Third Party Procurement - Interim Guidelines

Note: although it is being issued using the Policy Notification process, this is an Interim Guideline, rather than a new or modified policy.

Introduction

Third Party Procurement (TPP), generally speaking, takes place when a supplier to the government, in the course of performing a contract with the government, buys goods and services, using money that the government is paying under the main contract.

TPP is not new. Whether for goods, general services, construction, or A&E services, such buying by principal contractors has always taken place - such as:

• using sub-contractors to perform parts of the work;
• buying components for assembly into what the government has bought; or,
• buying the equipment required to provide a service.

The question is if, and when, restrictions should be put on a main supplier's "freedom" to buy goods and services. This guideline is designed to assist in that decision process, and has been developed based on extensive discussions with all Regions and Sectors.

In order to make sure that it is useful to procurement staff, PWGSC experience with this Interim Guideline will be reviewed after three months, and discussions subsequently held with industry, in order to issue (if necessary) a permanent policy statement. Users are invited to provide suggestions for addition and change to John Read, Director, Special Projects, SPMS, by e-mail or at 819-956-2651.

Following the Interim Guidelines below, is a general discussion of TPP; the Guidelines; and, their use.

Interim Guidelines

1. During the planning of a procurement, consideration must be given, as to whether there need to be any restrictions on a main supplier's ability to carry out TPP.
2. The TPP Planning Map (Annex A) and detailed TPP Factors (Annex B) are the framework for decision-making. Procurement staff should take the time to familiarize themselves with the various items included in each of the Factors.
3. When a main supplier will have the authority to carry out TPP, and that authority differs from accepted government or general industry practice, the proposed parameters must be included in procurement and contract approval documents.
4. Also, the NPP and bid documents must make the nature and scope of the authority for TPP clear. A potential supplier should be able to find out from an NPP when it/he/she will have to bid to a main contractor, rather than the government.
5. A main supplier must not be required or authorized to carry out TPP, for the purpose of avoiding government procurement obligations under Land Claim Agreements, trade agreements, the Government Contracts Regulations, Treasury Board delegations of authority, or other legal or policy requirements.

Procurement staff are cautioned particularly about situations where it is clear that the main contractor will be carrying out specific procurement on behalf of the government (e.g. a contract to provide LAN services, which specifies that the main contractor will be responsible for replacing a department's desktop computers). According to the Department of Justice, an agent (a contractor) who acts on the instructions of its principal for the benefit of its principal cannot shield the procurement from the trade agreements. Factors such as: whose money is paying for the goods or services; who is setting the specifications; and, who will own the goods or on whose behalf the services are being rendered, would be considered to determine whether the procurement is a government procurement and subject to the trade agreements.

Discussion

1. It is important to emphasize that the reason for issuing this TPP guideline is not to correct a problem. Rather, it is to prevent problems from occurring.
2. The challenge for PWGSC, is to find the best way to meet a client's operational requirements, without restricting unduly business opportunities for potential suppliers, and recognizing the resource constraints that exist increasingly for both PWGSC and its clients. Decisions must be made, in the context of the PWGSC common service procurement mandate, and recognizing the commitments that Canada has made, in the Land Claims and trade agreements.
3. A number of high profile situations have focused attention on the issue of TPP:
   • a complaint was filed with the CITT about a procurement being carried out by a private sector supplier "on behalf of" the government;
   • goods suppliers in a particular industry perceived that responsibility for buying their products, for use by an entire federal department, was going to be turned over to a service provider, who would have unrestricted ability to make purchasing decisions;
   • there were stories circulating of a major goods procurement that was being carried out by a main supplier, because the rules would not permit PWGSC to carry it out quickly enough; and,
   • there have been cases, particularly in IT where there have been concerns that unrestricted TPP decisions by the main contractor might in some way restrict the ability of the government to act after the contract has ended.
4. More generally, though, what is happening is that the way in which the government operates is changing. There is increased use of alternative service delivery mechanisms. The ongoing search for efficiency and cost savings is leading to pressures to replace numerous small contracts with one large one: client departments are increasingly seeking overall service providers, who will provide, and be responsible for, all aspects of a good or service - from design, through maintenance and repair, to disposal.
5. As a result, PWGSC's private sector suppliers find themselves increasingly able, or required, to buy goods and services. What the government used to buy, under the well-known rules of government procurement, is now being bought by others, who are not bound by the same legal and policy obligations. Requiring the use of Goverment-Furnished Equipment (GFE) in such cases may be counter-productive. The supplier community may find itself unable to bid for government business, with no warning, and no apparent recourse.
6. It has become clear that there are no hard and fast rules - no rapid checklist, which will allow (or force) an officer to conclude that, when a procurement has 'X' key dimensions, it must be handled using approach "Y". Instead, what is needed is a planning framework, that will allow procurement staff to identify, and deal appropriately, with situations that could become problematic.
7. The TPP Interim Guideline suggests on arriving at conclusions, on a case by case basis, using four main Factors: Ownership; Scope; Severability/Materiality; and, Risk. More specifically:
   • Ownership: it makes a difference, if the government will be the ultimate owner of what is being bought using TPP;
   • Scope: it makes a difference, if whatever is bought using TPP will be used by, or have an effect on, an entire department, compared to a few staff;
   • Severability/Materiality: it likely makes an difference, if dividing a project into two or more components for procurement purposes will affect the overall viability of the project: it also likely makes a difference, if the potential TPP purchase is a very small element of the larger project; and,
   • Risk: overall, the more risk that a procurement project carries, the more control over its conduct and outcome the government will want.
8. The four Factors (described in more detail in Annex B) support the planning map (Annex A). The map is followed from left to right: depending on the circumstances of a particular procurement requirement, it will lead to one of three conclusions:
   • the TPP procurement should be carried out by the contractor;
   • the TPP procurement should be carried out by the contractor, but following some rules set in place by the government; or,
   • the TPP procurement should be carried out by the government.

   Example cases for the various possibilities are attached to the Planning Map.

9. None of those conclusions is absolute. This Guideline, and the Planning Map, are a thinking process, rather than a set of fixed steps and results. It is always possible that one or more circumstances of a given procurement file will indicate that some other course of action should be followed. Any procurement officer finding such a situation should discuss the situation with his/her supervisor, before proceeding.
10. Extensive use is already made of rules to govern TPP by a main contractor - usually on a commodity basis. Their selection and use should be governed by the main objective of government contracting - acquiring goods and services, including construction, in a manner that meets operational requirements, enhances access, competition and fairness, and results in best value to the Canadian people.

(a)

1. MERX - This project was to put in place a new electronic tendering service, for use by: the federal and provincial governments, members of the MASH sector; and, any other interested Canadian and international organizations with procurement requirements. Performance specifications for the new service (the Government Electronic Tendering System) were set; there were no requirements imposed on potential suppliers, as to sourcing practices for any goods (e.g. computers) they might procure in the performance of the main contract.
2. Environmental Information Service - The purpose of EIS is to promote green procurement within the Federal government by helping procurement officers and their clients to have accessible information about products that have been certified as green. The contractor is to provide an Internet based system (as is MERX), but there are no requirements with regard to procurement that the contractor may undertake in the performance of the contract.
3. Supplied Stand-Alone Furniture (Leased Premises) - where the government leases furnished office premises: other than for general requirements (e.g. each office to have a desk, table, three chairs, and a filing cabinet), the landlord is responsible for acquiring/installing the furniture.

(b)

1. Minor software - purchase of a small number of software packages, needed to run a major IT network.
2. Construction Supplies - materials and equipment that will be used to construct, or installed in, a government building under construction - part of the basic structure of the building.
3. UTTH - ongoing maintenance of the Utility Technical Transport Helicopter: the craft, and maintenance, are basically civilian, parts are regular commercial, and there seems no reason to not simply let the contractor buy them as needed.

Between (b) and (c) (i.e. could go either way)

1. Network components - A Contractor may be authorized to procure individual components, based on business case analysis: to be used with discretion: this type of procurement is the PWGSC mandate, and it should to be evident that contractor procurement would provide significant overall benefits.

(c)

1. Canadian Firearms Registration System - to provide the process and system to implement the provisions of the new Firearms Act. Two separate Contracts were awarded for professional services to complete the work packages required for application builds, for provision of hardware and software, for integration services, for configuration management services, for documentation and training and for rollout of the system across Canada; the Contracts include the condition that any hardware or software procurements which are over $10,000 shall require that at least three independent bids are solicited.
2. Brookfield Lepage (the upper of the two paths leading to "Contractor buys under Explicit Ts & Cs") - operation and maintenance of government buildings: the contractor has procurement authority, up to a specified maximum; a key consideration was the element of risk.
3. MCDV: Maritime Coastal Defence Vessel, in which program the contractor often takes government direction with regard to procurement issues.

Between (c) and (d) (i.e. could go either way)

1. Parliament Hill BCC (Building Components and Connectivity - formerly FF&E, Furniture, Fixtures and Equipment) - all work in and for government premises; renovations, fixtures, communications and computer network cabling etc.; the procurement could be divided into separate "packages", but the general sensitivity of matters on the Hill (assessed under Risk) argues that the government must carry out the procurement.

(d)

1. DND Data Centre Consolidation and Automation Project - The purpose of this project was: to consolidate the two existing DND Data Centres into one Data Centre; to upgrade the IT infrastructure, and automate the operation to the extent possible; and, to optimize the operation of the Data Centre and the services it provides to clients. The project was implemented in phases. The several Contracts issued under Phase 2 "Consolidation" for the procurement of upgraded IT hardware were not awarded directly to the Bidder (IBM) selected for the other phases, but were established through competition by Canada, based on the specifications developed by IBM in the Phase 1 "Planning".
2. Furniture, Project - purchase of modular furniture, to be paid for and owned by the government, for leased office accommodation in Place de Ville; can be severed from other leasehold improvements; the clear mandate of PWGSC for furniture procurement, as a good, yields high risk if the procurement is left to the private sector; the government should procure.
3. Government/restricted sourcing - cryptographic equipment.

(e)

1. Corporate Shared Systems - To replace existing systems; and, to provide outsourced Information Technology (IT) services for all of a federal department; this outsourcing was to include the transfer of ownership of the existing departmental IT infrastructure (hardware and software) and transfer of the departmental IT personnel to the selected Service Provider (the department would no longer own the IT infrastructure). The Service Provider was to be required to provide specified functionality through a Service Provider-owned IT infrastructure, and to provide maintenance and operational support services meeting the performance service levels defined in the Contract. However, when such a procurement of services is to produce enterprise - wide results (such as major internal departmental information systems), even if the Contractor will own any goods procured, the Government should conduct the procurement.
2. Furniture (Department-wide) - purchase of modular furniture, to be paid for and owned by the government, for government accommodation in a federal building on Front Street the clear mandate of PWGSC for furniture procurement, as a good, yields high risk if the procurement is left to the private sector; the government should procure.
3. Projectiles - not just everyone can buy military ammunition.

Annex B

1. Ownership
   • will the government, or the supplier/contractor, ultimately own any goods purchased through TPP.
2. Scope
   • will the procurement be used by, or have immediate or long-term effects in, parts of a government organization (limited); or throughout it (enterprise-wide);
   • will the procurement have an impact on organizations outside the client department (e.g. will it impose procurement constraints on others).
3. Severability/Materiality

   This Factor seeks to deal with the question of the overall possible risk to the main contract, if and when TPP is involved. That is, it examines project risk.

   • severability: is it reasonable/practical/possible to sub-divide a procurement into several elements, that could be met by different suppliers: decision factors include:
   • is there government capacity to set specifications which will ensure compatibility between procurement elements (e.g. will custom software run on the hardware platform); is there government capacity to integrate goods and services from various suppliers;
   • what would be the effects of elapsed time on coordination of severed procurements (e.g. could technology advances in one component cause incompatibilities with others);
   • what would be the possible effects on the production/delivery of the main contract, if the main contractor is required to use GFE;
   • would a severed procurement, with different procuring organizations, accountabilities etc. be viable financially (e.g. could cost problems to one or more of the contractors result);
   • would PWGSC and/or the client department have the resources and expertise needed to ensure the effective integration of two or more contracts (e.g. ensuring that GFE is delivered on time); and,
   • would it be possible to ensure accountability and responsibility for the main contract, if GFE is included; also, would there be adequate ability to assess and deal with liability and warranty issues.
   • materiality: is the procurement by the third party/contractor a direct, essential and high value element of the total contract; or, at the other extreme, is the procurement of low value with little direct relationship to the main contract (e.g. furniture for a project office.
4. Risk

   The Factor Risk examines more externally-oriented issues, and recognizes that decision-making needs to be carried out in consideration of the overall context and circumstances facing a government organization, in areas such as:

   • mandate: will the government be seen to have produced a value-added service, if it severs some TPP and provides GFE to the main contractor;
   • policy: will the use of TPP have, or be seen to have, an effect on the ability of the government to achieve policy objectives and commitments;
   • political: is TPP likely to produce public interest or concern;
   • trade agreements: is the good/service covered by one or more of the international/national trade agreements with government procurement obligations (and also including Comprehensive Land Claim Agreements);
   • purpose: what is the main reason for considering procurement using TPP; and,
   • industry practice: what is the likely reaction of current or potential suppliers.