A New Paradigm to Address Bid Protests

Abstract

The goal of this study is to offer senior decision-makers a useful framework to evaluate, articulate, and recommend modifications of the government's bid protest policy to improve procurement outcomes. Most countries allow disappointed bidders to protest public procurement decisions as an oversight mechanism to minimize fraud and errors by procurement officials. The expectation is that allowing bid protests increases transparency and accountability and encourages competition, reducing the cost of public purchases. A key contribution of this study is to add an economics dimension to a bid protest process that is mostly thought of in legal terms. The economics approach suggests firms are likely to use the protest process strategically to improve their competitive bargaining position and will be equally strategic in their decision to protest an award. The conclusion is that a firm's responsibility to its shareholders can lead it to undertake protests for reasons substantially different from, and fundamentally opposed to, the government's objectives. The economics approach suggests minimizing the risk of protests that result in cost overruns, schedule delays, and performance gaps, while preserving the benefits offered by protests to promote competition and ensure the integrity, transparency, and accountability of the procurement process. Adopting an economics perspective reveals two other crucial insights: firms can exploit protests to extract concessions (Fed Mail), and risk-averse officials can overreact in attempts to achieve protest-proof procurements (Buy-offs). In recognizing costs as well as benefits of a protest system, the economics approach invites a review of alternative portfolios of governance mechanisms that complement bid protests (internal audits, external audits, independent investigations, alternative dispute resolution, increased training and incentives, etc.), to improve procurement outcomes.