The main driver for any organization, agency, nonprofit, or business to be able to perform their day-to-day operations is cost. No matter the organization’s end goal, staying within budget is the key to reaching that goal.
For government agencies especially, costs are extremely complex and highly regulated due to the nature of public spending and the need for transparency, accountability, and compliance with legal and regulatory standards. And once the budget has been exhausted, there is no additional funding or emergency fund to fall back on.
But when it comes to procurement processes, do you understand your costs and how they affect your budget?
Let’s look at costs and how they affect procurement operations.
Direct Costs
Direct costs are those easy to spot and recognize in the procurement process. These are what the taxpayer or constituent sees when they read the amount of the winning bid for a new road or bridge, updates to playground equipment, or the building of a new elementary school.
At the top of the list is the purchase price, or the actual cost of the goods or services procured. It’s the total amount quoted by the winning bidder for a new project or the contract price on a new software system being implemented by the organization. It’s the first thing – and often the only thing – stakeholders think about when voting on or approving a yearly budget, and it likely takes up the bulk of that budget.
But in addition to purchase price, there are often hidden costs like shipping and handling or processing fees and federal, state, or international taxes and duties. Although government agencies are typically exempt from these costs, their vendors may not be, and these costs may be rolled into the final price.
When deciding whether a project or purchase is within budget, direct costs must be the main consideration, and any steps should be taken to attain the lowest viable bid or contract for new projects.
Administrative Costs
No matter how many new projects or contracts an agency takes on or bids out in a given year, one constant for any organization is administrative costs – the costs of doing business.
The largest of these – and the biggest expense for any company, nonprofit, agency, or otherwise – is salary. Procurement staff salaries and benefits vary widely depending on location, experience, and title, but on average, a procurement analyst in the United States makes between $43,000 and $56,000 (as of April 24, 2024). A procurement manager’s salary ranges from $90,000-$140,000, and an agency’s procurement director average $129,000-$135,000 (as of May 2024).
As salary is the single highest cost facing an agency, it is imperative to get the most out of employees’ time. Any software, automation, or processes that can eliminate or reduce tedious day-to-day manual tasks that take up valuable time – and money – from staff is well worth the investment to free them up for more important strategic work.
These software and automation solutions are also an included cost that should be taken into account in the annual budget. Most government agencies can only get software purchases approved at the beginning of a fiscal year, so agencies looking into potentially adopting a solution to help streamline and automate procurement management processes should send out RFPs and have expected costs ready in advance of budget approval. These costs include the software purchase and any additional costs related to licensing, implementation and training, and ongoing maintenance and upgrades.
In addition to salary and software, office supplies and equipment are often overlooked but necessary administrative costs. Businesses and agencies cannot be run without – at the very least – computers and internet, but most often these costs include the office, desks and chairs, pens and paper, and anything else that is a daily use for employees.
Operational Costs
There are costs associated with the bidding process that may or may not be included in the eProcurement software or other systems. These bidding and tendering process costs related to preparing and managing bids can include advertising solicitations and open bids in the news, via direct mail or email, or on a bid portal. They can also include evaluation expenses like renting a location for the bid opening and award or even gas and mileage for travel to a bid or award meeting.
Contract management costs are those associated with managing contracts and vendors post-award – including monitoring, reporting, enforcement, addenda, and more. A software solution that can track these operational costs can save an agency money and make the project more efficient, reducing costs overall.
Compliance, Quality, and Risk Management Costs
Perhaps the costs that give most agencies heartburn, risk and compliance costs are unavoidable, but the proper management of legal and regulatory compliance can mitigate these and prevent unnecessary fines and additional costs. Legal fees and reporting costs, as well as costs for internal and external compliance audits to ensure transparency and accountability can be baked into a comprehensive eProcurement system that helps manage licenses, insurance, emergency plans, audits, permits, and more and alert the agency to expirations or potential red flags.
Quality control and quality assurance costs can also be rolled into this category – ensuring that goods and services purchased meet specified federal or state requirements. Any rework or returns due to a lack of quality control can directly affect the bottom line and can easily blow the budget.
Vendor-Related Costs
While vendors, suppliers, contractors, and subcontractors are the ones bidding on open projects and solicitations, there are still costs associated with identifying, evaluating, certifying, and selecting these companies. These costs can include any online solicitation portals or other advertising locations, travel expenses and time spent in the vendor evaluation process. Vendor training and development costs to meet government standards and requirements are also an often-unexpected cost related to procurement.
An eProcurement system that automatically includes and tracks these line items will aid in the solicitation and budgeting process.
Additional Costs
Any agency utilizing public funds, either donated or attained through taxes, must go through the extra hoops of ensuring transparency in their processes, especially in procurement and spending. There are costs associated with this transparency in the form of public notifications of open opportunities and awards in public forums, on public sites, or in the media, as well as the costs for engaging with stakeholders through public consultations, audits, and feedback mechanisms.
There are also hidden costs associated with procurement when considering the time and resources that could be used for other agency activities if those involved were not engaged in the procurement process. Staff training on procurement policies, procedures, and systems – as well as the costs of building up the procurement capabilities of the agency and its suppliers – should be considered as well.
While these numbers are difficult to ascertain, the agency can assume the hours one staff member spends on a typical solicitation from start to finish, multiply that by their salary per hour, and assume that at least half of that cost could have been allocated elsewhere.
And finally, there are sustainability and social responsibility costs that should be considered – more in some states than in others. For example, assessing the environmental impact or social impact of a purchase may be included in each RFP or solicitation, or it may be wrapped up in another part of the agency’s budget. Costs related to implementing sustainable practices, like sourcing environmentally friendly products or services, tend to be higher than “typical” sourcing, at least in the short term, although recent studies have shown that sustainability tends to save costs in the long run.
Calculating Costs
Understanding associated costs is critical for agencies to ensure efficient, transparent, and accountable use of funds in procurement activities, especially for government agencies and nonprofits.
Once you’ve calculated these costs – especially the hidden ones – you can begin to build a better budget forecast and take steps to reduce costs wherever possible, whether by expanding your vendor pool to source more bidders and get lower bids, or by implementing an eProcurement solution that helps you cut down on the manual tasks and waste that take up valuable time and resources. Or better still, find an eProcurement solution like the one from PlanetBids that does both, allowing you to access a vast vendor network of approved contractors, subcontractors, and suppliers while also helping you streamline processes, collaborate across teams and departments, ensure compliance and sustainability, and move your bid and award processes online.
Want to see how much an eProcurement solution like the PB System from PlanetBids can save your agency? Fill out our free ROI Calculator now or contact us to learn more.
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