I. Introduction

The purpose of a procurement policy is to ensure that best value – the most advantageous balance of price, quality, and performance —is obtained when purchasing business-related products and services, and to minimize fraud, waste, and abuse in purchasing. While LSC’s regulations at 45 C.F.R. § 1630 – Cost Standards and Procedures, the Fundamental Criteria of the LSC Accounting Guide, and the Property and Acquisition Management Manual (PAMM) govern LSC-funded purchases generally, LSC has compiled the following best practices associated with an effective procurement policy.

II. Basic Elements of an Effective Procurement Policy

Effective procurement policies typically address the following topics:

• Competition – How are potential vendors identified, evaluated, and selected?
• Negotiating Terms – What are the parties’ rights and obligations during the transaction?
• Documentation – How is best value verified?
• Internal Controls – How can equal opportunity for potential vendors be increased and wasteful, fraudulent, and abusive purchases be reduced?

Competition

Using a competitive process to identify, evaluate, and select potential vendors accomplishes several business goals:

• Promotes best value and innovation;
• Checks improper influence and nepotism;
• Improves bargaining power; and
• Bolsters funder and public confidence.

There are many ways to structure a competitive procurement process. But the cornerstones of an effective competitive process are transparency and objectivity.

Transparency. A transparent procurement process includes at least these elements:

• A written procurement policy that is accessible to employees and potential business partners.
• Internal controls that ensure vendors have an equal opportunity to compete for business opportunities (e.g., rules on communicating with vendors in competition; sharing information with vendors; drafting unbiased requests for information, quotes, and proposals; publicizing substantial business opportunities; sole-sourcing requirements; etc.).

 Objectivity. An objective procurement process includes at least these elements:

• • A standardized vendor identification, evaluation, and selection process.
  • Use of pre-determined, objective criteria to identify, evaluate, and select vendors (e.g., price, quality, qualifications, experience, technical expertise, plan and approach, capacity, performance, timeliness, responsiveness, professionalism, customer service, past performance, willingness to accept contracting terms, etc.).
  • A defined approval system for purchasing decisions (both the decision to purchase a product or service and which vendor to use).
  • A conflicts of interest policy that specifically addresses procurement conflicts (i.e., biased ground rules, unfair vendor advantage, personal and organizational conflicts, and influence-peddling).
    • Some good tips and sample procurement-specific conflict of interest policies can be viewed here: Nonprofit Risk Management Center’s Resources for Developing a Conflict of Interest Policy.
    • Here are some additional sample policies: Sample 1, Sample 2.

The particular competitive process adopted may depend on the organization’s location (urban vs. rural), resources (human and technological), and purchasing history (value of annual purchases compared to overall budget). For example, a competitive process that may be appropriate for a large urban company doing million-dollar purchases might not be appropriate for a small rural organization that primarily purchases low-value office supplies.

Here are some basic topics that are usually addressed in the competition section of a procurement policy:

Identifying Vendors.

There are several means of identifying vendors. Some promote transparency, objectivity, and equal opportunity more than others.

• Certification of Best Value: The process of affirmatively confirming that, in the purchaser’s professional judgment, a product or service meets price, quality, and performance requirements. It adds credibility to the purchase by demonstrating that it was thoughtful, deliberate, and provided best value.
• Price Comparison: The process of determining the best price for a known product or service by comparing the cost and quality of products offered by competitors. It is used when businesses know what they want and there are nominal differences in product or service performance. It is often used for recurring purchases and low-value products and services.
• Request for Information (RFI): A document that businesses direct to a group of known vendors to collect general information about industry standards/market conditions, vendor capacity and expertise, product specifications and availability, and pricing. It is used when businesses think they know what they want but need more information about product or vendor capacity. It is typically followed by a RFQ or RFP, but if sufficiently detailed, can also be used to quickly identify candidates for further consideration.
• Request for Quotes (RFQ): RFQs are commonly used when businesses know what they want but need specific information on how vendors would meet their requirements or how much the product or service would cost. Using the internet, personal referrals, and other relevant sources, businesses identify potential vendors and request quotes directly from them. Quotes come in various forms (e.g., letter, email quote, rate page, oral offer), but cover terms such as price, product specifications (e.g., quantity, functionality, compatibility, performance capabilities, etc.), and vendor qualifications (g. specialized expertise, reliability, warranty, delivery speed, etc.).
• Request for Proposals (RFP): A document that businesses publicize to elicit bids from vendors for a specific product or service. It is often used when businesses know that they have a problem but don’t know how to solve it. RFPs often prompt vendors to propose creative and innovative approaches, methodologies, and business solutions that distinguish them from others. RFPs typically follow strict rules for content, structure, and submission, and often include:
  • a description of the recipient’s organization;
  • product specifications or project description;
  • a proposed statement of work and deliverables; expectations and assumptions;
  • vendor qualifications and requirements;
  • overview of the RFP process and schedule;
  • proposal submission requirements;
  • proposal evaluation criteria; and
  • a list of required contract terms.

Because RFPs are document-intensive and time-consuming, they are generally reserved for high-cost or high-profile purchases. (The nature of the purchase should justify the increased administrative burden.) Reviewing procurement history can help organizations determine which purchases should be subjected to/excluded from an RFP process.

• Sole Sourcing: Sometimes legitimate business needs justify identifying and selecting a vendor without competition. For example, a sole-source engagement may be appropriate when the product or service is one-of-a-kind, a bona-fide emergency exists, time constraints make competing the opportunity infeasible, a grant or contract requires use of a particular vendor, or to ensure continuity of work. Sole sourcing is generally not appropriate to remedy poor procurement planning or to expedite selection of a preferred or long-standing business partner. Because sole-source engagements occur outside the traditional competitive process, they must typically be justified and documented.

Evaluating Vendors.

Evaluation Plan

• An evaluation plan helps organize and guide the purchasing process and ensures that vendor quotes and proposals are evaluated fairly. It typically addresses:
  • Evaluation team member assignments;
  • Evaluation timeline;
  • Evaluation rules and procedures;
  • Evaluation criteria, sheets, and scoring; and
  • How the process will be documented.

Evaluation Team

• An evaluation team ensures that proposals are evaluated objectively. Ideally, evaluation teams have 3-5 members and contain at least one subject-matter expert and one end-user of the product or the service being purchased (e.g., employees or clients). The evaluation team reviews quotes and proposals independently and as a team to determine which vendor offers best value.

Evaluation Rules

• Establishing rules for the evaluation manages expectations and promotes objectivity and fairness. Consider adopting rules regarding:
  • Communicating with vendors in competition;
  • How evaluation team members’ conflicts of interest (e.g., personal/financial interests in the competition outcome or organizational conflicts) will be handled (e.g., disclosed, recused from the process);
  • How scoring will be performed (e.g., checkbox system, yes/no, numerical score);
  • How a selection will be made (e.g., consensus, average of scores, etc.); and
  • Confidentiality of the process.

Evaluation Criteria

• Evaluation criteria are typically tailored to the business requirements established for the purchase. Standard evaluation criteria include:
  • price (i.e., reasonableness, cost analysis, market research, cost by category, cost of expenses);
  • performance (i.e., vendor timeliness, delivery schedule, understanding of and ability to meet business need, responsiveness, professionalism);
  • quality (i.e., vendor qualifications, experience, technical expertise, project plan/approach);
  • past performance; and
  • willingness to accept contracting terms.

Selecting Vendors.

• Justifying Selection. Articulating why a particular vendor is being selected helps ensure that business requirements are met and best value is obtained. Justification usually involves a comparison of the vendor options and an explanation of why the successful vendor did, and unsuccessful vendors did not, meet the business requirements for the purchase. Selection justification is often documented in writing when the cost, risk, or profile of the purchase is high.
• Conditional Selection. Vendor selection is typically dependent on negotiating and agreeing on the terms of purchase, especially in the RFP context, which encourages proposals of creative solutions that would require further negotiation.

Level of Competition Required.

• Effective procurement policies typically
  • increase competition requirements as the estimated cost, risk, or profile of the purchase increases, or
  • tie competition to the type of purchase being made.

EXAMPLE. Competition requirements based on purchase cost

• $0 - $3,000: Certification of Best Value or Price Comparison
• $3,001 - $10,000: Request for Quotes, Evaluation Sheet
• $10,000+: Request for Proposals, Evaluation Plan, Team, and Sheet

EXAMPLE. Competition requirements based on purchase risk:

• Preferred Vendor purchases: Certification of Best Value
• Product purchases: Request for Quotes, Evaluation Sheet
• Services purchases: Request for Proposals, Evaluation Plan, Team, and Sheet

EXAMPLE. Competition requirements based on purchase profile:

• Routine office supplies: Certification or Price Comparison
• Special event and entertainment purchases: Request for Proposals
• Conference-related purchases: Request for Proposals

EXAMPLE. Competition requirements based on purchase type:

• Employment contracts: Routine hiring protocols
• Hotel and catering contracts: Request for Quotes
• Renewal contracts: Certification of Best Value

In sum, competition is proportional to the nature of the purchase, so that the cost of making the purchase (calculated in terms of employee time and resources) does not exceed the cost of the product or service itself.

Negotiating Terms

Effective procurement policies require contracts to be, at a minimum, legally sufficient and in a form that is appropriate for the transaction.

• “Legal sufficiency” refers to the contract’s enforceability in the event of a dispute. A contract is legally sufficient if the contracting parties have legal capacity and the contract contains all material terms, is for a legal purpose, is in writing (if required by the statue of frauds), is conscionable, and has terms that are definite.
• Contract “form” refers to the general appearance, structure, and substance of the contract. Well-formulated contracts are legible, logically formatted, written in plain English, complete, tailored to the engagement, and anticipate and appropriately allocate risk by including clarifying provisions and neutralizing or excluding adverse provisions.

Some organizations require attorneys or contracting professionals to review and make suggestions for improving contracts, or a subset of contracts (e.g., high-cost, high-risk, or high-profile contracts), for form, legal sufficiency, risk, or fraud, waste, and abuse before an authorized officer or employee may sign them. Others require an attorney’s approval before a contract can be signed, although this is not the standard approach.

Negotiating contract terms is an art. Appendix A contains a list of best practices associated with drafting and negotiating contracts.

Documentation

Documenting purchases is important for verifying best value and for auditing purposes.

Level of Documentation Required.

Like competition levels, effective procurement policies typically

• increase the documentation required as the cost, risk, or profile of the purchase increases, or
• tie documentation to the type of purchase being made.

For example, purchasing printer paper ($100) typically requires less documentation than purchasing an accounting system ($100,000) because it is easy to identify vendors and assess best value, and there is low risk of fraud, waste, and abuse. The documentation for the paper purchase might include evidence of purchasing authority and a receipt for the paper, while documentation for an accounting system might include evidence of purchasing authority, a needs assessment, budget review, pre- and post-selection approvals, RFP materials (e.g., evidence of RFP publication; proposals received; communications with bidder; evaluation plan, team, and sheets; selections justification; etc.), legal and compliance reviews, and a signed contract.

Likewise, purchasing software from a long-standing industry leader may require less documentation than purchasing software from an industry newcomer (low-risk vs. high-risk purchase). Purchasing from a sole source may require more documentation because it occurs outside the customary competitive process (documentation tied to the type of purchase).

In sum, documentation is typically proportional to the nature of the purchase.

Purchasing Record.

There are many ways to capture and organize procurement-related documentation. For example, some organizations use electronic forms to capture procurement details, others keep a paper or electronic contracting file for each purchase. High-volume purchasers may use specialized purchasing software to compile procurement records.

Most procurement records typically include documentation of:

• The officer/employee’s purchasing authority,
• Purchase approvals, if required (e.g., LSC approvals for those purchases requiring such approval pursuant to LSC’s rules and regulations),
• Competition-related documents (e.g., RFI, RFQ, RFP, sole-source justification, quotes and proposals received, evaluation plan, evaluation sheets, selection justification, etc.),
• Contract negotiations
• Signed contracts, invoices, order forms, purchase orders, or sale receipts, as applicable.

Internal Controls

Procurement fraud, corruption, and anti-competitiveness are all too common. While the risk can never be fully eliminated, businesses can implement controls to reduce the likelihood of occurrence.

Here is a list of controls to consider when developing a procurement policy:

Control	Explanation
Written Procurement Policy	Approved and accessible to employees and business partners
Conflict of Interest Policy	Addresses common procurement conflicts and is available to employees and business partners
Segregation of Duties	Have different people approve purchases, receive products, approve invoices for payment, review and reconcile financial records, and perform inventory counts
Purchasing Authority	Who is authorized to make purchases and sign contracts on behalf of the business? All purchases, or specific types of purchases? Of any amount or limited amount? List of authorized staff maintained?
Purchasing Approvals	Who must approve a purchase? Who approves CEO/ED purchases? When must approvals be obtained? For what reason is approval needed (e.g., funds availability, consistent with corporate objectives, high-risk, public relations or union considerations)? Are multiple approvals needed for high-cost, -risk, -profile purchases?
Budget Review	Verify sufficient funds are available for the purchase
Purchase Planning and Needs Assessment	Establish why a product or service is needed and what the business requirements and budget for it are before initiating competition. Prepare an annual purchasing plan, based on anticipated operational needs
Control	Explanation
Competition Thresholds	Establish the basis (price, risk-level, or type of purchase) for the level of competition required (Certification of Best Value, Price Comparison, RFI, RFQ, RFP)
Sole Sourcing	Establish grounds for non-competitive purchases
Advertising Business Opportunities	Publicly advertise business opportunities in diverse locations likely to generate maximum bids
Quote/Bid Thresholds	Establish the minimum number of quotes/bids that must be received during competition
Evaluation Criteria	Predetermined and objective; based on identified business requirements
Evaluation Teams	Includes a subject-matter expert, end-user, and someone with purchasing authority
Evaluation Rules	Address confidentiality and communications with vendors
Documentation	Proportional to the nature of the purchase; often tied to competition thresholds
Legal Review of Terms	Contract is legally sufficient and its form is appropriate for transaction
Vendor Background Checks	Do due diligence: check references, review past performance, ensure no liens
Designated Purchasing Personnel	Have designated personnel specialize in purchasing and administer procurement processes Rotate purchasing personnel’s areas of responsibility
Individual vs. Aggregate Orders	Prohibit split-orders intended to avoid competition or documentation requirements
Work before Contract Award	Prohibit the practice with limited exceptions
Reporting	Periodic reports to executives on year-to-date purchasing and procurement policy compliance to improve oversight efforts
Quality Control	Periodic independent review of purchases for best value? Periodic review of recurring purchases and long-standing business relationships? Inspecting products received: are they accurately counted and examined, to ensure they meet quality standards? Milestone-based payments for installment contracts?
Training Program	Purchasers and accountants understand the procurement policies and their roles and responsibilities under it
Signature Authority	Do certain purchases require two signatures? Executive or board-level signatures?
Fraud Response Plan	Approved and accessible to employees and business partners

III. Contract Management Procedures

An effective procurement policy will establish how purchases and contracts are to be managed to ensure quality and cost control.

Products. For product purchases, this may include ensuring that the correct product was received, in the requested condition and quantity, within the specified timeframe, and that the invoice was accurate and timely paid.

Services. For service contracts, this may include ensuring milestones and deadlines are met, invoices are reviewed, and quality and quantity of contractor’s work product is sufficient.  This may also include routinely reviewing service contracts to determine whether amendments, extensions, terminations, or renewals are needed.

Other helpful techniques for managing contracts include:

Discouraging automatic renewals.

Many service and maintenance contracts contain clauses that automatically extend the contract for an additional term unless the organization notifies the contractor of its intent to terminate before the renewal date. This practice can unintentionally obligate unsuspecting organizations to continue working with a non-performing contractor. Accordingly, automatic contract renewals should largely be eliminated from consumer contracts.

Encouraging option contracts.

When a contract includes an “option,” the vendor is offering to sell additional items or to provide continued services at a quantity-, quality-, and price-certain in the future. The buyer can accept or reject the option when the time comes, but the vendor cannot revoke it before that time. Option contracts allow organizations to lock-in prices and product or service specifications/availability, often resulting in cost, time, and administrative savings. Option contracts also allow for greater budgetary planning and operational consistency.

Periodically recompeting recurring purchases and long-standing contracts.

Although it is beneficial to establish long-lasting business relationships with reliable vendors, it is important to periodically recompete recurring purchases and long-standing contracts every 3-5 years to ensure that best value is obtained.

Establishing contract closeout processes.

A Contract Closeout occurs when contract performance is complete and all related administrative actions have been taken. Many organizations find it helpful to create close-out checklists, including an evaluation of the vendor’s performance, to help contract managers properly account for the transaction and inform future engagements.

Accounting protocols

An effective procurement policy will also establish protocols for receiving, verifying, paying, and auditing procurement invoices and contract installations in accordance with LSC’s Accounting Guide for LSC Recipients.