generally not available due to high cost and system complexity. For more information about PennBid or to arrange a demo of the program, please call (610) or visit Several studies... have shown that the government procurement process is highly vulnerable to corruption. Risk management offers protection. DECEMBER 2018 PA TownshipNews 55