Stipends in P3 Procurement: Why Pay the Losers?

The procurement process for a public-private partnership differs in many respects from the ordinary public-procurement process for goods and services. To be sure, P3s are often large-scale and high-profile, with sophisticated participants, and more stringent procedures to ensure the quality of the product and integrity of the process might be expected. However, projects delivered under a traditional (i.e., non-P3) approach can be just as large and high profile, without any additional procedures. Ultimately, most of the differences between a P3 and a non-P3 procurement process can be explained by the need for participants to submit a bid with committed financing, which dramatically increases the cost to submit a bid. Indeed, mid-to-high seven-figure bid-preparation costs are quite common in large P3s.

With that cost in mind, the need for a low-cost qualifying phase, followed by a shortlist, is both readily apparent and non-controversial. After all, few (or no) firms should be expected to spend several millions of dollars to prepare a bid unless they can reasonably assess their odds of success. If, for example, there is a potential pool of ten or more bidders, each would likely determine that the probability of success is too low to justify the expense. Alternatively, if the industry needs to make itself comfortable with those odds, then all firms should be expected to raise their prices accordingly--ultimately at the expense of the public.

Another attribute of P3 procurement that is related to bid-preparation costs, but remains less understood than a two-phased process, is the availability of stipends to shortlisted proposers. Typically, the grantor (i.e., the government agency) will agree to make a one-time payment to each shortlisted proposer that submits a responsive bid in the second phase of the process. (The winner, however, does not typically receive a stipend unless the procurement is canceled.) Although there is no standard, accepted formula for determining the amount of the stipend, payments between $500,000 and $1,000,000 are common, and generally increase with the size of the transaction.

Stipends provide at least two benefits to the grantor. First, the stipend is often structured as a payment for the intellectual property included in the proposal, including the architectural drawings and any innovative ideas. By paying for the intellectual property, the grantor has the ability to incorporate it into the project or future projects, even if it is submitted by a proposer that is not selected for award. Second, and of even greater significance, a stipend encourages more participants to submit proposals, and more can be expected to result in better proposals and lower costs to the grantor.

To be clear, a stipend does not increase interest in a P3 because it makes the submission of a losing bid a profitable endeavor (or otherwise an end in itself). The stipend is never equal to more than a fraction of the total bid-preparation cost, and it never makes losing profitable. A stipend does, however, indicate the seriousness of the grantor and reduces the risk to the proposers. The industry will reasonably perceive the payment of a stipend as evidence that the grantor truly intends to move forward with the project, and that has as significant an impact on the probability of success as any other factor. If a proposer believes that it is not only competing for the two or three other shortlisting proposers, but also against the will of the grantor to pursue the project at all, then that seven-figure expense is hard to justify. By reducing that risk, a stipend encourages more robust participation and is ultimately a cost-effective way to ensure that the grantor achieves robust competition and the best possible terms.