by Bob Bland

As long as government has existed, third-party agreements have been used to achieve results beneficial to both or all parties to the agreement. International treaties represent a special case of intergovernmental agreements where the parties agree to actions that are seen as mutually beneficial. Governments use a variety of methods to select third-party providers, but all of these methods represent variations on two basic approaches: competitive bidding versus negotiation.

In competitive bidding, the local government may issue a request for proposals (RFP) or other type of announcement in which it invites third-party providers to submit bids. This method works best where the service or product is provided by multiple vendors. For example, local governments often competitively bid the sale of their bonds. Banks and investment companies form syndicates that diversify their risk and increase their potential to resell the bonds to investors should they win the bid. Each competing syndicate submits a bid offering an interest rate for the purchase of the bonds. The syndicate with the lowest overall net interest cost wins the sale.

In cases where the product or service is complex or where the qualifications of potential bidders varies, a local government may initiate the process by issuing a request for qualifications (RFQ) where it can identify qualified prospective vendors and then invite them to submit a bid. Once qualified bidders are identified and the terms of the transaction are established by the government seeking a third-party vendor, a call for bids will be issued either as an RFP or other public notification. The invitation will include a date, time, and location to submit bids. Prior to that date, the government making the call might host a pre bidders conference, at which time prospective bidders may ask questions in a public forum to further clarify the terms of the proposed agreement. Managed competition is a special case of competitive bidding in which units within a local government compete with other vendors for a contract to provide the desired services or products. For example, a municipal solid waste department may be invited to compete, along with vendors from the private sector, for a contract to outsource the collection of residential solid waste. 

Third-party bidders then submit their best offer on a form or in a format specified in the RFP or other call for bids. Bidders must also submit a good faith deposit (for example, 10 percent of their bid) along with their bid to the government issuing the call for bids. Once the deadline for bids passes, the host government opens the sealed bids and awards the contract to the best qualified bid, which is not always the lowest bid. State laws typically provide extensive guidance on how local governments must conduct their purchasing activities, including the selection of vendors through competitive bidding.

In the case of negotiation, state or local law might specify the circumstances in which a local government or state agency can identify a qualified provider and negotiate directly with that vendor on the terms of the agreement. Professional service providers, such as management consultants, architects, and legal counsel, are often selected through a negotiation process. At other times, governments seek a sole-source agreement (or no-bid contract) because there is only one qualified supplier or, because of the urgency of the situation, selecting a vendor through competitive bidding is not feasible. Such agreements are often met with public skepticism. Some of the most controversial were several no-bid contracts awarded by the U.S. Departments of Defense and Homeland Security to subsidiaries of the Halliburton Company in the conduct of the war in Iraq and the war on terrorism. Dick Cheney had served as CEO of Halliburton from 1995 to 2000 prior to becoming vice president.

A number of analyses have been made of the relative effectiveness of negotiated versus competitively bid contracts in providing the best price to local governments. Several studies have examined the interest cost of municipal bonds sold through competitive bidding with those sold through negotiation. Competitive bidding more often assures public administrators that they are getting the best terms when awarding third-party agreements. But negotiation can be done effectively, especially where representatives of the government are knowledgeable and where they can negotiate with more than one prospective vendor concurrently.

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Bob Bland is professor and chair of the Department of Public Administration at the University of North Texas and the author of two ICMA books, A Revenue Guide for Local Government (2005) and A Budgeting Guide for Local Government (2008).