How to win a Public Service Contract (PSC) without putting the burden on your employees?
Being the winner of a Public Service Contract (PSC) is a major success for a company, especially for a small and medium firm.
And when the awarding of PSCs is mostly based on the lowest price, leading to higher rebates, it is economically beneficial for public administrations. But it can also moderate the effects of the award on the firms’ performance and it may be achieved at the expense of worse economic conditions for the employees of the winning firms and lower payments of Social Security Contributions (SSCs).
The risk of precarious work due to the pressure to reduce costs in the private sector
The research team has investigated the effects of the award of public service contracts by Italian public administrations in 2015 on a sample of 1782 winning small and medium firms.
Their results reveal that higher winning rebates moderate the positive effects of the award on payroll by inducing the winning firms to downward manage both salaries and social security contributions per employee to maintain their desired level of performance. And the results are even worth in the construction industry, characterized by higher insecurity and employment, vulnerability, where firms downward manage the payroll of their employees more aggressively than firms in other industries.
Are the public administrations really winning?
Awarding to the lowest price implies that efficiency gains for public contracting authorities could be achieved at the expense of the conditions of the employees within the winning firms. The latter have a tendency to pass higher awarding rebates onto their employees by reducing their salaries and onto the social security system by reducing their payment of SSCs. It could, in fine, lead to a reduction of paid Social Security Contributions (SSCs) needed to finance national social security systems.
How to prevent this?
The researchers suggest that the inclusion of “labor clauses” in awarded public service contracts (PSCs), aimed at establishing minimum working conditions and protecting the employees of winning firms from labor exploitation, could ensure socially responsible Public Procurement.
The award of PSCs could be based on more qualitative criteria including social, labor, and environmental parameters. This may discourage aggressive bidding practices leading to abnormally high rebates. In addition, it may facilitate the access by SMEs to PP contracts.
When a PSC award is mostly based on the lowest price, it leads to higher rebates. In the first instance, it may produce efficiency gains for public administrations. But it may also generate an undesirable pressure on the financial margins of the winning firms. Therefore, to maintain an acceptable level of performance, these firms may tend to downward manage their payroll expenses by causing their employees to bear the final burden of high winning rebates.
To prevent this, the inclusion of labor clauses and qualitative criteria is suggested. The apparent efficiency losses for public contracting authorities may be more than offset by better economic conditions for the employees of the winning firms, higher social security revenues, and the provision of higher-quality public services.
This article was published in Industrial and Corporate Change.
For more information, please visit the following link: https://doi.org/10.1093/icc/dtab067