Panel: Rethink services pricing

Critics: Nature of professional services makes it difficult to apply GSA’s price reduction clause

The Multiple Award Schedule Advisory Panel has concluded that the price reduction clause in the General Services Administration’s schedules program is useless for professional services contracts.

The pricing clause requires contractors to give the government price discounts that are at least as good as those given to the companies’ most discounted commercial customers. If the contractor later lowers its prices for the commercial customers, the government must get the same markdown.

However, the system does not work with professional services, because the wide variety of services being acquired makes it difficult to make meaningful comparisons, according to panel members.

“The definition of a good deal is a variable issue,” said Elliott Branch, the panel’s chairman.

Although they said their decision likely would rankle lawmakers and auditors, the panel members have decided to recommend that GSA eliminate the clause for professional services orders.

Playing the market
Several representatives from agencies that buy from the schedule contracts said the original price makes no difference to them. Instead, market forces lower the price.

“GSA’s price does for an ordering agency what Wikipedia does for a scholar,” said Branch, executive director of contracts at the Naval Sea Systems Command. If an agency seeks out competition among vendors, the dynamic market will dictate a fair and reasonable market value, as regulation requires, he said. “If you’re in continual competition, you’ll get those prices.”

Likewise, panel member Thomas Sharpe, senior procurement executive at the Treasury Department, said
GSA needs “to get out of the pricing business.”

“I don’t see the value of the price at the schedule level,” he said.

When GSA and a vendor negotiate a schedules contract, they agree which commercial customer gets the best terms on the product or service the contractor is seeking to sell to the government. Once decided, that customer is deemed the most-favored customer and becomes the benchmark by which the government measures its own deal.

But for professional services, such as assisting with acquisition planning or analyzing a certain proposal’s requirements, the orders aren’t all the same. What appear to be similar services can be considerably different because of a host of variable factors.

The panel’s recommendation to GSA states: “Eliminate the Price Reduction Clause for MAS program schedule services contracts and adopt an 803-like approach to compete orders above the simplified acquisition threshold for all agencies using schedule contracts.”

The term 803-like refers to Section 803 of the fiscal 2002 National Defense Authorization Act. It requires the Defense Department to solicit proposals from all contractors or receive at least three bids to achieve a meaningful competition. That is a stricter standard of competition than the one used by civilian agencies. The panel said imposing such a requirement on the civilian agencies would minimize the risk of agencies simply awarding work to preferred firms with minimal or no competition.

But, the panel said, requiring Section 803 compliance for civilian agencies would demand statutory changes — something the panelists consider unlikely.

Resistance to change
Several inspectors general and several members of Congress have said the clause is needed to protect agencies from contractors who would charge the government exorbitant amounts.

Some members of Congress already have expressed skepticism about the panel and its value. Rep. Henry Waxman (D-Calif.), chairman of the Oversight and Government Reform Committee, has written letters criticizing the panel to former GSA Administrator Lurita Doan, who chartered the panel, and former Acting Administrator David Bibb. Waxman questioned its value and defended the price reduction clause.

“The requirement is a powerful tool that helps government agencies,” Waxman wrote in an April 18 letter to Doan. “An initiative to eliminate or weaken the clause could significantly increase costs to the taxpayer.”

Representatives from the IGs’ offices have testified before the panel, saying the clause protects agencies from abuses while allowing the government to make the most of its buying power.

However, acquisition experts say a lot has changed since GSA established the clause. Services were not available through the schedules then but now make up the majority of schedules business, said David Drabkin, panelist and deputy chief acquisition officer at GSA. Also, today’s market moves too much and too fast to keep track of changes in price, he said.

This is not the first time experts recommended ending the clause. In January 2007, the Acquisition Advisory Panel recommended that the Office of Federal Procurement Policy authorize GSA to establish a new information technology schedule contract for professional services under which prices for each order are established by competition and are not based on posted rates, according to its report.

The panel found that GSA and contractors invest a lot of time and money negotiating prices that aren’t relevant in a competitive marketplace. OFPP did nothing with the proposal.

Nevertheless, if GSA does drop the price reduction clause, many people on the MAS advisory panel said there should be another method for agencies to check for fair and reasonable prices.

The panel passed two recommendations that would require GSA and the agencies to report on their purchases. The first recommendation would have GSA set up a process to collect information from agencies on their orders, including the price, quantity and quality of the services. The agencies could use the information as a barometer as it seeks proposals.

Judith Nelson, a panel member and management and program analyst at GSA’s Office of Acquisition Management, said GSA would depend on the other agencies to collect that information.

“We don’t have access to that information without agency participation,” she said.

With that in mind, the panel will also recommend that GSA’s contracting officers be required to provide federal buyers with a short summary of their reasons for deciding a particular schedule contract price was fair and reasonable.

The recommendation concerning the price reduction clause applies only to services. When the panel meets in October, it will consider the value of the clause in purchasing commodities.

The panel intends to submit a report to the administrator in November. The panel said the new administration is less likely to use the recommendations.

 “This work will get lost,” Branch said. “When briefing books are prepared for the next administration, we want this to be part of that book.” 

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