Free lunches and public procurement

Here's an article (in Spanish) that caught my eye this morning. A couple of interesting tidbits:

"The Spanish cleaning companies Association and the Unions trust that the new Public Contracts Law covers labour costs and to guarantee the social rights of workers in all tenders from the various contracting authorities."

 Here's what is meant by it, in the words of the Association president:

"...to include in the award criteria various elements related to the service quality, such as the working conditions offered by the companies..."

I find this article interesting for a couple of reasons. First, it is very uncommon to see both business and unions agreeing on labour costs. Second, it is possible to explain it by looking at the incentives and how they are both aligned in this instance. Let's start with the companies.

Cleaning services are incredible price sensitive and (as it is claimed) 90% of the cost incurred with each contract is simply labour costs. Companies hate competition and honestly price is the most liquid of comparators wether we like it or not. Since those contracts tend to be awarded based on price, if the costs is essentially fixed (the minimum wage) then they are effectively competing in the narrow sliver of their margin (those 10%) and that is where it  hurts. No wonder they want to either take price out of the equation or dilute with "service quality" criteria. More about this in a second.

As for the unions, they simply want a better deal for their members and there is nothing wrong with that, so they also want prices to rise assuming they translate into higher wages (they won't) or at least better working conditions for cleaning staff.

So, both parties interests are aligned in reducing price importance in the equation. In other words, both want the contracts to get more expensive. One side wants better margins, the other either more pay or better working conditions.

About the "service quality" then. The second citation above is a direct citation. The example of service quality provided by the President of the cleaning companies association has nothing to do with service quality (well, at least not directly) but with working conditions instead. To conflate the two is disingenuous to say the least. Working conditions are a problem for companies like cleaning services companies due to attrition and costs of training/recruiting new staff.

It is not surprising for me that he did not pick up other award criteria for quality. No mention of efficiency (although price is a proxy for it), availability/turn around of staff in case of spike in cleaning needs, technology to manage the contract/communications, etc. It may well be, however, that he did mention them but the reporter chose that tidbit instead.

In any case this is a roundabout way of solving the fundamental problem: wages are probably too low. It will lead to worse outcomes than solving the fundamental problem. And even then, let's be honest and assume that solving that problem implies higher taxes. There are no free lunches in public procurement.

Links I Liked [Public Procurement]

1. Scotland wants to use public procurement to find good employers. Peter Smith thinks this is a flawed approach and I am inclined to agree. It never ceases to amaze me, Government's desire (and ability) to bend procurement to achieve goals not connected with its core function.

2. DIGIWHIST project makes some bold claims about corruption in public procurement in English local councils. The full report by Mihaly Fazekas is here. My interview with him can be found at the Public Procurement Podcast.

3. Apprentice requirements in public procurement have hidden costs for bidders and make life more difficult for SMEs. Shocker! If someone can point me towards where proponents of these and similar measures haver their free lunches, please get in touch.

4. King's College is organising a one day workshop about convergence in transatlantic procurement markets on October 26th. Programme looks great.

5. Albert comments on Case T-299/11 by the General Court where compensation for loss of opportunity was granted to an aggrieved bidder on a framework agreement. Very interesting case and one of the first where we see a court looking into the messy inside of framework agreements.

6. Rome Tor Vergata is running a International Executive Week in Procurement Management next January.

PS: Apologies for the slow movement here on the blog but term has started. I hope to have a little bit more time and mental bandwidth over the next few weeks.