November 20, 1998
To: Audit Committee
From: City Auditor
Subject: Chemical Pricing
Recommendations:
It is recommended that:
(a) the recommendations contained in this report be implemented;
- the Purchasing & Materials Management Division (City Purchasing) communicate to city departments the approval and other requirements under the interim financial control and purchasing by-laws, as well as related purchasing policies and procedures, and confirm the roles and responsibilities of the Division and user departments with respect to the procurement of goods and services; and
- this report be forwarded to the Works and Utilities Committee for information.
Background:
At its meeting of July 8,9,10, 1998, City Council adopted Clause No.7 of Report No.6 of the Works and Utilities Committee, which referred the issue of chemical pricing to the City Auditor, with a request that a report be submitted to the appropriate committee on the matter.
Comments:
The bulk of chemicals purchased by the City are used at sewage treatment plants of the Water Pollution Control Division and water treatment plants of the Water Supply Division (former Metro). Prior to January 1, 1998, the Purchasing and Material Supply Section, Finance Division, Corporate Services Department of the former City of Toronto, being the purchasing agent for the then Metropolitan Toronto, was responsible for the procurement of services and materials, including chemicals. The Division continued to provide this service following amalgamation. In 1998, awards totaling approximately $9 million have been issued for the supply and delivery of sixteen major chemical products.
The objectives of this review were to determine whether current procedures for the procurement of chemicals are effective in ensuring fair market competition and economy, and that corporate policies and procedures are consistently observed.
Our examination included a review of corporate procurement policies and procedures, interviews with representatives of the Purchasing & Materials Management Division and Water & Wastewater Services Division, an examination of relevant purchase transactions and other procedures deemed necessary during our sample period of 1995-1998. The results of our review and applicable recommendations are outlined below. We have reviewed the findings with staff from the Purchasing and Materials Management Division, City Finance as well as with staff from the Water and Wastewater Services Division, and have included their responses to the recommendations.
Due Process for Fair Market Competition
We have examined procedures with respect to product sourcing, awareness promotion, bid evaluation and awards. Our review confirmed that interested persons and firms are provided open access to business opportunities with the City. They are adequately advised of related procedural requirements and quotation/tender requests through venues such as video presentations, newspaper advertisements and the Internet. The supplier database has been regularly updated to include leads from trade magazines, professional contacts and other sources. Bid evaluation and award decisions are made by City Purchasing and the user department, taking into account both price and established technical specifications.
Except for the procurement of ferric chloride (which is addressed later in this report), chemical contracts were awarded through open competition and with the involvement of City Purchasing.
Chemical Pricing and Contract Awards
During our review of price quotations and related correspondence from 1995 - 1998, we determined that there was general compliance with established procurement procedures, and that contracts were awarded to the lowest price bidder who also met pre-established technical specifications. We also noted that suppliers that have an existing contract with the City have a higher success rate in securing a new contract for the same chemical product.
A survey of chemical pricing practices followed by other municipalities indicated that they compare prices with other organizations, as required. Some also obtain published price lists such as the Camford Chemical Report or other applicable information through the Internet. These procedures provide added assurance that quoted prices are reasonable. City Purchasing does conduct price comparisons on an "as required" basis. However, these comparison, in many cases, are done in reaction to circumstances or events. To ensure the City is obtaining fair and reasonable prices for the goods and services it buys, a more proactive price comparison approach should be adopted. In the case of a sole bid, this process will assist City Purchasing in determining the reasonableness of the quoted price. To further strengthen the process and discourage any potential collusion among bidders, the National Institute of Governmental Purchasing suggests that organizations include a clause in their Request For Quotation, Tender or Proposal documents, alerting suppliers that pre-bid information exchange among competitors is a criminal offence.
Recommendation #1
It is recommended that:
(a) City Purchasing implement a more proactive price comparison process, which would include conducting regular price comparisons with other organizations and against published price lists and industry standards, where possible; and
(b) City Purchasing consider adding a clause to the City’s Request for Quotation, Tender or Proposal documents, alerting suppliers that pre-bid information exchange among competitors is a criminal offence. This should be done in consultation with the City Legal Services.
Response from Purchasing and Materials Management Division:
Established purchasing procedures require that all goods and services be obtained as the result of an open, competitive, non-restrictive process in which all bidders are provided an equal opportunity to submit bids on City requirements. This ensures maximum competition to achieve the best price possible. The Purchasing and Materials Management Division follows such procedures.
The purchase of chemicals for water and wastewater treatment are not discretionary purchases that can be delayed. These are essential requirements. We question the value of subscribing to industry publications or other information to confirm if the pricing being offered to the City is reasonable, if they will not affect the decision of whether to buy or not buy the commodity at the quoted price.
With respect to a clause alerting suppliers that pre-bid information exchange is a criminal offence, the Purchasing and Materials Management Division will consult with Legal Services on the form and content of such a clause.
With regard to comparing prices with other municipalities or organizations, the Purchasing and Materials Management Division has had recent discussions with other GTA municipalities on this point. The GTA municipalities have indicated that they do not make public unit prices or bids, thus making a price comparison between the City and the other GTA municipalities not possible.
Splitting of Contract Awards
In July, 1998, the contract for the supply of liquid chlorine was awarded to a new supplier. Prior to this recent award, two suppliers had been sharing the annual contract for a number of years These two companies offered identical prices each year and were the two lowest bidders since 1992. Purchasing and the former Works Department made the decision to split the annual award. Respondents to our survey indicated that splitting an order in the case of two tied low bids is not common practice. In the event that two companies offer the same lowest bid, other criteria are taken into consideration in making the decision, and the contract is awarded to only one supplier. The National Institute of Government Purchasing indicates that a contract should be awarded to only one supplier in the case of tied bids, and advise that suppliers should be made fully aware of the City’s policy in this regard. Staff from the Competition Bureau, Industry Canada also recommend that in the case of suppliers offering the same low bid for a commodity or service, it is in the best interest of the City and the competitive process to award the contract to one supplier, as this would reduce the risk of companies colluding on a bid.
Recommendation #2
It is recommended that:
(a) in the event two or more suppliers offer the same lowest bid for the provision of goods or services, the contract be awarded to one supplier based on other evaluation criteria; and
(b) City Purchasing consult with Legal Services on any legal issues that should be considered in awarding a contract to only one supplier in the case of two or more tied low bids, and on any additional clauses that should be added to the City’s purchasing documents (Request for Quotations, Request for Tender, etc.) to protect the City’s interests accordingly.
Response from Purchasing and Materials Management Division:
The splitting of contract awards is only considered after it is determined that all criteria taken into consideration have been evaluated as identical, not just pricing. As a result, the splitting of a contract award is done quite infrequently.
However, there is an advantage to splitting contract awards. Having two suppliers proving a good or service can provide an increased security of supply so that if one of the suppliers has unexpected problems or delays in delivery of the commodity at any time during the contract period, there is an immediate back-up source of supply. In the case of chemicals for water purification and wastewater treatment, where continuity of supply is critical, this can be a distinct advantage.
Also, if two firms submit identical bids for a good or service, then each is the "low bidder" and is entitled to be awarded a contract. In such a case it may not be wise to look for factors upon which to award a requirement which may be considered minor.
This may result in legal action by a bidder not awarded a requirement for loss of business. It may be useful to consult with the City Solicitor on this point.
Procurement of Ferric Chloride
Ferric Chloride, in the form of soluble iron salts, is required for the precipitation of phosphate compounds contained in the sewage flow at the Main, Humber, Highland Creek and North Toronto sewage treatment plants. Eaglebrook, Inc. of Canada (previously known as Mineral Recovery Company) has been the sole supplier of this chemical to the Works Department (former Metro) since January 1, 1981. Purchases totaling $1.5 million were made in 1997.
Our review of this contract identified the following concerns:
(i) Lack of Purchasing Involvement
Various Council reports indicated that in September, 1980, the then Metro Council adopted the proposal to award a 5-year contract, commencing January 1, 1981, to Mineral Recovery Company, a division of Eagle Brook Investment Limited (currently known as Eaglebrook, Inc. of Canada), the lowest bidder. At the time, sixteen firms were invited to submit quotations and four quotations were received. The annual contract value was estimated at $900,000 in 1981. The agreement included a renewal provision for a period of five years.
In August 1985, the then Metro Council approved a 5-year contract extension to December 31, 1990. The unit price was discounted by $0.0648 per kilogram in return for a reduction in the performance bond requirement (from $750,000. to $500,000.). The contract was further extended by 5 years in 1990 (to December 31, 1995) and again in 1995 (to December 31, 2000). Both extensions were approved by Metro Council.
According to correspondence reviewed, Eaglebrook has been dealing directly with Works Department staff regarding the supply of this product. A Pre-bid Contract Proposal to the Director, Water Pollution Control dated January 9, 1995 indicated that Eaglebrook offered a price reduction of 17.88% in return for a 5-year extension, or a 6.36% price reduction for a 3-year extension. A reference check done by the Works Department on another major supplier at the time identified various operational concerns. In view of these concerns and potential savings of between $2 million and $2.6 million over the 5-year period, staff recommended and Metro Council approved a further 5-year extension to the Eaglebrook contract in May 1995.
City Purchasing was not asked to participate in the procurement process for ferric chloride subsequent to their involvement in 1980. Price quotations were not publicly solicited from interested suppliers. To assure the presence of open and fair competition in all procurement matters, as well as conforming to due process, it is important that City Purchasing participates in all procurement related decisions.
Recommendation #3:
It is recommended that upon the expiry of the existing contract in December 2000, the purchase of ferric chloride (soluble iron salts) be done through an open bid competition, coordinated by City Purchasing.
Response from Water and Wastewater Division:
Agreed.
(ii) Payment Controls
A purchase order was issued in October 1980 for the supply and delivery of ferric chloride for a 5-year period commencing January 1, 1981. Related payments during 1981 - 1997 were processed with reference to the same purchase order. New purchase orders were issued for 1998. In March 1998, City Council authorized a 0.3% price reduction for 1998 in accordance with the Consumer Price Index, as stipulated in the contract. Invoices paid in September 1998 were processed at the higher price as quoted on the purchase orders which Purchasing issued in February 1998. The potential overpayment for 1998 is approximately $4,000. The Water and Wastewater Division has indicated that it is in the process of taking action to recover the overpayment and will confirm the adequacy of procedures to prevent a recurrence.
We also found that the Water and Wastewater Services Division is unable to locate the supplier’s performance bond (in the amount of $500,000) which was stipulated in the contract.
Recommendation #4:
It is recommended that the performance bond be located and kept on file until expiration of the contract with Eaglebrook.
Response from Water and Wastewater Division:
We have verbally requested Eaglebrook to provide a copy of the bond to complete our records. However, in the event that one was not issued, the division would like to clarify the appropriateness of this request in light of the terms and conditions of the other chemical contracts and to achieve consistency.
Authorization of Purchase Awards
On March 6, 1998, City Council adopted an Interim Purchasing By-law To Establish Interim Procedures And Authority for the Procurement of Goods and Services (By-law No.57-1998). In defining the reporting relationship of the Purchasing Agent to Council and designated committees, Section 5(3)(b) states that "the Bid Committee is authorized to make an Award if the amount of the Award is equal to or less than the funding approved by Council and is equal to or less than $1.0 million."
Council further directed that "quotations and tender calls over $1.0 million shall be reported to the appropriate Standing Committee of Council and/or Community Council, and subsequently submitted to Council for approval." This by-law was amended on June 5, 1998 (By-law No. 304-1998) such that a Standing Committee or Community Council is authorized to make an Award if the amount of the Award is less than the funding approved by Council and is equal to or less than $2.5 million, or make a recommendation to Council.
Our review found that in April 1998, the Bid Committee approved an award for the supply and delivery of hydrofluosilicic acid. The award, in the amount of $747,900.04, was made to Lucier Chemical Industries Limited for the period ending December 31, 1998. The contract includes an option to renew for a further one or two year period, should all the terms and conditions be agreeable to both parties. Purchasing staff are of the opinion that further approval from the Bid Committee is not required if the Department elects to award a one or two year extension.
The Interim Purchasing By-law (No.57-1998) defines an "Award" as "the acceptance of a Tender, either by the Bid Committee pursuant to the terms of this by-law or by Council in adopting the recommendation of a Standing Committee of Council". Since the potential amount of this contract, if extended, will exceed $1.0 million, it is our opinion that this award requires Standing Committee approval.
Recommendation #5:
It is recommended that City Purchasing consult with Legal Services to clarify whether the cost of renewal options are to be taken into consideration when determining the value of a commitment/contract for approval purposes, and that such clarification be communicated to all applicable City Purchasing staff and departments.
Response from Purchasing and Materials Management Division:
This matter had been reviewed with Legal Services earlier this year who have advised us that it is acceptable for approval purposes to include renewal options in Reports when determining the value of a commitment/contract. However, the Purchasing and Materials Management Division will again review this matter with Legal Services to clarify this issue.
Request for Tenders
Currently, tenders are requested on an individual basis for each chemical. There be some economies to the supplier and in turn some price advantages to the City by packaging the tender requests so that a supplier could bid on multiple chemicals at the same time. We also noted in our review that the contracts for some chemicals extend beyond one year. It may therefore be advantageous to the City to request pricing on other major chemicals for different contract duration terms (for example one-year, three-year and five-year terms), after taking into account factors such as price volatility, changing technical specifications and general quantity requirements for each chemical.
Recommendation #6:
It is recommended that:
(a) City Purchasing, in consultation with the Water and Wastewater Services Division, investigate the feasibility of having multiple chemicals included in a Request for Tenders/Quotations and whether there would be any price advantages of allowing suppliers to bid on more than one chemical on the same tender; and
(b) City Purchasing, in consultation with the Water And Wastewater Services Division, consider requesting quotations for contract terms beyond one-year for all chemicals, as appropriate.
Response from Purchasing and Materials Management Division:
Requirements for chemicals are issued separately to avoid confusion on the part of suppliers. Individual mailing lists are prepared for each requirement and suppliers are included on each mailing list according to their response to the Purchasing and Materials Management Division’s "Bidders Application Form", which asks suppliers to indicate for which goods or services they wish to receive Requests for Quotation.
As indicated in the City Auditor’s report, approximately $9 million is spent annually on the purchase of sixteen major chemical products. Combining these commodities, each with its own unique specification, may lead to confusion by the suppliers when they are completing the bid documents for submission to the Purchasing and Materials Management Division.
However, the Purchasing and Materials Management Division will again review this matter to determine if any of these commodities can be combined in one bid package.
Response from Works and Wastewater Division:
The Water and Wastewater services will consider this recommendation, however, as different chemicals have different evaluation criteria, e.g. Polymer requires extensive testing prior to acceptance, awarding of the purchase orders may be delayed until all issues for all chemicals are resolved.
In addition to this, there are few contractors which could supply all chemicals used by the Division. Such contractors would most likely subcontract some of the supplies to others. This in turn would cause a price increase due to additional overhead and profit margins added.
The Water and Wastewater Division will consider contract terms beyond one-year provided that agreements incorporate a process which will ensure fair price throughout the contract and the interests of the division are met with regards to quality, delivery and technical assistance.
Purchase Order Adjustments
During our review we noted that numerous Purchase Order Adjustments were issued during the first quarter of each year. Our discussions with Purchasing staff revealed that due to extensive product testing and delayed responses from the Works Department, purchase orders for chemical products are historically issued around April or May of the year, but with a December 31 expiry date. Consequently, it is necessary to issue Purchase Order Adjustments to the same supplier in the new year to authorize invoice payments until the award of a new purchase order.
Recommendation #7:
It is recommended that:
(a) in order to minimize the number of purchase order adjustments issued, purchase orders should cover a full twelve-month period; and
(b) staff allow for sufficient lead time for product testing and other procedures so that a decision is made on the award of a new purchase order before the existing one expires.
Response from Purchasing and Materials Management Division:
The Purchasing and Materials Management Division encourages the Works Department to forward their requirements for chemicals well in advance of the commencement date of the annual contracts. In the past, there have been instances where the contract did not commence exactly on time due to delays caused by the lack of scheduled Works Committee meetings in the former Metro Toronto and the relatively low threshold ($100,000) above which all purchases had to be approved by Committee and or Council.
In the new City of Toronto with the Bid Committee having regular weekly meetings and being able to award contracts up to $1 million in value, together with closer co-operation with the Works Department, these instances of delayed contract awards will diminish.
The Purchasing and Materials Management Division has issued in July of this year, procedures to all departments which outline the process that is to be followed for all purchasing activity handled by the Division.
Conclusion:
Current procedures for the purchase of chemical products are effective in extending fair and equal opportunities to interested persons and firms wishing to do business with the City of Toronto. There is also general compliance with established policies and procedures. By implementing the recommendations in this report, Purchasing can further protect the integrity of the process and better ensure that the City is obtaining the best prices for chemicals purchased.
The Purchasing & Materials Management Division performs an important role in ensuring that the City’s procurement process is fair and open, that due process is followed and properly administered, that departments are receiving quality goods and services at the best prices, and that laws and regulations with respect to procurement matters are observed. In the transition to the new city, not all departmental staff may be aware of by-laws that have been enacted to establish financial control and procurement requirements. It is therefore important that City Purchasing communicates its mandate to departments, including roles and responsibilities in the procurement process, as well as applicable by-law and policy requirements.
Contact Name and Telephone Number:
Tony Veneziano, Senior Audit Manager, 392-8353.
Jeffrey Griffiths
City Auditor
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