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The Ups and Downs of the Vendor Selection Process

Property owners, operators, and developers who invest millions of dollars in constructing, upgrading, refurbishing, and repurposing properties may not be attentive to one of their industry’s widespread key risks: fraud, which can lead to excessive project costs.

This article is concerned with the challenges faced by property owners, operators, and developers, and the recommended improvements to the vendor selection process in order to address these challenges.

Bid Rigging

A particular concern in selecting a contractor/vendor is the potential for bid rigging, which can take many forms. In bid rigging schemes, bidders and/or employees may have a beneficial agreement that increases prices paid to contractors/vendors and reduces or eliminates competition among those involved—often with a pre-determined winning bidder.

Internal involvement occurs when an employee receives a bribe or kickback to influence the selected bidder. The employee may only request bids from specific vendors, ignoring bids from vendors who did not participate in the bribe/kickback, and/or give inside information (advance notice, more specific information, or the ability to amend a bid) to the vendor who provided the bribe/kickback.

Vendors may also work together to rig a bid. They may agree not to bid, withdraw a bid at a later date, submit false bids, or take turns as the lowest bidder. They can also conspire to divide up contracts so each vendor is assured a certain amount of work.

Controlled Competitive Bidding Process

Through a controlled competitive bidding process the property owner/operator/developer works to procure contracts from potential vendors that satisfy suitable project criteria at the best value, through a sealed bid process, promoting competition. Through this process, the property owner/operator/developer hopes to minimize collusion and any unfair advantages a contractor and/or vendor may engage in.

Delivery of bid requests to as many potential bidders as possible should also be considered, to increase competition among prospective suitors.

Screening

The screening of potential contractors or vendors is key for the property owner/operator/developer’s consideration. This information can include each contractor/vendor’s experience, integrity, financial and managerial abilities, reputation, work history, and more to develop a list of qualified bidders receiving invitations-to-bid. The property owner/operator/developer should also be alert to relationships between contractors/vendors and employees. A background check on the contractor or vendor is recommended. The idea is to reduce the risk of receiving bids from colluding and underqualified responders.

Bid Specifications

 Invitation-to-bid requests should clearly and accurately describe project requirements, including supporting documents and exhibits detailing specifications that assist in obtaining the best possible responses for the evaluation team handling the comparative analysis for the assessment of the bidders and their proposals. They should also be identical and be simultaneously sent to multiple vendors from the bidding company’s purchasing department. They are required to provide sufficient time for a response to facilitate minimization of any unfair advantages and to increase the quality and number of responses.

Disclosure

Minimizing disclosure or sharing of any information pertaining to pricing, contents, or any other information collected during the bidding process with those not involved in the process is necessary to achieve essential confidentiality. Employees should be monitored for signs of bribery and influence, such as the receiving of gifts and over-friendly behavior by contractors/vendors with employees. Employee behavior indicators to monitor include living beyond one’s means, having financial difficulties, and exhibiting an unwillingness to share duties.

Prohibiting one-on-one vendor meetings can also minimize the opportunity for contractor/vendor-employee collusion or unfair advantages. In cases where a pre-bid conference is necessary for communication of requirements and specifications to enhance overall project success, all vendors/contractors should be encouraged to attend along with key members of the bidding company’s bid originating and evaluating teams. Also, a whistle-blowing system and a hotline may be used to encourage the reporting of any witnessing of improprieties.

Sealed Bid Responses

Sealed bid responses should only be opened by a designated person on the bid request date specified and be witnessed and recorded by at least one or two others. The bid response and proposal should be inspected for the presence of any irregularities or missing required items. There should be a tabulation of the bid information for comparison and review, noting any bid quotes that appear out of line with similar past and relative industry standard projects.

Overall, property owners, operators, and developers need to consider the risks of fraud in the vendor selection process and to establish and implement an effective controlled bidding process to mitigate the risks.

 

Ronald Badke, CPA, Director
Citrin Cooperman
rbadke@citrincooperman.com
212-697-1000
citrincooperman.com

 

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