OTTAWA — It should be a good-news story: an Ontario manufacturer beats out a dozen factories in China in a competition to produce 400,000 Canadian flags for the federal government.

But the $294,000 contract awarded to Toronto-based Scythes Inc. earlier this year has raised questions about whether the tendering process was fair and transparent.

Scythes Inc., parent of Flying Colours International, was one of 18 firms that bid to produce small nylon flags for distribution to new Canadians at citizenship ceremonies. The firm operates a factory in Toronto's west end, with about 60 workers producing flags and banners.

The company won the contract not because its prices were lower --internal documents obtained under the Access to Information Act show their bid was actually the second-highest, just behind another Ontario firm, at about 65 cents a flag.

Rather, Scythes got the contract because the 17 other bidders submitted flag samples that a Public Works official declared were technically non-compliant. Colours were slightly off, for example, or staples were missing.

"Something doesn't smell very good here," says Michael Blanchard, whose Ottawa-based Adware Promotions Inc. made a rival bid that was $220,000 cheaper -- about 17 cents a flag. His were to be made in China.

"I'm just at my wit's end with these folks."

It's Blanchard's second bad experience with a flag order that Public Works has tendered on behalf of Citizenship and Immigration.

In 2007, 12 bidders responded to a tender to supply 150,000 nylon flags -- and 11 of them were declared technically non-compliant by a Public Works official, again because of problems with samples.

Scythes Inc. won that contest as well, with a $121,000 contract that was about $80,000 higher than Blanchard's bid.

The latest purchase for 400,000 flags is also unusual because Citizenship and Immigration had budgeted only $140,000 for the order, requiring delivery by March 10, three weeks before the fiscal year-end.

The department wound up spending more than twice as much, just as the Conservative government was preaching fiscal restraint in its March 22 budget.

"The initial budget for flags was underestimated which was adjusted to purchase the required quantity based on the price received as a result of the tender," Nancy Caron, a Citizenship and Immigration spokeswoman, said in an email.

Caron called the bidding process "fair and reasonable."

Under international trade agreements, the federal government cannot require that the flags it buys be made in Canada. The tender did stipulate, however, that "the flags will bear no marking of origin."

A Public Works spokesman said "additional marking such as the origin could generate additional costs, which was found not necessary to impose on taxpayers."

Scythes, which delivered the flags on time, adhered to the ban on printing country of origin, thereby delivering a product that does not proudly declare its Canadian pedigree.

A spokesman for Scythes says the company won the competition fair and square because of its significant investment in quality and consistently high technical standards.

"And so people cry foul, but we have put a lot of money into developing the capability of repeatedly doing this type of work," said general manager Murray Jefferies.

Competitors, especially offshore, do not properly invest in textile products that have stringent technical specifications, such as national flags, he says.

"The worst thing you want to have is an orange Canada flag, and believe me we see them," said Jefferies.

Scythes has won about $2.4 million worth of federal flag business since 2009, supplying National Defence, Canadian Heritage and others.

Blanchard, meanwhile, says the whole experience has soured him on dealing with Public Works officials, who he says relied on a "flimsy technicality" to exclude his bid.

"I'm really starting to be selective about the tenders I do," he said in an interview, citing another unhappy experience providing baseball caps to National Defence.

With 170,000 new Canadians sworn in each year, the current flag supply is expected to last until the summer of 2013.

The flags are about 25 cm by 13 cm, mounted on a 30-cm black plastic stick, with design specifications as set out in the National Flag Act of 1985.

Provincial and federal governments are routinely castigated when Canadian emblems such as flags and lapel pins are discovered to have been shipped from offshore factories.

In 2009, the Ontario government came under fire for ordering provincial flags for MPPs that were made in China. The contract was eventually given back to Flying Colours International.