Contracting: A Growing Ethics Problem in the Age of Privatization

Contracting is one of the municipal ethics issues that is most often overlooked as an ethics issue. One reason is that the laws governing competitive bidding are often at the state level. Another is that municipal competitive bidding laws often appear outside codes of ethics (often because they are state mandated). But municipal contracting should be at the center of ethics concerns, because it is a relatively secret area where a great deal of wrongdoing and harm can occur.

Contracting is especially serious today, when government has turned so many of its functions over to businesses and nonprofit organizations, and when, therefore, contracting has become a principal form of patronage. Privatization means that contracting rules are the most important way to hold contractors, and officials who contract with them, accountable for their actions and omissions.

There are numerous problems with no-bid contracts. First, they cost taxpayers a great deal of money. The cost of a no-bid contract is almost always greater than that of a competitively bid contract. Often the cost is a great deal more.

Second, officials who control no-bid contracts often favor friends, family, and business associates (in fact, usually the no-bid contractor becomes, in effect, a business associate). It's no accident that they're called "sweetheart deals." Such deals undermine the level playing field most people think government should provide. They also tend to favor businesses owned by people similar to those who govern, bypassing affirmative action laws.

Third, the windfall profits that go to no-bid contractors are a common source of kickbacks. That is, sometimes a sweetheart deal is a two-way street, so that everyone comes out doing well. Except, of course, the taxpayer.

The problems with no-bid contracts don't stop at the harm done. They extend to discovery of the harm and accountability for it. If no bids are taken, who's to say that the town could have found a lower bidder? Even if the contract is eventually put out to bid, circumstances or contractual requirements may have changed, new companies may have come into the field or old companies may need the work more, or the no-bid contractor might be able to do the work for less now due to the experience its personnel have. It's hard to prove that the taxpayer was harmed, and even harder to prove the extent of the harm.

It is sometimes difficult to prove why a contract was not bid out or who was responsible for the failure to bid, especially when the municipal ethics environment finds no-bid contracts acceptable and when no vote was taken on the contract. Even if the contractor or a related party gained something, it is difficult to prove that was the purpose of not bidding out.

It can sometimes be argued that there was no other comparable contractor in the area, or that research was done and no other contractor could do it as well or for the same price. When it comes to professionals or specialized work, many competitive bidding laws make exclusions, because the lowest bidder might not do good work (a cheap attorney or accountant, for example, might not be worth the price). But competitive bidding laws can be phrased so as to provide some leeway in these circumstances, while still requiring public bidding (only law firms that specialize in municipal work and have no conflicts of interest, for example).

Exemptions should be provided, because there will be occasions when there is only one qualified contractor in the area. But exemptions and other considerations should be carefully described, and any request for an exemption should be open to public discussion before the contract is entered into. Such a discussion should include other possible bidders. It is especially important to make sure that dollar exemptions (contracts valued at, say, less than $10,000) do not allow large contracts to be split into small (sometimes monthly) contracts to get around the law. This is a favorite ploy of clever municipal officials. Language should also be clear enough to prevent officials from entering into long-term contracts that allow for unstated price rises or for claims of "continuing contracts," in effect exempting a contract from being bid out again, even though no such exemption exists.

It's also difficult to prove that any of the money ended up in an official's hands. Rarely will anyone involved tell the authorities (especially when there is no ethics hotline available), books can be cooked, and investigations tend to start only when there is already evidence.

There is often very little if any oversight regarding contracts. Rarely does anyone carefully read through contracts or research possible relationships between officials and contractors. This is why ethics codes should require that all contractors disclose their relationships with municipal officials when they bid on a contract (competitively or not). And if any relationship is not disclosed, the contract should be automatically void and the contractor should not be allowed to do any more business with the municipality.

Competitive bidding laws can be ignored if there are no penalties for ignoring them. No penalty is more effective than the automatic voiding of contracts (as well as preventing the contractor from doing further business with the municipality). Fines can be included in the cost of business much more easily than the loss of a contract or the loss of the right to bid on future contracts.

Also valuable are provisions requiring the return of windfall profits that originate from no-bid contracts, even though these are difficult to determine. Such ethics provisions should appear clearly on every municipal bid form and contract, so that no party can say they didn't know about disclosures or bid requirements. There should also be penalties for officials responsible for bidding out contracts and failing to do so.

It is difficult to enforce a competitive bidding provision if a suit must be brought. Residents are rarely in a position to sue. They are dependent on suits by the municipality (whose officials might have a conflict of interest or, at least, have shown preference for the contractor) or by losing bidders, who must prove that a bid was rigged or that the winning bidder had inside information, and these are hard to prove.

Without effective penalties, officials and contractors can merely apologize and say they didn't understand the rules, that they'll bid the contract out in the future.

Contracting is an area where ethical rules must be clear and where enforcement must be strong, must involve no political players, and must affect both officials and business. This is why contracting rules should be brought into the ethics code, so that they can be enforced by an ethics body.

People will complain that such contracting rules are just more red tape. They should be reminded that red tape is an important precaution against unethical behavior. Efficiency is important, but not more important than ethics and democratic accountability.

Robert Wechsler
Director of Research-Retired
City Ethics, Inc.