By Constance Hornig and Kathi Mestayer

Competitive solid waste management service procurements for major collection, processing, or disposal services commit many months of staff time and potentially tens of thousands of dollars of department budget and put your local government’s credibility on the line with potential private-service providers. Before deciding to secure solid waste management services from a third party (public or private) rather than providing them with your own municipal employees, ask the following questions.

1. Can you draft measurable performance standards? If you cannot summarize your service expectations on paper, not only will you be unable to compare proposers’ prices, but you will be stymied in enforcing service levels. For example, if you have been providing municipal collection service, you might routinely clean up litter around commercial bins, go back for "missed" containers that were not set out on time, and dismount and provide push services for an elderly resident. If these sorts of premium services are not outlined in the collection-service contract that underlies your price proposals, you can be certain that either you will not receive them or they will appear as surcharges appended to your base rate.

2. Does the market provide keen competition? No one wants to throw a party and have nary a single guest attend. Not only do multiple bidders, hungry for your business, translate into better prices, but they can result in more favorable contract terms in general, including:

• Lower escalators (i.e., percentages of the CPI on portions of the service fee)
• Cheaper termination-for-convenience buyout prices
• Tighter default provisions
• More comprehensive indemnification
• More favorable risk allocation (e.g., events of force majeure such as labor disputes and changes in law)
• More detailed performance standards
• Better service levels during the contract period (because of the option of quickly replacing a defaulting contractor)

Do not risk expending the time and money on developing expensive procurement documentation, including consultants’ fees, and then discover that few qualified companies are interested. (But on the contrary, if bidders believe that competition exists during the bidding process, such as a large crowd attending the prebid conference, the fact that some bidders ultimately drop out unbeknownst to the others just prior to submission should not matter. Perceived competition is the key.)

3. Have you developed a valid benchmark? This advice is easier counseled than conducted. Collection services, in particular, contain so much program variety and municipalities embed so many other fees into their rates that comparison can be misleading. Even comparing your competitive bids, one with the other, is not determinative of whether or not you should award the service contract if you do not know what it costs you to provide the service yourself. That cost benchmark should be developed using full-cost accounting and rational-cost allocation (such as rationally considering transitional, differential, and "sunk" costs). Despite the difficulty, you must arrive at a valid benchmark to not only make your outsourcing decision, but to quantify it prospectively…and retrospectively as well. You might consider establishing a "cost-saving threshold" up front: Services will not be outsourced unless the demonstrated savings exceed x percent of the benchmarked costs.

4. Can you protect public health and safety if your contractor defaults? Several considerations intersect here. If your law permits, you may wish to avoid awarding the contract to the "lowest responsible/qualified bidder." At a minimum, you should consider creating a detailed description of what constitutes "qualifications," including creditworthiness in particular to subsidize operation costs, if necessary; fund indemnifications; and pay prescribed damages for nonperformance. Many purchasing ordinances allow local governments the flexibility to make complex determinations such as creditworthiness based on comparing submittals and disclosures rather than on a predetermined threshold. Performance bonds can provide illusory, or delayed, cash flow to fund substitute services, so parent performance guaranties, letters of lines of credit, or performance assurance accounts that you can access might provide you with the best assurance that safe and responsive service continues without interruption.

In addition, your service agreement may give you the right to use your contractor’s service assets and take over providing service yourself or through third parties if the contractor fails to timely do so itself.

In conclusion, if you feel confident that you can creditably answer these questions, proceed with outsourcing.

MSW