Disputed Contracts Place Procurement in Spotlight

Disputes over recent state contracts have put Republican lawmakers at odds with the Republican governor, angered potential vendors and muddied understanding on what businesses can expect from the process of awarding state work.

Since December, procurement issues have embroiled the governor’s office and bedeviled state agencies and the Legislature, while scrutiny has grown for the Office of State Procurement.

That office, part of the state Department of Finance & Administration, oversees the competitive bidding meant to save taxpayer money and assure that public business isn’t steered to cronies or political favorites.

“This procurement stuff is not glamorous or pretty. Actually, it’s kind of boring, but it’s where the money is,” said state Sen. Jimmy Hickey, R-Texarkana, a leader in a movement to revise the system.

Hickey and Rep. Kim Hammer, R-Benton, filed a bill this month to make bottom-line pricing a greater factor in state bid solicitations and to make the judging system in competitive situations more transparent to those seeking state contracts.

The bill, to be considered in the waning weeks of the current legislative session, is being revised, Hickey said last week. But he is convinced that a new focus on pricing is essential to getting the best deal for taxpayers and for bolstering businesses’ confidence that the system is fair and bias-free.

Mary Scott Nabers, a former Texas railroad commissioner who now leads Strategic Partnerships Inc., a consulting firm that advises companies seeking government work, also sees pricing as an essential factor. “Politics should not play any part in state contract decisions,” she told Arkansas Business. “It should strictly be who’s got the best solutions at the best price.”

A 2014 amendment to the state Constitution was seen to give lawmakers greater power over executive branch contracts, but that conclusion hasn’t been tested in court and has drawn considerable pushback from Gov. Asa Hutchinson.

The procurement office handles a fraction of the state’s annual budget of well over $5 billion. State paychecks, health care expenses, many highway contracts do not fall under the procurement process. However, the billions of dollars in work awarded through the procurement law in recent years is “a monstrous number,” Hickey said, and well worth a look from taxpayers and businesses.

Businesses bid for procurement contracts by responding to bid solicitations. Written proposals are submitted to judges selected by the state agencies issuing the contracts. A bid solicitation known as an RFP (request for proposals) makes pricing a prime consideration. Another type, the RFQ (request for qualifications), has by law allowed price negotiations only after a vendor is chosen.

Traditionally, RFQs solicited highly technical services like engineering or architecture, but state agencies were allowed exceptions. A multimillion-dollar pact for marketing the Arkansas Department of Parks & Tourism, for example, was initially issued as an RFQ but was withdrawn and reissued as an RFP earlier this year. Clarifying the RFP-RFQ process and making pricing a major component of both are goals of Hickey’s legislation. (See Bill Seeks to Change Procurement Process; Businesses Want to Understand It.)

Regardless of method, state contracts face legislative review after a winner is selected. Since judging is by nature subjective and disappointment inevitable, losing bidders have always vented. But the rocky course of three recent contracts — one for running facilities for troubled youths and two for marketing services, for the state lottery and for Arkansas tourism — put the system under a microscope.

“If the perception is that the system is not fair, there’s a potential that some qualified businesses won’t bid on state work,” said Hickey, a businessman and longtime banker who called submitting bids a substantial commitment.

“If a qualified business thinks it’s not worth it, and they might have been the low bidder, that could cost the state a lot of money,” he said.

Billions in Contracts
The Arkansas Department of Finance & Administration, says estimated payments on contracts administered through the procurement office totaled more than $285 million for fiscal year 2016 alone. Costs ranged from more than $71 million for information technology augmentation to $200,000 for portable toilet rentals. But since many contracts are for more than one year, the full price is multiplied, and Hickey put the value of all state procurement contracts well into the billions.

“If there’s a change in the level of scrutiny, it’s not attributable to anything we’ve done differently at Procurement,” state Procurement Director Edward Armstrong told Arkansas Business. “Ninety-five percent of the contracts go straight through review. Procurement processes haven’t changed. It’s the level of legislative review that’s changed, but we are doing just as we have since I’ve been in procurement, and as laid down by our procurement law.”

The scrutiny seemed to have an effect last month when bidding for the state’s largest advertising contract, for tourism promotion worth more than $14 million a year, was suspended on the last business day before proposals were due. DF&A issued a new solicitation five days later, adding cost considerations to the mix.

In December, a clearly annoyed Hutchinson announced that a contract for running a half-dozen facilities for troubled youths would be voided and the state would take over the lockups for six months. Lawmakers had refused to approve a contract awarded to an out-of-state company over two Arkansas firms that had run the facilities for years.

Legislators, including Hickey, agreed with the rejected Arkansas companies — South Arkansas Youth Services of Magnolia and Consolidated Youth Services of Jonesboro — in objecting to the higher costs in the new contract. The deal would have paid Youth Opportunity Investments LLC of Carmel, Indiana, $22 million a year, up from the previous $13 million. Hutchinson said the state needed additional services and suggested that lawmakers had been swayed by lobbyists.

“I was disappointed by the lack of legislative support today,” Hutchinson said in a Dec. 16 news conference. “We’re unable to issue a contract that has been appropriately through the bidding process.”

In fact, he said, it had been through twice. The procurement office had thrown out its first evaluation, which also favored Youth Opportunity Investments, and assembled new evaluators after irregularities were noted, including the fact that some judges’ score sheets couldn’t be located for review.

Admitting no wrongdoing, DHS Chief Procurement Officer Misty Eubanks acknowledged “incomplete documentation” and concluded that it was “in the best interest of the agency, the vendors and the state to re-score the previously submitted technical packets.” Again, the Indiana company was selected. But lawmakers weren’t satisfied, and their refusal to review the contract triggered the state takeover.

“We have to have quicker action if we’re going to run the government, avoid shutdowns, issue contracts in a timely fashion and manage the state,” Hutchinson said at the time. The Department of Human Services is now running the youth lockups with state managers overseeing staffs largely inherited from the previous contractors. The budget is coming from the money that would have been disbursed under the voided contract. Another bid process to outsource the youth lockups is likely this spring or summer.

Hutchinson said his goal is “not just renew contracts to incumbents for decades and decades,” but to “have an open bidding process” attractive to all businesses.

Separated Powers
The governor also addressed the oversight powers granted to lawmakers by the 2014 constitutional amendment, insisting that the law requires only that lawmakers review the contracts, not that they approve.

“The law ... says that the Legislature reviews a contract,” he said. “It doesn’t say they have to review and agree with; it just says they review. I have questions about whether that law is even constitutional, and we reserve the right to challenge it.”

Describing a separation-of-powers issue, Hutchinson said the “Legislature appropriates; we execute. We have to run a business. And the legislative review process ... is cumbersome, and then you have lobbyists working the system to say, ‘We want this person to get it; we want somebody else to get it.’ ”

One Arkansas executive with government contract experience suggested the governor was wise to be wary of lobbyists.

“The lawmakers are engaging the OSP because they are being lobbied, and the lobbyists will say or do just about anything that’s legal to influence that elected official,” the executive said, speaking on the condition of anonymity. “After having all this whispered in their ears, lawmakers are ready to fight these contracts and scream that something’s not right.”

Legislators have sought common ground with the governor since the December confrontation, and Hickey now says legislators do not have the right of contract approval. But if the Legislature can only look at contracts without real ability to stop faulty ones, what is the purpose of legislative review?

“I’ve asked myself that same question,” said Sen. Gary Stubblefield, R-Branch, who sharply questioned Armstrong on procurement procedures in several legislative hearings.

State Senate President Pro Tempore Jonathan Dismang, R-Searcy, says legislators should certify that legal processes are followed and that contracting is fair. “We shouldn’t have approval authority,” he said. “If we were to find anything unjust or improper, I don’t think the governor and the executive branch would just ignore it. I believe they would listen and make adjustments.”

Dismang cut short the lengthy debate over the five-year, $34.5 million lottery marketing contract, which eventually went to Little Rock advertising agency CJRW. That contract endured official protests by two rival agencies and an initial negative vote by the Joint Budget Committee’s Performance Evaluation & Expenditure Review subcommittee.

Dismang said that the two protesting bidders, Mangan Holcomb Partners and the joint venture Ghidotti-Vines, should have had better legal advice on the bid solicitation language they later objected to.

That drew a sharp response from Natalie Ghidotti of Ghidotti Communications, whose partnership with Brooke Vines finished second to CJRW in the bidding process.

“I disagree with Sen. Dismang’s comments,” she said. “He seems to think that small businesses, like those of us who participated in the lottery RFQ, should hire attorneys on the front end to question bid solicitation documents.”

Small businesses shouldn’t bear that burden, she said.

Ghidotti and Sharon Tallach Vogelpohl, president of Mangan Holcomb, pointed out that the language Armstrong relied on in rejecting their protests was not included in the original RFQ, but was in an addendum answering bidders’ questions. The crucial language required the “successful vendor” to reveal any associations with other clients that might pose a conflict in promoting the lottery “within 15 days.”

The specific issue was CJRW’s longtime relationship with Oaklawn Park, the Hot Springs thoroughbred track and casino that consultants had branded as a lottery competitor.

Lottery Director Bishop Woosley did not consider CJRW’s relationship with Oaklawn to be a problem, nor did Oaklawn object to their marketing firm also serving the lottery.

Armstrong, who rejected the protests by ruling that the conflict disclosure requirement applied only to future relationships, told lawmakers it was silly to think that the Oaklawn-CJRW connection was a secret requiring disclosure.

“The truth of the matter is we’re all talking about it,” he told the subcommittee. Nevertheless, Hickey’s pending bill would require companies competing for state contracts to disclose all potential conflicts.

Scoring and Relationships
The scoring of bid submissions, as well as ties to the judges themselves, also became an issue in the lottery pact dispute. One of the three judges, Esperanza Massana of the Arkansas Economic Development Commission, worked for several years at CJRW. Several lawmakers said the state should seek out less-connected judges.

Hickey also took issue with a scoring procedure that brings judges together to form a consensus after tabulating their scores separately. His new legislation would require evaluators who change their scores after a consensus meeting to justify the changes in writing. He also wants procurement judges to be identified to bidders earlier, and even to be paid for their work.

Hickey’s legislation would weight pricing considerations at 30 percent of the bid evaluation process in cases that aren’t decided by simple competitive bids.

“Sometimes you’re not always going to go with the lowest bidder, because there are other considerations,” he said. “But we believe that price always has to be a part of the decision.”

Top Procurements of Fiscal 2016*

Information Technology Services July 7, 2015 $71,033,819 Computer Aid Inc.
Juvenile Facility Management, Alexander Aug. 1, 2016 $34,113,499 Rite of Passage Inc.
Computer Hardware
(estimated potential use)
Aug. 14, 2015 $30,500,000 Apple Inc.
Computer Hardware
(estimated potential use)
Aug. 14, 2015 $30,500,000 EMC Corp.
DF&A Employee Benefits Software July 1, 2016 $16,225,200 ARBenefits
Public Safety Communications Equipment Jan. 8, 2016 $12,000,000 No Vendor Listed
Child Support Case Management System July 1, 2016 $9,807,072 Protech Solutions
Lab Equipment
(NASPO-ValuePoint co-op contract)
Apr. 5, 2016 $4,000,000 Fisher Scientific
Lab Equipment
(NASPO-ValuePoint co-op contract)
Apr. 1, 2016 $4,000,000 VWR International
(10 each of various types)
Oct. 13, 2015 $3,626,980 Landers Chrysler
(10 each of various types)
Oct. 12, 2015 $3,393,200 North Point Ford
(10 each of various types)
Oct. 16, 2015 $2,837,489 Bale Chevrolet

*Procurements managed by Office of State Procurement in fiscal 2016,  with projected value of contracts estimated for one year. Items noted as estimated potential use do not represent any actual commitment to spend.