The state’s Nonprofit Revitalization Act (NPRA) took effect July 1, 2014. Nonprofit organizations throughout New York have invested a significant amount of board, management, legal, and financial effort in complying with requirements of this extensive reform legislation. Two of the primary focus areas for both reform and increased board governance regard conflicts of interest and […]
The state’s Nonprofit Revitalization Act (NPRA) took effect July 1, 2014. Nonprofit organizations throughout New York have invested a significant amount of board, management, legal, and financial effort in complying with requirements of this extensive reform legislation. Two of the primary focus areas for both reform and increased board governance regard conflicts of interest and related-party transactions.
The requirements in each of these areas have been well documented in my previous columns. However, one of the common results of focus on these two areas has been an increasing number of questions regarding competitive bids for various types of professional and vendor-supply contracts.
Prior to the NPRA, the following questions were frequently discussed during the decision-making process related to competitive bids.
“They are all the same, aren’t they?”
“Six of one, half dozen of the other. It makes no difference to me.”
“Let’s take the lowest price quote. I can’t identify any differences between and among the firms.”
“We have to take the lowest price to fulfill our fiduciary responsibility.”
“There is no way to differentiate one firm from the other.”
“We have to change vendors. It has been more than five years that we have used the current firm.”
“They all have similar qualifications, right?”
Both before and after the NPRA, the answer to each of the questions or comments above would be a resounding “no.” In many cases, there is truth in the adage, “you get what you pay for.” This can be particularly true in the selection of service providers for your organization.
In New York state, the Office of the State Comptroller has issued a “Vendor Responsibility Questionnaire,” which the state has used for a number of years as a component of qualifying a vendor for a state grant or contract award (http://www.osc.state.ny.us/vendrep/forms_vendor.htm.). In addition to the recommendations below regarding the adoption of a “lowest responsible bidder policy,” I strongly recommend that a policy of this type require the completion of this questionnaire for the vendors you are seriously considering.
In the nonprofit sector, too often, and at times with disastrous consequences, the lowest price quote, without consideration of qualifications, dictates the decision process. With certain minor exceptions, there are no regulatory requirements in the area of professional-service contracts that “require” the frequency of change in service provider or that the lowest price be awarded the contract.
First and foremost, adopting and implementing a “lowest responsible bidder” policy requires that your organization consider what is:
- Practical for implementation
- Scalable to the size of the entity
- Feasible, and
- Cost-effective for management and staff
If we can agree that lowest responsible/qualified bidder is a preferable course of action from a policy perspective, the remainder of this column will provide guidance regarding the implementation of such a policy.
Organizational culture will influence your policy and decision-making in the area of contracted professional services. We can all agree that buying a television set or an automobile by the same manufacturer can be focused primarily on choosing the lowest price. However, for contracted professional and/or administrative support services, there are many factors to consider, in addition to price.
Criteria to be considered in your assessment of service providers should include:
- Integrity, trustworthiness
- Financial stability
- Skill
- Judgment
- Ability to perform
- Promptness
- Experience
- References from previous clients/customers
Although I can be viewed as having a biased opinion in this area as a professional service provider of audit, tax, and consulting services, my goal is to remain objective in the recommendations that follow.
Certain basic assumptions need to be agreed upon before addressing the issue of frequency of bidding professional and administrative support-service contracts.
1) If the current relationship is not broken, don’t fix it.
2) f the service being provided is of high quality, timely, and provided at a reasonable cost, the need for and frequency of change is significantly reduced.
3) here can be a substantial internal cost associated with coordinating a request for proposal process (RFP).
4) eferences from current and former clients of the service provider should be obtained and considered as a key component in the decision process.
5) n the nonprofit sector, the volume and complexity of regulations require that professional service providers have relevant experience. Ignorance of a law or regulation is no excuse for non-compliance.
6) hanging service providers can be costly and disruptive if the transition is not managed effectively. The change should be viewed as similar to turnover in a key employee position.
With these basic assumptions, modified to fit your organizational culture, your lowest responsible bidder policy should include documentation of the expected frequency of an RFP process for each professional service contract. The type of services to be scheduled can include, but are not limited to, the following:
- Independent audit and tax services
- Legal
- Insurance
- Banking
- Investment management
- Transportation
- Telecommunications
- Actuarial and valuation services
- Contracted support services (example: payroll, maintenance, utilities, food service)
In most cases, it’s important that a board committee has designated responsibility for the evaluation of each service provider on a periodic basis. Management, generally, will take the primary responsibility for conducting the RFP process with appropriate input and oversight from the board committee.
In the absence of regulatory requirements, the decision regarding frequency of the RFP process should consider the factors described above. As a general guideline, I believe that a five-year cycle, assuming satisfaction with the current service provider, is reasonable for most of the service contracts described above. However, frequency of the evaluation and assessment process does not anticipate or require that the service relationship be transitioned to a new provider. In fact, the evaluation and assessment may not require an RFP every five years, if you are satisfied with the current service provider on quality and cost.
In my chosen field of accounting and auditing, I have often said that if a service provider is providing satisfactory service at a reasonable price, changing firms can generate more negative implications than positive results. The important element in this area is documenting and implementing a policy that is effective for your organization and its decision-making culture.
Gerald J. Archibald, CPA, is a partner in charge of the management advisory services at The Bonadio Group. Contact him at garchibald@bonadio.com