For a few years now, government contractors have had a new challenge to take into consideration when placing bids. Most government agencies are now following a procurement method known as Lowest Price Technically Acceptable or LPTA. Simply put, this practice is about choosing the lowest price instead of the best value.
This is affecting the government contracting market in different ways:
- Contractors have to engage in a real price war and undercut each other for a chance to win a contract.
- Placing low bids to win contracts results in lower profit margins, which is often reflected in low wages for employees.
- This works for small companies where a single person performs most of the work and is comfortable with a lower profit margin.
- This is a real issue for new players on this market who have to make incredibly low bids to get their first contracts.
Does it mean the only way to win a contract is to place the lowest bid?
Not really. The real question is how government agencies are interpreting what ‘technically acceptable’ means. This procurement practice was instated to prevent contractors from overcharging for the services they offer. The reasoning is that if another contractor can offer the same service at a lower price, the first contractor must be overcharging. (Read this recent article in Government Executive that talks about why LPTA has a clear but limited place in source selection.)
Contractors have to adapt and look for ways to provide the lowest price over the best value. Contractors have to cut corners wherever they can, which usually means they will use the cheapest supplies they can find and save money by lowering wages. This could end up being more costly and time-consuming for the government since not getting the best value for a project means there might be a need to restructure the contract or to hire someone else to fulfill the contract if the quality of the work provided is too low. (Listen to this recent set of interviews conducted by Federal News Radio at the 2015 PSC Vision Conference about why both industry and the military are starting to see fallout from the over use of LPTA.)
LPTA makes sense in some instances.
No one wins when LPTA is used on projects where value is crucial or when contractors place unrealistically low bids just to win a contract. However, LPTA should not be an issue as long as government agencies understand when to use this procurement method and when to focus on finding the best value. For instance, LPTA makes sense for cleaning services as well as maintenance and operations contracts.
Whether we like it or not, LPTA is here to stay. As a contractor, you will have to face this new challenge and look for ways to place the best bid you can while making sure the profit margin is still worth it.