On September 19, 2016, the General Services Administration Office of the Inspector General (OIG) issued a memorandum to the Commissioner of the General Services Administration's (GSA) Federal Acquisition Service (FAS), the unit responsible for administering the GSA's Federal Supply Schedules (Schedule Program). The memorandum, the fourth in a series over the past several years, detailed major issues identified during the OIG's Fiscal Year 2014 preaward audits.

Under two broad categories, the OIG published the following findings:

  • The failure of the Schedule Program to serve as the lowest overall cost alternative to the government; in particular:
    • Contractors' Commercial Sales Practices (CSP) disclosures were not consistently providing sufficient sales information to ensure GSA was receiving fair and reasonable pricing;
    • Schedule prices were being treated as ceilings where agencies have the option to negotiate prices downward (meaning that the list prices were not the lowest prices);
    • GSA has not been maximizing savings identified in preaward audits based on disclosures related to commercial transactions; and
    • The Price Reduction Clause (PRC) was being negated by an ineffective basis of award customers.
  • Contractors were not generally in compliance with their Schedule contract requirements; for example:
    • Contractors were providing the government with unqualified labor;
    • Contractors had inadequate systems to accumulate and report schedule sales and are improperly computing Industrial Funding Fee (IFF) payments; and
    • Contractors are overbilling their customer agencies for contract products and services.

The OIG's findings are based on two faulty premises. First, the OIG seems to imply that the regulatory standard of fair and reasonable pricing means absolutely best pricing; this is not the regulatory standard. In fact, in determining "price reasonableness" the GSA Acquisition Manual explicitly states otherwise:

When establishing negotiation objectives and determining price reasonableness, compare the terms and conditions of the MAS solicitation with the terms and conditions of agreements with the offeror's commercial customers.

* * * * * * * * * *

(7) Any other relevant information, including differences between the MAS solicitation and commercial terms and conditions that may warrant differentials between the offer and the discounts offered to the most favored commercial customer(s). For example, an offeror may incur more expense selling to the Government than to the customer who receives the offeror's best price, or the customer (e.g., dealer, distributor, original equipment manufacturer, other reseller) who receives the best price may perform certain value-added functions for the offeror that the Government does not perform. In such cases, some reduction in the discount given to the Government may be appropriate. If the best price is not offered to the Government, you should ask the offeror to identify and explain the reason for any differences. Do not require offerors to provide detailed cost breakdowns.

(f) You may award a contract containing pricing which is less favorable than the best price the offeror extends to any commercial customer for similar purchases if you make a determination that both of the following conditions exist:

(1) The prices offered to the Government are fair and reasonable, even though comparable discounts were not negotiated.

(2) Award is otherwise in the best interest of the Government.

48 C.F.R. § 538.270-1 (emphasis added). (Although the current regulation was updated on June 23, 2016 to account for the new transactional data reporting requirements, the prior version of the regulation included the same concepts and sentiments.)

Indeed, it is often more costly for contractors to do business with the federal government, because of various tracking and reporting requirements, thereby justifying higher, yet still fair and reasonable, prices. This is especially the case when contractors' commercial sales dwarf their federal sales.

Second, the OIG seems to assume that the Schedule Program is a unilateral arrangement, whereby the GSA should and is permitted to dictate all the terms. This is not and should not be the standard. Rather, it is possible and completely conceivable that GSA had not maximized savings identified in preaward audits because contractors had well-developed and articulable reasons to reject the basis of such savings. The fact that the OIG is second-guessing the discretion of the GSA's bilaterally negotiated terms oversteps its authority. Not even courts are permitted to substitute their judgment for that of an agency. Why would the OIG be permitted to do so?

What Does This Mean for Contractors?

While the GSA is moving away from the use of a CSP and has significantly blunted the teeth of the PRC under its new transactional data reporting (TDR) pilot program, this pilot program has only recently begun on a limited number of Schedules, and the vast majority of Schedule contractors have yet to convert to the TDR program. As a result, the added pressure on GSA from the OIG Memo will likely drive contracting officers to look for and report even the smallest of perceived noncompliances. Furthermore, negotiations could become formulaic, focused only on best pricing, and devoid of judgment and rationed trade-offs. This Memo could mean more difficult and less reasoned partners in GSA.

What You Can Do to Protect Yourself

There is unfortunately a long history of Schedule contractors paying hefty fines and penalties for Schedule noncompliance. While the TDR program is slowly implemented across the Schedule Program, it appears increased scrutiny, oversight, and enforcement could be on their way. As a result, contractors should consider:

  • Performing an audit of their compliance with Schedule terms and conditions. While finding noncompliances is never enjoyable, uncovering these issues early typically better enables the contractor to correct such issues and minimize harm. Ideally, these reviews are done by counsel or at counsel's direction to maintain attorney-client privilege protections.
  • Disclosing noncompliance prior to being audited. Not only is the disclosure of most noncompliances required under the terms of Schedule contracts (see FAR 52.203-13), by disclosing an issue first, the contractor forecloses the possibility of a whistleblower lawsuit. Furthermore, disclosure by the contractor, as opposed to discovery by the GSA, customer agency, or OIG, typically better positions the contractor for settlement and avoiding debilitating actions, such as a referral for suspension or debarment.
  • Negotiating more favorable or management terms. Often contractors seek the path of least resistance to get on Schedule; however, this strategy can lead to unfavorable terms and/or terms that are difficult or time consuming to administer. Consider whether more favorable or manageable terms are possible in order to ease the compliance burden.
  • Ensuring that those assigned to GSA compliance understand its requirements. To avoid noncompliance altogether, it is critical for contractors to assign Schedule contract responsibilities to persons who understand the company's Schedule contract and ideally have experience with the Schedule Program. Furthermore, it is imperative that others, whose responsibilities touch on or impact the Schedule contract, have periodic training that instructs them on compliance issues appropriate to their job responsibilities.