By: Thomas Klein
For many water and wastewater utilities in the US, regulations like Pennsylvania’s Municipality Authorities Act mandate competitive bidding for purchases exceeding certain cost thresholds. I find many individual states’ thresholds are low to begin with, but then a lot of utilities set even more restrictive bid thresholds for themselves. Some utilities have set $3,000 or $1,000 thresholds for themselves. While these regulations aim to ensure transparency and fairness, the thresholds are often set too low, leading to inefficiencies and increased costs. In this blog I’ll break down the problems associated with setting bid thresholds too low, focusing on two main issues: the inability to buy basic commodities and the excessive time, effort, and overhead consumed in obtaining multiple bids. I’ll then offer some recommendations on how to bid strategically.
Low Bid Thresholds Don’t Even Cover Commodities Now
In today’s market, the cost of even basic commodities has risen significantly. When bid thresholds are set too low, utilities often find themselves unable to procure essential items without undergoing a lengthy and costly bidding process. Basic supplies like pipes, fittings, and chemicals, which are critical for day-to-day operations, frequently fall under these low thresholds. This situation leads to delays in procurement and sometimes even interruptions in service. In other words, a dollar doesn’t go as far as it used to, which basically means you’re bidding everything, and that takes a lot of time.
Low bid thresholds can also force utilities to make smaller, more frequent purchases to stay under the threshold, which can be less efficient and more costly in the long run. I’ve even experienced utility personnel intentionally splitting up purchases just to stay below the bid threshold (which I guess is one way to procure strategically). And frankly, splitting up purchases into small frequent ones just to avoid a bid threshold sort of defeats the purpose of having a threshold in the first place.
The Time, Effort, and Overhead Consumed in Getting Three Bids Costs More Than You Realize
Another area where I see many utilities struggle with the bid process is in the hidden costs of running the bid process itself. The requirement to obtain multiple bids for low-cost items often leads to significant administrative overhead which are costs that are usually not readily apparent or are totally untracked. Preparing bid documents, advertising the bids, evaluating responses, and awarding contracts can consume a lot of time and effort. This process can be especially burdensome for smaller utilities with limited staff or without a dedicated procurement team.
In some cases, the hidden costs of the administrative effort to manage the bidding process can exceed the cost of the items being purchased. This situation can create a paradox where the efforts to save money through competitive bidding end up costing more than they save.
I’ve also witnessed how some vendors may be less willing to participate in bidding processes for small contracts, resulting in a utility not receiving enough responses. Not receiving enough responses creates a vicious cycle of more administrative overhead from paperwork or rebidding.
Just as a quick example, if you spend 40 staff hours on a small procurement at a fully-burdened rate of $68.80/hr (arrived at from $43/hr and a 60% burden rate) you’d have spent $2,752.
Let’s jump into a quick example to illustrate some of the issues I’ve highlighted so far.
A Quick Example
Let’s pretend that you are a utility manager, engineer, procurement team member, etc., and you need to procure a riding lawn mower for maintenance. Now, I realize that many utilities will have a commercial landscaper and not need a mower. It’s just easier for me to use lawn mower pricing which is consistent from state to state for this demonstration compared to something like chemicals which varies a lot. Also, most chemicals like coagulants seem to cost an actual fortune these days, and it would be depressing to say that within your $1,000 bid threshold you can purchase a thimble of ferric sulfate. So mowers are what we’ll use for this demonstration.
Let’s assume that you’ve already worked up a bid specification for the mower or know what you need to purchase. There is a sample spec attached to the bottom of this article courtesy of me and ChatGPT which you may feel free to use the next time you’re in the market for a mower (you’re welcome). That spec will show you what type of mower I’m looking for and getting pricing for (just in case you’re interested in actually reading that spec, which I wouldn’t be if I were you). The type of mower we’re after here based on pricing from Home Depot’s website comes in at a price of $3,399. Now let’s also assume that number is the winning bid.
For $3,399:
| If your bid threshold was… | Your purchasing power is… | Recommendations |
| $1,000 | 0.29 mowers | Maybe consider a rental |
| $3,000 | 0.88 mowers | Maybe consider financing it |
| $12,600 | 3.7 mowers | Consider loaning it to the utilities whose bid threshold is $1,000 |
Note: $12,600 is the bid threshold based on the Pennsylvania Municipality Authorities Act. Other states’ thresholds will vary.
So what does this demonstration show? First, with the way prices are today, even a common piece of equipment like a lawn mower is still above many utilities’ bid thresholds which means it’s likely you’d need to bid it out. Second, knowing what we now know about staff hours and overhead consumed during the bid process, it’s likely that the process of bidding out this lawn mower cost about as much as the mower itself. Only bidding it probably took longer than simply walking into a supplier or shopping online to purchase it.
Recommendations for Improving Bid Processes for Small Purchases
- Raise Bid Thresholds: If you’re directly responsible for or can influence bid thresholds for the utility you are a part of, consider adjusting bid thresholds based on more than just inflation or what your peers are doing. Adjust bid thresholds strategically based on what your overhead looks like and what your typical purchases are. In other words, set thresholds that match your unique needs. An adjustment of the threshold to $5,000 in the mower demonstration above would have streamlined the procurement process and reduced administrative overhead. If you’re making small, infrequent purchases of certain products or services, those are probably not good bid candidates. Larger quantities or frequencies of purchases might be better candidates for bids. You can adjust your thresholds based on those transactions.
- Implement a Simplified Bid Process: For purchases clearly below a certain threshold, consider adopting a simplified bid process. This approach could involve direct procurement or obtaining quotes from a set number of pre-approved vendors. This approach maintains desired pricing and quality while drastically reducing time and effort of bidding. Simplified processes can include using online bidding platforms or pre-approved vendor lists, which can further expedite the procurement process.
Our CART platform and professionals at Constructive can help with these recommendations. But even if you don’t call on us to help, it’s worth considering a more strategic municipal procurement approach by keeping those recommendations in mind.
If you want to get more strategic about your municipal procurement, consider applying for our free tier here.
Conclusion
Low bid thresholds, while intended to ensure fairness and transparency, often lead to inefficiencies and increased costs for water and wastewater utilities. Or simply put, low bid thresholds often make the juice not worth the squeeze. By raising thresholds, and implementing simplified processes, utilities can improve their procurement practices and focus their resources on providing high-quality services to their communities.
