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CASE ABOUT GOVERNMENT OUTSOURCING

The provincial government is looking to outsource its transportation function that was previously done internally.

Lukas Company, a non-government service provider, was awarded the provincial government contract to provide a taxi service for Government personnel. As part of this contract, Lukas Company is leasing a fleet of Government vehicles. The terms of lease are very clear that the company has complete care and custody of the vehicles including:

Maintenance

Repairs

Cleaning / Appearance

98% service availability

Insurance* *

The insurance requirements stipulated in the contract state that the prescribed insurance amounts are mandatory minimum limits only and that Lukas Company has the overall responsibility to ensure adequate insurance coverage. Recently a severe weather event caused excessive damage to the fleet of vehicles. Upon appraisal of the required repair costs, it was determined that the anticipated costs would exceed their insurance limits by $100 K. Furthermore, the damage was so severe on some of the vehicles that temporary replacements would need to be rented to ensure the contracted service levels (ie: availability of vehicles) were being maintained. The estimated cost of these rentals is approximately $50,000. For reference, the contracted penalty costs of failing to meet the required service levels would be $75,000. The supplier has approached the government with a Force Majeure claim and requested that the government fund the $100,000 of insurance shortfall as well as the cost of replacement/ rental vehicles. The supplier's rationale is that the weather event was no fault of their own and they should not be penalized.

Task: Being the manager for Contracts, your Department director has asked you to provide an analysis and response of Lukas Company's request.

1) What factors and options you considered in your analysis

2) Your recommended position/ option for addressing Lukas Company's request

3) A draft response communicating your position back to Lukas Company