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Tuesday, May 6, 2014

One buyer's "fair and reasonable" is another's fair and reasonable -- "maybe"

The US government General Services Administration operates an Amazon-like online catalog service for its agencies, states, territories and certain NGOs and others to purchase routine, or commercially standard, supplies and services.
GSA awards Schedule Contracts to responsible companies that offer Commercial off-the-shelf (COTS) products and services falling within the descriptions of the Schedules. Combined, the GSA Schedules are a comprehensive, categorical offering of almost every product and service available. To date, there are over 11 million commercial products and services available through the GSA Schedules.

Acquisitions through GSA Schedules are issued using full and open competition. Prices have already been deemed fair and reasonable, and Contracts are in compliance with all applicable laws and regulations, reducing evaluation cycles. Purchases can be made directly from a contractor's GSA Schedule Contract, eliminating time-consuming responses to complex RFP’s and lengthy negotiations.

See source.
That's their story and GSA is sticking with it.

Fundamentally, the government is intended to purchase anything only if the price is "fair and reasonable". (See FAR Part 15.402.) And what does that mean; how is fair and reasonable determined?

"Supplies offered on the [GSA]schedule are listed at fixed prices. Services offered on the schedule are priced either at hourly rates, or at a fixed price for performance of a specific task (e.g., installation, maintenance, and repair)." (FAR Part 8.404(d).) Under a fixed price contract, "the contracting officer can establish fair and reasonable prices at the outset, such as when — (a) There is adequate price competition", etc. (FAR Part 16.202-2.) (Also see, for instance, 5 GCA 5232(c) under Guam procurement law (based on the ABA Model Procurement Code), which suggests cost or pricing supporting data is not required "where the contract is based on adequate price competition", etc.)

So, then, is the GSA schedule a list of the lowest priced contractors for each item of supply or service? No. It is, as mentioned, like Amazon, with multiple pre-vetted contractors, each with its own price and contract terms. Each approved contractor posts its own pricelist which contains the pricing and the terms and conditions pertaining to each Special Item Number that is on the contractor's schedule. (See FAR Part 8.402(b).)

Thus, the GSA schedule does not provide the lowest price (nor one necessarily associated with contract terms specified by an agency), but simply a catalog of contractors GSA has determined offer "fair and reasonable" prices. The prices simply reflect "prices associated with volume buying" (Part 8.402(a)). The implication is that each of these prices are fair and reasonable because they have been determined by arm wrestling with the largest monopsony in the US economy; in effect, it is fair and reasonable because it is determined by the same thing as monopoly power. Of course, in a market with a monopoly, or a monopsony, there is no effective competition. Thus, the GSA prices are not based on price competition, but unilateral market power by a party that the market power has determined is -- or should be -- the "most favored customer".

The GSA describes this benevolent rule this way: GSA's goal is to be the best value supplier of choice. GSA Schedule contracts are negotiated with the intent of achieving the contractors' "most favored customer" pricing/discounts under similar conditions. (See GSA FAQ #7 here.)

Critical observers have pointed out, this requirement (to obtain most favored customer pricing) is not based on any explicit mandate of law or regulation, and is problematic as a practical policy decision. For instance:

Most Favored Customer And Price Reductions Clause
The most favored customer (MFC) and price reductions clause (PRC) operate jointly - seldom will you see the MFC clause without the PRC, and the PRC has no meaning without the MFC clause. There simply does not exist a legal basis for these clauses to exist. The FAR standard at 15.4 is "fair and reasonable". Their inclusion in an IFB or RFP is clearly not proper. It is currently in the FTS 2001 RFP improperly.

GSA has imposed these clauses in the schedule program for decades without legal basis. But no one has taken GSA to court. So, the bluff wins. The MFC clause is based on the premise that the government deserves similar or better discounts than the best discount you offer to a particular customer category. When you apply for a GSA schedule, you are required to identify the best discounts you have granted the following customer categories: Dealers/retailers; distributors/wholesalers; educational institutions; state, county, city and local governments; OEMs; and others (national accounts, end users.) Based upon the information you provide, the government will identify the customer that you have granted the largest discount to as your most favored customer, such as the OEM category. It is up to you to negotiate with the government in identifying the category that is most similar to the government customer. This will usually be the end user customer category, which ordinarily receives a lesser discount than offered to other customer categories and is most similar to the government in the way it buys.

We would like to make the case that GSA does not deserve any special price consideration from vendors in schedule negotiations. The rules clearly require procurement from lowest price vendors or justification of higher prices. GSA should be content to let market forces determine price. If Vendor A gives GSA 3% and Vendor B offers 8% for a comparable product, Vendor B will get the business. If this does not occur, this means that the entire schedule program is not workable and should be abandoned. If GSA and GAO cannot enforce this simple concept then we can only conclude that the higher priced product is worth more. - See more at:
See also, GSA and Most Favored Customer Pricing and POGO's White Paper on GSA Multiple Award Schedule Pricing, which has a chapter specifically addressing the Most Favored Customer ("FMC") pricing issue.

It is an issue recognized in the GSA Acquisition Manual: "The Government will seek to obtain the offeror’s best price (the best price given to the most favored customer). However, the Government recognizes that the terms and conditions of commercial sales vary and there may be legitimate reasons why the best price is not achieved." (Part 538.270)

The Office of the Undersecretary of Defense has recently released new guidance, under the hand of Richard Ginman, Director of Defense Procurement and Acquisition Policy, directing DOD contracting officers to determine fair and reasonable pricing independent of the GSA scheduled prices:
GSA has determined the prices of supplies and fixed-price services, and rates for services offered at hourly rates, to be fair and reasonable for the purpose of establishing the schedule contract. GSA 's determination does not relieve the ordering activity contracting officer from the responsibility of making a determination of fair and reasonable pricing for individual orders, BP As, and orders under BP As, using the proposal analysis techniques at 15.404-1. The complexity and circumstances of each acquisition should determine the level of detail of the analysis required.
This directive is discussed in an Lexology-posted article written by Attorney J. Catherine Kunz of the law firm Crowell & Moring LLP:

GSA schedule contracting: has selling to DoD just gotten harder?
This memorandum directs DoD contracting officers to make their own determination of fair and reasonable pricing when using Federal Supply Schedules (also known as GSA or VA Schedule contracts), rather than rely on the fair and reasonable price determination made by GSA when GSA awards Schedule contracts. Specifically, the memorandum establishes a class deviation to FAR 8.404(d) that will be applicable to DoD entities buying off Schedule contracts.

The direction to use proposal analysis techniques at FAR 15.404-1 could mean that DoD contracting officers will (a) compare proposed prices received in response to an RFQ; (b) compare proposed prices to historical prices paid for the same or similar items; (c) use parametric estimating methods/application of rough yardsticks (e.g., dollars per pound); (d) compare proposed prices with competitive published price lists; (e) compare proposed prices with independent government cost estimates; (f) compare proposed prices with prices obtained through market research for the same or similar items; or (g) request and analyze “data other than certified cost or pricing data.”

Because “data other than certified cost or pricing data” is defined at FAR 2.101 as “pricing data, cost data, and judgmental information” and can include “the identical types of data as certified cost or pricing data [required pursuant to the Truth in Negotiations Act] . . . but without the certification,” it is possible that Schedule contractors will need to disclose their cost information in order to perform work for DoD.
The author suggests "This adds complexity and risk to Schedule contract performance and moves Schedule buys even further from the intent that the Schedule program mirror commercial buying practices." (Read the whole article for context I have left out.)  

But, if, as I suggest, the GSA Schedule is simply an Amazon for government buyers, wouldn't a commercial buyer also want independent assessment that the prices offered do, indeed, reflect fair and reasonable ones and not blindly take the first one to pop up on the screen?

Before leaving this topic, to follow up from the observation made above that the Schedules do not offer up the lowest price, rather a catalog of contractors at various prices, I note that the GSA Schedules program has evolved to now both offer and in circumstances require that any authorized government buyers ("ordering activities") to poll the list of contractors with an RFQ (Request for Quotes). The parameters of the e-Buy RFQ program are in FAR Part 8.402(d)
"E-Buy allows ordering activities to post requirements, obtain quotes, and issue orders electronically. Posting an RFQ on e-Buy — (i) Is one medium for providing fair notice to all schedule contractors offering such supplies and services as required by 8.405-1, 8.405-2, and 8.405-3; and (ii) Is required when an order contains brand-name specifications (see 8.405-6)".
See the GSA's Buyer's Guidance here

When ordering activities have been authorized to access the GSA Schedule, but are required to use the local source selection method competitive sealed bid to do so, as is the case with Guam agencies under 5 GCA 5122, it would not take a lot of tweaking of the system (laws or regulations) to allow a bid by the lowest contractor on the Schedule, determined by the e-Buy RFQ process, to be qualified for consideration under a local IFB, assuming the contract terms of the GSA Schedule contractor are consistent with the contract terms in the IFB.

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