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Competitive bidding aims to put competitors on equal footing. The idea is to get people to provide the highest quality service often at the lowest possible price. The most efficient competitor wins the bid - and profits - if it has analyzed everything correctly.
For example, a government-contracting authority wants to screen workers for a pulmonary disorder, and it issues a request for proposal (RFP) asking for bids for pulmonary function tests. The RFP includes all the services that must be provided (spirometry, DLCO), specifies how the services are to be provided (at the job site), and generally offers some performance standards (results must be provided within 48 hours). The RFP asks a health care provider to "make an offer"; it is not an offer itself.
Every contracting agency uses different methods to evaluate a bid. In some instances, the lowest bid determines who earns the contract. However, sometimes the proposed bidders' ability to perform and other factors like the firm's stability and performance record are weighed in a matrix to determine who should get the bid.
A 50-bed hospital has the tools to deliver on a pulmonary function RFP, but a 500-bed facility might receive preference because an agency feels it had a better ability to perform. In this case, the lowest bidder is not the successful bidder because the agency considered factors other than price.
The federal government has massive procurement regulations. These establish what kinds of entities can bid on contracts. A company must demonstrate financial solvency, and in some instances, it may be required to post bond. State and local governments often have similar requirements, which may preclude individuals who want to provide services on their own.
Once a bid or offer is accepted, the contract becomes binding. Failure to perform can result in a breach of contract lawsuit as well as other penalties.
In years past, the government paid premium prices for hammers and toilet seats, among other things. This caused the government in 1986 to beef up the False Claims Act. In large government defense contracts, a contractor could pass along price increases in goods and services. These overruns often inflated the cost of projects significantly.
The False Claims Act took aim at these cost overruns and is one of the chief ways bidders stay honest. When contractors seek payment on a claim without having fulfilled the contract's terms (for example, by performing spirometry without calibration or issuing computer-generated reports instead of physician-generated reports), they become liable under the False Claims Act to repay the government three times what it paid, plus a civil penalty of between $5,500 and $11,000 per false invoice.
Sometimes competitors get together and agree to split the spoils of a lucrative contract. They might agree to subcontract with one another as a way to keep the bidded price high. Thus, if one gets the contract, it simply farms out half the work under a subcontract to the other bidder and both companies make money.
This is criminal conspiracy and bid rigging. It can result in federal and state prison time. It is far better to compete honestly and lose the contract than cooperate illegally and win an all expense paid trip to Leavenworth.
When deciding whether to generate a bid, the facility should be absolutely sure that it can deliver the services requested as contemplated by the agreement, and within the price bid. The bid must be based on hard data - not on a best guess. Once the contract is issued, it is binding.
If instead of making $100 on every test, the facility loses $100, it will be difficult, if not impossible, to break the contract. Any bid issued to a government agency should be reviewed for fiscal and legal impact by the facility's financial officers and general counsel.
A.L. DeWitt is a partner in the law firm of Bartimus, Frickleton, Robertson, and Gorny, Jefferson City, Mo. This column is not a substitute for the advice of legal counsel.
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