The difference between the poison and the medicine may be in the dose: application of sanctions in public procurement
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The difference between the poison and the medicine may be in the dose: application of sanctions in public procurement
Authors : Caio César de Medeiros-Costa and Helena Araújo Costa
Summary: In the quest to expand its operations, a public administration body sees the need to build a second headquarters. To carry out the work, the agency needs to pay attention to the legal dictates and use a series of tools that aim to ensure the contractual execution within the agreed deadline and cost. In the quest to ensure the fulfillment of State objectives, Francisco and Carla, respectively Fiscal and contract manager, need to make decisions that involve Trade-offs related to the use of incentives and the consequences of this use in the relationship between contractor and contractor. Thus, the knowledge to be applied in the resolution of this case involves the discussion of organizational strategy, management of public procurement, as well as basic notions of administrative law.
Keywords : Government procurement management, bidding, public administration, sanctions, organizational strategy
Abstract : Seeking to expand its operations, a public administration agency needs to build a second headquarters. For the construction of this new headquarters, it is necessary to pay attention to the legal dictates and the usage of tools that aim to guarantee the contractual execution. In this quest to ensure compliance with the State objectives, Francisco and Carla, Supervisor and Contract Manager, respectively, need to make decisions that involve trade-offs related to the use of incentives and the consequences of this use in the relationship between contractor and contractor. Thus, the knowledge to be applied in solving this case involves the knowledge of organizational strategy, public procurement management, and basic notions of administrative law.
Keywords : Public procurement Management, public bidding, public administration, sanctions, organizational strategy
It is another day of work for Francis. As always, he arrives at his office, drinks his coffee and starts his routine in his organ, in which he is very proud to work. He works in an organ of the structure of the federal executive branch, created with the aim of fostering the development of small municipalities in Brazil. The complementary law that gave rise to the agency limited its activities to municipalities of up to ten thousand inhabitants, but this action was expanded to municipalities of up to twenty thousand inhabitants. Such a change significantly expanded its demand for services.
In order to meet this new demand, the agency had to build a new headquarters for its unit outside the capital. The headquarters project has an area of 50,250 square meters, contains an auditorium for 600 people, offices, restaurants, as well as technical and parking areas. In addition to its size, the project stands out for meeting accessibility standards, as well as technology for capturing rainwater and solar energy, aiming to be self-sustainable in these two important resources.
With a project with these characteristics, the director of the agency, Otávio, a politician who had been defeated in the last elections for federal deputy, wanted to take the office to the region of his electoral base and make this new headquarters a place where mayors from the surrounding area, as well as from other states, could meet to discuss, formulate and improve their public policies and partnerships. With this, Otávio hoped to demonstrate the strength of the agency and the importance of the new office.
To materialize the agency's expansion plan and build the new headquarters, it was necessary to carry out a bid, which had its notice published in record time, after an instruction of the contracting process considered by the agency's Board of Directors as excellent.
Despite the quality of the instruction process and the size of the project, the number of companies interested in the bidding was not large. After all, in the region chosen for the construction of the new office, there are few companies with the capacity to carry out such work and the estimated price for the contract was also considered low given the conditions of the civil construction market at that time. Only three companies were interested and qualified. These companies have different characteristics in terms of experience with public procurement. The first has never made contracts with the public administration; the second is involved in several scandals and with recent problems with the Justice; The third is a company with a high reputation, being responsible for approximately 90% of the contracts signed by the public administration for the execution of works in the region that will host the project. However, recently, due to the increase in the prices of civil construction inputs, rumors suggest that interested companies would be facing financial difficulties.
At the end of the presentation of the proposals, the third company was declared the winner with a price 10% below the estimated and 8% lower than that of the second place. With the selection of the best proposal, the award was made, an act in which the administration attributes to the winner of the contest the right to contract the object in vogue in the public notice. Then, the bidding was approved, confirming its result, and the contract signed. The winning company had a period of 18 months from the signing of the contract to carry out the work.
The announcement of the signing took place with great pomp, in which director Otávio summoned the press and declared that from then on a new era would begin. To mark this era, the inauguration of the new headquarters was fundamental and would serve for him to show his ability to carry out before the next elections in which he intended to run again. Therefore, compliance with the deadlines established in the contract was a priority in contractual management.
Contract management and the choice of its agents
In view of the demand generated with the expansion of the number of municipalities to be served and, especially, the proximity of the elections, Otávio was concerned about the management of the contract. He knows that maintaining deadlines and ensuring the best interest of the administration requires good contractual management, seeking to minimize elements such as opportunism and informational asymmetry that can bring losses to the agency, such as non-compliance with deadlines and the increase in costs associated with the work (MEDEIROS-COSTA, 2019).
Aware of the importance of management from the beginning of the execution of the contract (Medeiros-Costa and Terra, 2019) and complying with what is stated in Law 14,133/2021 in its article 117 [1] , the director recognizes the strategic nature of contractual management and, consequently, the choice of agents who will act in this process. Also during the preparatory phase of the bidding, training was provided to the agency's employees for contract management and inspection, according to the need expressed in item X paragraph 1 or article 18 of Law 14,133/2021. Participation in the course was optional and ten civil servants participated in this training, with emphasis on Francisco and Márcio, who obtained grades 10 and 9, respectively, in the evaluation undertaken at the end. The two were appointed to act in the inspection of the contract, but only one would be appointed due to the volume of work accumulated by the agency's employees.
The two civil servants have different profiles, but both have the technical qualification and training necessary to occupy the role of inspector:
Francisco is a dedicated servant, with 40 years in public service, who has always performed his duties with zeal and probity. He is considered by Otávio and his co-workers as someone who always acts in accordance with the law. On the other hand, he is also seen as an inflexible servant, whose catchphrase is the following phrase: "With the law you cannot negotiate". Otávio knows that with Francisco, the contract management will not have problems with the control bodies, but he is not sure if his way of acting will work with a company that is rumored to face financial problems, but which still has great market power.
Márcio, in turn, is considered a pragmatic server, focused on solving the problem and not on a single solution for different situations. He understands that sometimes negotiation can be a more effective method than the incentives provided for in contracts. The phrase that sums up his professional performance is: "We are here to find solutions, don't worry." Like Franscico, he has extensive experience, with 30 years of public service, being very well liked by colleagues. However, he has always worked in smaller cases, occupying the functions of manager in several areas, manager of service contracts.
Considering the two previously selected profiles and afraid of problems with control bodies and the impacts that any irregularities and failures in the management of the contract could have on his probable candidacy, Otávio decided to appoint Francisco. Thus, the ordinance was published and Francisco notified of his new duties.
Involved in a series of activities, Francisco learned about the contractual issues and analyzed the complexity of the project, feared that he would not be able to perform the function for which he was assigned. However, he gave up requesting the review of his designation, when reassured by Carla, the contract manager.
Carla is a servant considered studious and experienced, but with difficulty in saying no. She was already approaching retirement and was unmotivated with her work, but she told Francisco that they would work together and that under the baton of director Otávio she was sure that they would not have problems in the execution of the contract, since the contracted company also had experience with carrying out public works and met all the requirements for hiring.
Execution begins, problems begin
The cornerstone was laid and the work began, the presence of the Minister and even the President set the tone for the speeches, in which the strategic issue of the new headquarters was once again emphasized. Otávio opened the speeches and greeted the owner of the contracted company, saying he was sure that everything would come out according to the agreed deadline.
In the audience, Francisco followed the speeches and the importance given to the work by the managers present increased his already high sense of responsibility and his self-demand. But something told him that nothing would go as well as Otávio and Carla said.
Already in the first contact with the representative of the contracted company, Francisco realized that his intuition seemed to be right. To carry out the first stage of the work within the deadline established in the schedule, Francisco thought that the company would need a team at least twice as large as the one that presented itself and machinery in quantities four times greater than what was available at the construction site. Therefore, Francisco questioned the representative, who presented as justification the various works that the company was completing in other contracts with governments and assured that this issue would not compromise the deadlines and would not bring losses to the agency, since the work in question was in its initial phase. Francis was satisfied and resumed his activities feeling less worried.
However, in the following visits, the problems continued and the employees complained about the delay in the payment of the transportation voucher and the non-compliance with several clauses approved in the convention. Francisco, touched by the situation, when looking for the representative demanding explanations, was informed that the company had already made the payment and that the delay only occurred due to a failure in the bank's processing. Since there was no delay, Francis did not report it to his superiors.
At the end of the second month, Francisco attended the work and in possession of the schedule proceeded with the measurement, as agreed in the contract. At the end of this period, the work carried out by the company should make up a total of 10% of the workload necessary for completion. Francis found that the one presented corresponded to less than half and did not approve the measurement stage. Francisco then registered the delay and notified Carla, the contract manager. Carla then notified the company, which attributed the delay to the incidence of heavy rains in the region. Aware of the pertinence of the justification, Carla decided that there were no grounds to open a sanctioning process.
However, another problem remained, as the company began to press for the approval of the measurement and Francisco did not accept the pressure, saying that with "the law does not negotiate". The company, in turn, under the argument that without the resource to be paid after the measurement, it would not be able to continue the work, and that the delay was caused by the rain, took the demand to Director Otávio, as he knew of his interest in the completion of the work and inauguration of the new headquarters.
Otávio, fearful of the damage caused if the company abandons the work, summoned Francisco to a meeting. The conversation started harshly, Otávio began by stating that Francisco should think about the agency and that for a simple matter the continuity of the work could not be put in check, disregarding the impacts it would have on the management and purpose of the agency. Francis, for his part, argued that he could not do anything in the case in question and that approving the measurement incorrectly, in addition to incurring in illegality, would be a sign of leniency, which could generate delays and even greater problems. Francisco argued that he needed to follow the rule and that he did not agree with the decision not to open a sanctioning process, since the company did not delay other works in the region and the justification should not be accepted.
The meeting was closed and Francis' point about the measurement prevailed, but the hypothesis of applying a sanction was discarded. Although at that moment, Francisco came out as the "winner", he did not feel prestigious by the direction of the agency and knew that the way the director dealt with the issue indicated that sooner or later he would face new pressures.
The company continued its work without significant changes and once again the steps were delayed. As always, Francis proceeded to register on a proper form and detailed all the problems, including the repeated delays. The process was instructed by Carla, the company was notified to present the prior defense. After the deadline and the procedural flow was finalized, the conclusion was that the company should be fined. Upon consulting the recently sanctioned legislation, the manager found that the fine could not be inferred at 0.5% or higher than 30% of the value of the contract signed. What now? What is the dosimetry to be used? If, on the one hand, Carla, pressured by Francisco, believed that a very small percentage would not generate an educational effect, on the other hand, she knew that a percentage close to 30% could compromise the company's financial capacity and, consequently, the continuity of the work.
The manager, after consulting some colleagues who work in other agencies, decided to apply a fine of 5% of the contracted amount. The representative, extremely upset, sought out Francisco and argued that if they had had a closer and more cordial relationship he would have realized that the company is making every effort and that it had even obtained a loan that allowed it to double the capacity and that it could thus finish the work on time, without losses to either party.
Francisco returned home feeling guilty thinking that perhaps his appointment as a tax inspector was not the best choice for this contract. He thought that Marcos' profile, less legalistic, could have avoided the high cost of the sanctioning process and its possible effects on the continuity of the work. Some colleagues noticed Francis' discomfort and expressed support for his decision. According to colleagues, without Francisco's firm hand, the company probably would not have changed its behavior and the delays would have been greater.
A third of the deadline for completion of the work, Francisco still did not believe that the deadline would be met. Time passed and by the end of the first year the company had already caught up, but a sixth sense combined with what he had already seen throughout his vast experience in public service, made Francisco imagine that in this final stage some problem would occur.
Francis was right. In one of the visits to the construction site to monitor the work and carry out routine inspection, he noticed a great commotion. Francisco is aware of the situation, an important beam of the building had collapsed. The representative addressed Francisco and said that the responsibility was of those who prepared the project and that the agency would have to bear the costs of the repair and the losses caused. In addition, the representative claimed that there was a failure of the inspection that should have pointed out the problems. Then the representative left Francis talking alone and left.
Concerned and trying to find a solution, Francisco immediately tried to report the situation to Carla to assess the appropriate measures.
And now what to do?
The process was instructed based on the events observed, ample defense and the adversarial process guaranteed. Carla was thoughtful and analyzed the situation weighing the options, she believed she had made a wrong choice when defining the percentage of the fine. Now, once again, she found herself in the need to make a decision and wondered how she should manage the situation.
She consulted Francisco, who indicated that the decision should be the termination of the contract and the consequent sanction of impediment to bid and contract. The inspector argued that the damage caused by the contractor's failures was enormous and that the company, through its representative, had already declared that it was not possible to comply with the agreement. In addition, the representative declared that the company would file a lawsuit if it was sanctioned.
On the other hand, when consulted informally, Director Otávio pondered the costs associated with the termination of the contract and the time needed for a new contract to be made. He also argued that there was a risk that the courts would annul any administrative decision and that a high fine would lead the company to bankruptcy. A bankruptcy of the company would paralyze many works and modify the entire market structure, reducing competition in future bids. Pressured by his superiors and already certain of the impossibility of meeting the schedule, the Director was now concerned with completing the work and preventing other works of the public power from being paralyzed and a large company from being out of the market. Giving a vote of confidence to the manager, the Director declared his full confidence and support for the decision that was made.
Carla left the agency at the end of the day and, driving home, could not get the question out of her head. He spent all night thinking about what decision to make and came to a conclusion.
The process needed to be finalized, and the solution found by the manager was to follow Francisco's advice. The contract was unilaterally terminated and with due procedure the company was prevented from contracting and bidding with the federal public administration for a period of two years.
A year has passed since the sanction was applied, the company appealed to the courts and managed to reverse, in an injunction, the penalty applied. The work is stopped and caused a loss to the public administration. Whenever they meet, Francisco and Carla wonder what they could have done differently for the contract to be executed within the agreed conditions.
Discussion questions:
1- In view of the events narrated, what could have been done differently so that the contract was executed within the agreed conditions?
2- What would be the alternatives to the decisions made by Francisco and Carla, when they defined the payment according to the fulfillment of the schedule and that the fine would be 5%? What are the pros and cons of each alternative?
3- Were all the risks associated with the decision to terminate the contract considered by the actors involved? Point out existing risks and come up with suggestions for managing them.
4- How did the director's decision to appoint Francisco to the position of contract inspector contribute to the outcome of the case? Were Francis' decisions oriented towards preserving the interests of the body?
References
Brazil, Federative Republic of. Transparency Portal (2021). Available at: < http://www.portaltransparencia.gov.br/sancoes/ceis?ordenarPor=nome&direcao=asc > Accessed on: August 06, 2021
Câmara de Notícias Agency. Book points out 14 thousand public works stopped; cost so far is R$ 70 billion . Available at: < https://www.camara.leg.br/noticias/599773-livro-aponta-14-mil-obras-publicas-paradas-custo-ate-agora-e-de-r-70-bi/ > Accessed on: August 06, 2021
Girth, Amanda M. 2014. "A Closer Look at Contract Accountability: Exploring the Determinants of Sanctions for Unsatisfactory Contract Performance." Journal of Public Administration Research and Theory 24 (2): 317–48. https://doi.org/10.1093/jopart/mus033 .
de Medeiros-Costa, Caio César ; Terra, A.C.P. Public Procurement : Beyond economy. 1. ed. Brasília: ENAP, 2019. v. 1. 135p.
de Medeiros-Costa, Caio César . Analysis of the educational effect of sanctions on administrative contracts of the federal public administration in Brazil . 2019. ENAP
REIS, P.R.C. Performance in Public Procurement Contracts: empirical evidence from recent changes in Brazil. Thesis (Doctorate in Administration), Federal University of Bahia. 2015
About The Authors
[i] Caio César de Medeiros-Costa is an Adjunct Professor at the Department of Administration – University of Brasilia. PhD in Public Administration and Government – EAESP/FGV. He teaches the disciplines Applied Scientific Methodology (MCA) and Public Procurement Management at UnB. Email: caiocosta@unb.br
[ii] Helena Araújo Costa is an Associate Professor II at the Department of Administration (ADM/FACE) at the University of Brasília (UnB). She is the coordinator of the ADM Casoteca. She has a PhD in Sustainable Development (CDS/UnB). He teaches Contemporary Topics in ADM 1 and 2, and Introduction to ADM at UnB. Email: helenacosta@unb.br
Thanks
Special thanks to Paulo Reis and Ronaldo Corrêa for their careful reading and important suggestions.
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Gallery
This case is fictitious and was based on the authors' experiences, research observations and reports from civil servants who work in the area of bids and contracts of numerous agencies. The actions employed are based on Law 14133/2021. It is not the authors' intention to evaluate or judge the legislation or public administration and its servants. This text is intended exclusively for academic study and discussion, and its use or reproduction in any other form is prohibited. Copyright infringement will subject the offender to the penalties of Law No. 9,610/1998.