Doing Business in L.A. (part 1): Big Business

by Tony Chavira

When the Hubble space telescope was first being bid, the components were sent through the purchasing division at NASA via Jet Propulsion Laboratory right here in Pasadena. The winning bid for the lenses came from a company called Perkin-Elmer, who beat the price Eastman Kodak offered by millions of dollars. How did they figure out how to chop that much money off the price of the lenses, you ask? It was simple: Perkin-Elmer didn’t follow-up the results of a simulation for their mirror under conditions in space. Instead, they simply created the mirror, installed it, double-checked that the whole thing worked kind of like a gigantic pair of binoculars, and watched as NASA blasted the whole thing into the great beyond. A few weeks later, the incorrectly shaped Perkin-Elmer mirror returned blurry images to NASA headquarters and an investigation found that Perkin-Elmer was at fault. Eastman Kodak was brought in to clean up the mess and didn’t have to bid this time. Many million dollars later, we can marvel at amazing images of space from the Hubble Space Telescope.

This was a fantastic example of the greatest inherent flaw of the government bidding process. The process of awarding contracts for anything from gigantic new buildings to Black Hawk helicopters and fighter jets is pretty much the same as the process of awarding contracts for pencils, Christmas cards and bottled water. First, the government usually works with the General Services Administration (or a similar local purchasing agency) and sends out a Request for Proposals (RFP). These RFPs are usually broken into two parts: the serious contract part (which is twenty to fifty pages of legalese and lines to sign and date) and an outline for what the actual proposal should include. Then the government receives your forms and proposal and compares the dry pieces: staff sizes, qualifications, tax statuses, this, that and the other. Once the dust of weeding out unqualified sellers or service providers has settled, there’s usually a small stack of proposals that made the cut.

Third, and the part I have issues with, the government compares your prices. Infrequently, there is someone who’s underbidding by a ton of money (as in the case of Perkin-Elmer). Infrequently, two prices are excruciatingly close to one another. But neither of those outstanding situations are important to purchasing agents. The winning bid is always the lowest price. Always.

Hubble photo of Carina Nebula

Sure, there are incentives for businesses who work with disadvantaged subcontractors, or businesses whose offices are located in areas that need revitalization. There are incentives for veterans, women, and minorities that own companies. But these incentives are small, sometimes just five percent. If you’re selling twenty million dollar jets, that five percent might mean a lot. When you’re selling pencils at two-point-five cents each, not so much.

It’s not always a bad thing to have the lowest bid, especially once everyone’s products or services have been compared evenly. If Seller A is offering the same service at Seller B, you might as well buy from whoever’s cheaper. And weeding the sellers to the lowest possible bidder helps the government compare huge and well-known sellers to smaller, lesser known ones who are just trying to get their feet in the door. Sometimes the government notices that a smaller seller’s product or service is just as good as (or better than) a big-time seller’s, and the smaller seller will get the job. That’s the Cinderella story small businesses are pitched, anyway.

But the idea that “the lowest price should always win” doesn’t always make sense. As the case involving NASA, JPL and telescopic mirrors illustrates, sometimes thinking cheap makes the government cut corners. The telescopic mirror failure was not entirely the fault of Perkin-Elmer. When purchasing agents and project managers compare prices, services and products, they know exactly what they’re getting themselves into. NASA and JPL project managers didn’t expect that relating the simulations to the final mirror’s creation would matter, since they were getting the products they needed anyway. But they could only blame themselves for receiving a lower quality product for the price they were willing to pay.

No project’s outcome can be completely forecast by an RFP, and when the official government policy is to cut the price, the government is inviting sellers with the lowest prices to provide the lowest-priced services. This does not necessarily mean that they will be the lowest quality services, but you get what you pay for and the government’s no different.

It’s bad enough that the process of getting work from any levels of government is already difficult for those trying to make a few bucks, but sellers only have one option if they want to compete: lower their prices. That’s not altogether a bad thing, but it tempts those who want to get paid comparably for their goods to drop off important or useful services.

The scary part is that this policy is completely institutional, at all levels of the government. Boilerplate (i.e. completely standardized) contracts are strictly structured to accomplish the lowest-cost bid, not necessarily the highest-quality final outcome. It’s understandable that government agents would want to find the highest-quality products at the lowest prices, but when it becomes very clear to you and your company that the American government cares more about the cost than the quality of your services, the public should clearly expect a lower quality of government services as well. Not exactly something you want when you know you’re paying your taxes on time.

I do understand that the economy is sucking right now. All government agencies at all levels are cash-strapped, and that’s not something that should be taken lightly. But we want our prison guards to have bullets in their guns. We want our schools to have classrooms, and our classrooms to have books in them. We want our governor to be able to afford a pen to sign important legislation. These are just expenses we need covered and they need to be purchased from someone.

A quick solution may be to provide a wider budgetary window per bid, so that there’s some leeway for bids that are a little more expensive (and worth the money). But this wouldn’t solve the institutional problem of focusing first on cost and second on quality. In reality, the process of bidding will have to completely change before this can be properly addressed. Visit the website for the General Services Administration, the State of California, Los Angeles County or even the city of Los Angeles and you’ll be shocked at how ingrained this policy is. Even more shocking: how many sellers are willing to completely forgo profits simply to get a foot in the door of any government agency. People need to work and sell their products, and the government’s one of the biggest buyers out there. Government agencies rely on sellers knowing this. It’s how they watch their bottom line.

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