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Contracting Out Government Services:Evaluating Bids

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Practice Advice on Program and Service Delivery 

Contracting Out Government Services: Evaluating In House Bids and Ensuring Valid Comparisons (OECD) 

Summary AdviceThe OECD recommends conducting a systematic analysis of the costs and benefits of contracting out proposals and suggests evaluating in-house binds as potential service delivery solution.

Main Points: When considering proposals for contracting out, it is important to consider alternatives which include in-house provision. This involves considering both the costs and outcomes or outputs, including comparative quality. All risks should also be systematically assessed. This includes the risk of dismantling in-house capabilities and possible dependence on a single-supplier. The OECD lists the following recommendations:

  • A thorough costing of the present  activity should be conducted and used as a benchmark for evaluating contracting out proposals. This involves identifying all costs related to the activity that is to be contracted out. These include not only the direct costs of the activity, but also its share in overhead costs and such non-cash costs as depreciation and cost of capital. The treatment of the present activity for taxation purposes also needs to be taken into account.
  • If the present activity can be restructured in such a way as to offer improved performance, then this should be assessed for its financial costs, and used as the benchmark for evaluating contracting out proposals.
  • If contracting out an activity will incur a liability for severance payments, then this should be identified as a separate item recognising the one-off nature of such payments.

Specifically, when it comes to the evaluation of in-house bids, the OECD highlights the following considerations:

  • An in-house bid occurs when the staff presently performing an activity bids against an outside contractor for an activity being considered for contracting out.
  • In-house staff are often in the best position to identify opportunities for work process improvements. Their bid should be judged on the basis of these improvements.
  • In-house bids should in all respect be treated as the same as outside bids. Special care needs to be taken to ensure that the costing of the bid is complete, i.e. that it incorporates all items of cost faced by private sector contractors. The costing should be reviewed by an independent organisation to verify its accuracy. In-house bidders should also fulfill any accreditation and certification requirements imposed on an outside bidder.
  • The criteria used for deciding whether to permit an in-house bid should be clear and specific.


Source: OECD (1997). OECD, “Best Practice Guidelines For Contracting Out Government Services",  Public Management Services, PUMA Policy Brief, OECD Publishing at: . Last accessed February 28th, 2013.

Page Created By: Khilola B. Zakhidova. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.


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