Report 2016-125.1 Recommendation 8 Responses

Report 2016-125.1: The University of California Office of the President: It Has Not Adequately Ensured Compliance With Its Employee Displacement and Services Contract Policies (Release Date: August 2017)

Recommendation #8 To: University of California

To ensure that the university achieves its goals of obtaining services at the lowest cost or best value and of providing vendors with fair access to contracting opportunities, the Office of the President should revise the university's contract manual to incorporate the best practices found in the State Contracting Manual for limiting the use of amendments to repeatedly extend existing contracts.

Annual Follow-Up Agency Response From October 2019

We strongly disagree with the State Auditor's contention that the State's three-year contract duration represents "best practices", and note no such evidence supporting that claim. In fact, there is no state law that limits the length of a contract as does UC's self-imposed 10-year term limitation. "Best practices" in our view is that policy and process that best supports case specific, value based strategic sourcing decisions, as determined by skilled category managers and procurement professionals; rather than adherence to generic, compliance driven regulatory standards best suited to repetitive purchasing transactions of commonplace supplies/services. The appropriate term of a contract is affected by numerous considerations which include in part, the specific commodity or service, the specific geographic delivery location or breadth of locations, the estimated supply base, projected market conditions, required supplier investment, etc. Longer contract durations often lock in pricing as a hedge against anticipated price increases, increase supplier familiarity with complex and variable campus service requirements and reduce the perpetual solicitation/contracting churn necessitated by three-year terms, freeing scarce staffing to deliver enhanced client service support and supplier relations management.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

We stand by the recommendation we made to the University to limit contract terms and that the State Contracting Manual can serve as best practice. The State Contracting Manual makes clear that a three-year contract term can be exceeded with written justification and approval. If the University were to conform to the practice in the State Contracting Manual, then the University would require a written justification and executive approval of contracts longer than three years, but it would not necessarily prohibit them.Thus, adopting a shorter, standard contract term does not preclude the University from achieving value based strategic source decisions as it notes.

1-Year Agency Response

We continue to agree with the recommendation to limit the use of amendments to repeatedly extend existing contacts, and believe that we have addressed this in the revision to BUS-43.

The University of California negotiates contracts to efficiently supply commonly purchased goods and services to the various campuses. Whereas the average contract length is 5 years, the strategic interests of the University may dictate entering into contracts of a longer term. Some examples of circumstances dictating longer contract terms are:

- Situations in which a longer duration is warranted to offset a significant upfront investment

- The good or service is needed systemwide and on a routine basis. Having a longer term contract in place would facilitate expedient purchasing by multiple departments.

- Revenue generating contracts where the interests of both parties are benefitted by a longer-term contract

We differ from the CSA recommendation in the assumption that "best practices" for service contracts is defined by the State's three year duration policy, although such may be the standard for public municipalities. Such, however, is not the standard for higher education as demonstrated by the attached survey responses of member institutions in the National Procurement Leadership Council. This council is comprised of the 35 CPO's of large research universities who have been recognized by their peers as strategic leaders in Procurement and Supply Chain Management in the higher education space. Their responses make it clear that our revised policy of a maximum ten year term is perfectly representative of "best practices" within higher education procurement.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

We acknowledge that the university has made changes to its contract manual to limit the use of contract amendments. However, the university also revised the contract manual to allow a 10-year contract duration, which is contrary to the practice outlined in the State Contracting Manual, which suggests no more than a three-year term unless there is written justification and approval.

Based on a survey it conducted, the Office of the President claims that that the three-year-limit is not standard. Although it is true that most respondents do not have a hard rule, most range between 3 and 6 years. Therefore, although there is no industry standard for three years, 10 years is beyond the upper end of the range. Given this fact, the university should conform with best practice as outlined in the State Contracting Manual.

6-Month Agency Response

To limit the use of amendments to repeatedly extend existing contracts the Office of the President:

-Revised BUS-43 to limit the maximum term of any contract to 10 years inclusive of the initial term plus all amendments or renewals, and to require that any exception receive appropriate approval by the Policy Exception Authority.

-Removed the alternative to extend contracts indefinitely from all template agreements

-Training for all Procurement systemwide and campus management and staff was conducted on November 29, 2017. An additional session for the Procurement Leadership Council was conducted on November 7, 2017.

-Updated templates, job aids and FAQs published on the UCOP website

California State Auditor's Assessment of 6-Month Status: Partially Implemented

We acknowledge that the university has made changes to its contract manual that more closely restrict the use of contract amendments and that substantially address our recommendation. However, the university also revised the contract manual to allow a 10-year contract duration, which is contrary to the practice outlined in the State Contracting Manual. Specifically, section 7.80 of the State Contracting Manual indicates that "contracts for services should generally not exceed three years, absent a substantial written justification for a longer term, based on business reasons."

60-Day Agency Response

To achieve the objective of this recommendation UC Procurement will:

-Revise all template agreements to ensure that contract terms, including extensions, do not exceed 10 years.

-Address these items in a webinar/training event for all procurement leaders and staff

-Update job aids and FAQs on the Office of the President's website

-Evaluate how UC can leverage the procurement technology currently being implemented to provide visibility to current contract terms

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2016-125.1

Agency responses received are posted verbatim.