(Editor’s Note. From time to time we have addressed the rules related to Federal Supply Schedules since they are increasingly being used for pricing purposes. Regulations, guidance and court/board decisions keep altering the rules so we decided to provide an update, relying on the April 2004 issue of the Briefing Papers written by John Stafford and Pang Khou Yang of Greenberg Traurig, LLP.)
The FSS program has for decades provided the government a convenient vehicle for purchasing commercial products and services. The FSS program is administered by the General Services Administration under the Federal Property and Administrative Services Act of 1949 and it is touted as mirroring the commercial marketplace. Though it provides for a single award schedule the FSS program is primarily oriented to multiple award schedules (MAS) where solicitations are kept open indefinitely, contractors may bid on proposals at any time and the GSA awards government-wide contracts for a full five year period with options to numerous suppliers for commercial products and services at varying prices and labor rates.
MAS contracts are indefinite-delivery, indefinite-quantity (ID/IQ) contracts where eligible buyers place task and delivery orders directly with Schedule contractors and deliveries are made and services performed directly for the government customer. There are currently over 12,000 MAS contracts in place to provide four million commercial services and products. Services account for 60% of MAS program sales and they are growing faster than products.
In addition there are Government-wide acquisition contracts (GWACs) and multiple-agency contracts (MACs) which are both task or delivery order contracts and are established by one agency for government-wide use. There is also the Department of Veterans Affairs separate FSS program that provides products and services such as healthcare services, pharmaceuticals and medical and dental equipment and supplies.
GSA Order ADM 4800.2F provides definitions and a comprehensive list of agencies and other activities authorized to use GSA sources of supplies and services where at present there are over 200 agencies, organizations and other eligible users. In May 2004 the GSA issued a final rule authorizing state and local governments to purchase automated data processing equipment, software, supplies, support equipment and services from Schedule 79, Information Technology, contracts. The program, known as "Cooperative Purchasing" is open to all state, local, regional and tribal governments and their instrumentalities such as school districts and local colleges.
Price Negotiation and Award. The GSA’s stated goal is to be "the best value supplier or choice" for all eligible agencies. As such, the GSA encourages contractors to submit offers of their products and services, updates the terms and conditions of the MAS solicitations and refines the Schedules and "GSA Advantage!" (GSA’s on-line shopping service). To be eligible for award of a Schedule contract, the prospective contractor must first submit an offer under the applicable solicitation. The contractor must accept all the terms of the solicitation such as its offered items are commercial items falling within the description of the Schedule and the GSA contracting officer determines that prices are fair and reasonable.
Since the Schedule prices are presumed to be fair and reasonable, ordering offices need not seek further competition outside of the FSS. Pricing is the most critical aspect of the Schedule and the GSA’s negotiating objective is to obtain the "most favored customer" pricing. This means that the prices are equal to or better than the prices a company offers its best commercial customer or category of customers. To help make this comparison, offerors are required to disclose information about their commercial pricing policies and practices. This information was previously obtained through completion of Discount Schedule and Marketing Data (DSMD sheets) that were certified by the contractor and subject to audit for compliance with the Truth in Negotiations Act. In August 1997 the DSMD sheets were eliminated and replaced by the Commercial Sales Practices (CSP) Format.
The CSP Format emphasizes the contractor’s pricing policies and practices rather than transactional data as before with DSMD. Now the contractor identifies a customer or category of customers and the best price offered to it without regard to quantity. A "customer" is defined as any entity that acquires the supplies or services being offererd and can include commercial customers, national accounts, resellers, distributors, dealers, state and local governments and educational institutions but does not include federal government agencies. Discounts, concessions and other relevant terms are also fully identified and explained. After receiving the offer the government will establish negotiation objectives based on a review of price reasonableness. To the extent they are relevant the government will consider such factors as (1) aggregate volume of anticipated purchases (2) net prices offered to commercial customers after discounts, concessions, etc. (3) length of contract period (4) inclusion of warranties, training and maintenance included in the price (5) ordering and delivery practices and (6) other factors that may warrant a higher price to the government such as more expense or the most favored customer performs certain functions not performed by the government.
If the best price is not offered to the government the contractor must be prepared to explain why. Detailed price breakdowns are not required and the CO may award a higher priced contract if the following conditions exist: (1) prices offered to the government are fair and reasonable even though comparable discounts were not negotiated and (2) award is otherwise in the best interest of the government.
Price Reduction and Reporting Requirements. Under the GSA Schedule "Price Reduction" clause (GSAR 552.238-75), if a change occurs in the contractor’s commercial pricing or discount arrangement applicable to the identified commercial customer (or category of customers) that results in a less advantageous relationship with the government compared to the customer, this change constitutes a "price reduction" that must be reported to the GSA. The Price Reduction clause is a critical clause in a Schedule contract because it requires continual monitoring after contract award to ensure the pricing relationship established under the "Basis of Award" remains the same throughout the contract. Failure to adhere to the clause over time will likely result in a large refund due the government as well as possible double or treble damages. The clause requires the contractor to offer and provide the same price concessions to the government as that provided to the customer or category of customers (referred to as "category of comparability" or "COC") that was identified in the "Basis of Award" and agreed upon at the time of award.
The contractor and not the government is charged with compliance with the Price Reduction clause. The fact the GSA never asks why the contractor has not reported a pricing concession is no defense to the failure to report. The clause applies to all customers within the COC and to all items on the Schedule sold to the government. A pricing concession to a COC customer must be reported to the GSA contracting officer 15 days after its effective date and the report must include an explanation of the conditions under which the price reduction or other concessions were made. The contractor must offer the price reduction to the government with the same effective date and the same time period as extended to the commercial customer. Though it is the government’s right to demand the pricing concession the government must be purchasing the Schedule items under similar terms and conditions as the COC customer and if not, then the contractor has a basis to argue the government is not entitled to the same price reduction or at least not to the same degree. In addition, the Price Reduction clause spells out four exceptions: (1) when the sale to the customer exceeds the maximum order threshold specified in the contract (2) for sales to federal agencies (allows for "spot price" reductions to other agencies) (3) for sales to state and local government entities when the order is placed under the contract and the state and local government entity is the agreed upon COC and (4) when the price reduction results from an error in quotation or billing, provided adequate documentation is provided to the CO.
Up until recent changes in the FAR, ordering procedures were based on whether the Schedules were non-mandatory (agencies were not required to order off the Schedule) or mandatory. With the July 19, 2004 changes to FAR Subpart 8.4, there are now distinctions for ordering procedures by whether there is a statement of work (services priced in Schedule contract by hourly rates) or not a statement of work (services listed in a Schedule at a fixed price for performance of a specified task such as installation, maintenance or repair). The ordering procedures are further broken down into orders (1) at or below the micro-purchase threshold of $2,500 (2) exceeding the micro-purchase threshold but not the maximum order threshold (typically set in each Schedule on a Specified Item Number) and (3) that exceed the maximum order threshold.
Products and Services Where SOW Not Required. For orders not requiring a SOW and under the $2,500 micropurchase threshold, ordering is straightforward where they are placed with any FSS contractor meeting the agency’s needs. Orders without a SOW but at or above $2,500 must be placed with the contractor providing the best value. Elements other than price to be considered include past performance, special features required for performance, trade-in considerations, probable life of the items selected, warranty considerations, maintenance availability, environmental and energy considerations and delivery terms. In addition, buyers must either review GSA Advantage! for available information about supplies or services offered or review the catalogs or pricelists of at least three Schedule contractors. Further, the agency may seek price reductions from the best value contractor but if price reductions are not offered an order may be placed.
Services Where SOW is Required. Order procedures where services require a SOW (services priced at hourly rates) are more complex. The FSS publications and contractor’s pricelists will identify applicable services. When placing orders over $2,500 contracting activities must prepare a RFQ, which can be posted to e-Buy, that must include a SOW and evaluation criteria. SOWs must be performance-based to the maximum extent possible and include a description of the agency’s needs (work to be performed, location, duration, deliverable schedule, performance standards and special requirements). The RFQ must be provided to three Schedule contractors that can meet the agency’s needs and should request firm fixed prices. These requirements also apply to services placed above the maximum order threshold with a further requirement to provide the RFQ to additional Schedule contractors meeting the agency’s needs. No precise number of contractors is specified. When using RFQs, responses are evaluated using evaluation criteria provided. Only the labor hour rates reflected in the Schedules are predetermined to be fair and reasonable so buyers are responsible for considering proposed level of effort and mix of labor to determining whether the total price is reasonable. Though court decisions have ruled FAR Part 15 does not directly apply to FSS task and delivery orders, the GAO views the process as being much like a negotiated procurement.
Blanket Purchase Agreements. The recent July changes to FAR Subpart 8.4 provided guidance on BPAs. Generally, BPAs may be established with any number of ordering activity’s discretion. A buyer can establish a single BPA and can place orders directly under it when a need for the supplies or services arise. If multiple BPAs are established with the buyer the order must be placed with the contractor offering best value. The duration of the BPA should not exceed five years with limited exceptions such as the need to meet program requirements or to exercise option years. The buying agency must review its BPA at least once a year to determine whether the Schedule contract upon which the BPA was established is still in effect, it still represents best value and additional price reductions can be obtained if estimated quantities have been exceeded.
Incidental Item Ordering. The Competition in Contracting Act (CICA) mandates full and open competition in government procurement of goods and services. Incidental items, commonly referred to as "open market items" are those supplies and services that a buyer may purchase from a Schedule contractor that are not listed on the Schedule. The government has decided that purchase of such non-FSS items is contrary to CICA and hence buying agencies cannot use FSS ordering procedures to purchase non-FSS items. Nonetheless, agencies are continuing to purchase non-FSS items and numerous cases have ruled that protests against such purchases will likely be sustained.
Contractor Team Arrangements. The ordering process allows for two or more companies to form a "team arrangement" to complement each other’s capabilities to satisfy government needs. Such arrangements take one of two forms: (1) two or more companies form a limited partnership or joint venture to act as a potential contractor or (2) a contractor agrees to team with another company and have it act as a subcontractor. Since each team member holds independent GSA Schedule contracts, with separate price lists, arrangements should be clearly stated where pricing, invoicing, payments warranty responsibilities, recording and reporting sales and remittances are detailed. It should be noted that DCAA often takes the position that prime contractors who bill for subcontractor labor at the prime contractor’s Schedule rates violate the "Payments" clause in labor time and time and materials contracts which limits reimbursement of costs under such circumstances to amounts paid by the prime contractor.
"Examination of Records" Clause. This clause at GSAR 552.215-71 gives authority to the government to conduct postaward audits under the Schedules Program. In response to comments that postaward reviews of initial pricing actions deviated from commercial practices the program was designed to emulate, the Examination of Records clause was amended in August 1997 to eliminate that portion of the clause that automatically provided for postaward audits of pricing information. Though such authorization may be given under unusual circumstances, the clause became much less onerous by removing the threat of defective pricing audits. Contractors must still, at a minimum, retain records for their Schedule contract and options from contract inception or the beginning of the option until three years after receipt of the last payment.
Postaward Audits. The GSA is still entitled to conduct postaward audits to ensure compliance with two GSAR clauses – the "Industrial Funding Fee and Sales Reporting" clause and the "Price Reductions" clause. Common problems are (1) failure of contractors to report sales and remit the IFF and (2) report discounts after award to the "Basis of Award" customers and hence provide proportionate price reductions to the government. The IFF is a fee paid to the ordering agency to cover GSA FSS’s operating and administration costs. The burden is on Schedule contractors to (1) include the IFF in the prices charged to the ordering agency (2) collect the IFF (3) make quarterly reports to the FSS on contract sales and (4) remit payment of the IFF (currently 0.75% of their quarterly Schedule contract sales). The quarterly reports and IFF payments are due "within 30 calendar days following completion of each reporting quarter."
During an audit for IFF compliance auditors may investigate whether contractors are performing in accordance with the "Basis of Award" and "Price Reduction" clause. Generally auditors will question (1) whether contractors’ current sales and billing data are complete (2) whether the contractor has timely disclosed changes in its price lists, discounts or discounting policies (3) whether the Schedules reflect price reductions offered to the "Basis of Award" customers (4) whether the government has been given the appropriate discounts in a timely manner and (5) whether the contractor is compliant with the other contract terms. If the audit uncovers violations of the IFF or Price Reduction clauses the government will almost certainly seek a price reduction and possibly other damages.
Enforcement Rights. The government has a variety of tools to discourage false reporting. A number of statutes (e.g. criminal False Claims Act, Major Fraud Act, etc.) provides hefty criminal sanctions against willful false statements. Expensive civil actions, where double and treble penalties can be imposed, are also possible where the state of mind aspect necessary for criminal action is much less. Rather than intent to defraud for criminal action, the government only needs to prove, by a preponderance of the evidence, the contractor had "actual knowledge of the information" or "acted in deliberate ignorance" or "reckless disregard of the truth." Finally, there are considerable administrative remedies where claims against the contractor can be made where no form of intent is needed.
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