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O'Brien lays out bricks and mortar of procurement rules

Health-sector organizations need not be concerned about imposing their own strict procurement rules on purchases made by most of their sub-contractors, says Toronto health lawyer Kathy O’Brien.

“Generally, our advice is you don't need to worry about it,” says O’Brien, partner with DDO Health Law. “You just procure the general contractor, and you let the general contractor follow their own rules for procuring.”

As government purchasing rules tighten, public sector institutions are seeking clarification on this issue, says O’Brien, who represents and advises health organizations and non-profits on governance and procurement.

In Ontario, strict procurement rules apply to major provincially funded institutions such as hospitals, universities and school boards, along with organizations in the broader public sector that receive more than $10 million in government money each year, according to an official publication.

They are required to conduct an open procurement process on all contracts worth $100,000 or more, extending the opportunity to the marketplace, she says.

All bids must be assessed according to transparent, predetermined criteria, and each contract must be awarded to the vendor with the highest score, O’Brien says.

“That’s supposed to help guarantee the contract goes to the highest-rated bidder with the best price, creating the best value for money,” she tells

Twenty years ago, procurement guidelines were relatively lax, O’Brien says. “Now the pendulum has swung to the other end of the spectrum. This decade introduced these very specific value-for-money rules.”

For instance, the Canada Free Trade Agreement, which governs commerce among the provinces and territories, includes commitments to open procurement practices, O'Brien says. It stipulates that public institutions can’t divert funds to third parties to avoid procurement regulations.

Governed by such stringent guidelines, health-sector clients tend to be very conservative, she says. “They want to avoid risk. They want to be in compliance with the rules.”

So when a hospital goes to the marketplace and follows its own strict procurement rules to engage a general contractor to, say, build a wall, officials want to know if that contractor is bound by the same regulations when purchasing materials for the job, O'Brien says.

“And the answer is, basically, no,” she adds.

That’s because the hospital is paying the general contractor for a completed project, not the components, O'Brien says. “It’s not buying the bricks. It’s not buying the mortar. It’s buying the completed wall.”

Of course, the hospital must follow stringent procurement rules in hiring the general contractor, she says. “And then the contractor goes out and builds the wall as best he can. You’ve discharged your obligation when you hire the wall builder.”  

The third-party contractor has a built-in incentive to get the best value for money spent on materials because the less he pays, the more profit he makes, O'Brien says. However, he still has to follow all the terms of the contract respecting the type and quality of materials he purchases, she says.

These rules apply for the vast majority of agreements health organizations sign with general contractors, called “fixed-price contracts,” O'Brien says.

However, they should take a different approach when entering into “time and materials contracts,” which are relatively uncommon, she says.

“And the distinction there is, you're paying the general contractor an hourly rate for his time, and he is going out and procuring the bricks and the mortar, and you're paying for the materials as well,” O'Brien says.  

The risk allocation is different because the contractor isn’t exposed if the materials are overpriced, the organization that hired it is, she says.

“So our advice differs depending on what type of contract you're entering into,” O'Brien says.

“The analysis is: Are they buying those materials as part of their fixed fee or are you reimbursing them for the cost of what they go out and procure? In that case, you're going to be much more interested in making sure they follow a value-for-money process.”

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