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By Steve Kelman

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Improving the purchase card program

One of the most positive changes introduced into the procurement system during the 1990s was the government credit card, called a “purchase card.” In the days before the card, every purchase, even small ones on the order of $25, had to go through an agency’s contracting shop.

This meant users would have to fill out a requisition form explaining what they wanted, send it to the contracting office, wait until it got on top of the pile, perhaps answer questions about the item from a semi-clerical purchasing agent, and wait until the item arrived.

Miscommunications frequently led to the need to return the original product and start the process anew. Users often waited weeks or months to receive even minor items. Seventy percent of all procurement transactions were for less than $2,500.  Using the full procurement procedures for small purchases consumed as much as 40 percent of procurement staff time. The purchase card dramatically sped up delivery of simple commercial items to frontline civil servants while saving the government very significant administrative expenses. (The administrative cost of buying these small items was often greater than the cost of the items themselves.)
 
However, this very positive change came with one big downside: Many offices have been using the card to buy things at local retail stores. This is quick, but it condemns the U.S. government – the largest purchaser in the world – to paying the same retail prices available to any individual consumer coming in off the street! 
 
GSA, which manages the program, is now taking an excellent initiative based on the philosophy “if you can’t beat them, join them.”  Given that government customers are likely to continue using local stores, GSA has begun to move aggressively to provide purchase card users automatic discounted prices when using retail outlets that already have prenegotiated contracts or GSA schedules, whether or not the buyer even knows such contracts or discounts exist. So, for example, under the set of 16 blanket purchase agreements GSA has recently negotiated for office supplies, a government credit card holder will automatically get the discounted negotiated price on any item on the blanket purchase agreement at the retail outlets of any of the contract holders.

GSA has also negotiated with Home Depot and Lowe’s to give customers using the card GSA schedule prices (which are negotiated as discounts from retail) when they purchase in those stores. This program is being expanded to retail chains specializing in photographic and audio-visual equipment and supplies, which are often used by government customers purchasing such items.
 
Purchase cards, of course, may be used to pay for orders using prenegotiated contracts, or to pay for transactions using reverse auctions, up to $150,000. (The card can be used as a procurement device, without a pre-existing competitive arrangement, only up to $3,000.) This is another way to get good prices with the card. Here, the problem has been the merchant fee (so-called interchange) that the credit card companies charge vendors who accept the card.

The interchange has been a fixed percentage of the transaction amount, meaning that the merchant fee for a $100,000 transaction has been several thousand dollars, even though the cost to the credit card company of processing such a transaction is hardly more than for a purchase of $100. Some of this sum must get factored into higher prices vendors need to charge the government.  I am guessing that $100,000 individual transactions using a credit card are so rare in the private sector that this issue has never attracted attention. As GSA continues to work to improve the card program, this seems like an area that should get their attention.

(Full disclosure: I am on the board of advisers of Fedbid, whose sellers often get paid using the credit card and are therefore hurt by these high merchant fees.)

Posted on Apr 13, 2011 at 12:09 PM


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Reader comments

Tue, Apr 19, 2011 Jackson Florida

Isn't there a long trail, and many tales that are true, of employee mis-use and waste with these cards when the cards are used on the open market, in one-off mode???. Yes, it saves a lot of processing, but are we paying too high a price? The "innovation" of the Home Depot contract arrangement giving GSA pricing. Why that's smart, and at least 15 years behind commercial best practice. Can we wait much longer for the government to discover what companies have known for so long? It is really costing us to wait.

Thu, Apr 14, 2011 Steve Kelman

Thank you, program coordinator! OK, now I will pass on both the comments to OFPP,and let them decide what they think makes sense. Meanwhile, I'll wait another day or two to see if anybody else wants to come in on the issue Jim raised.

Thu, Apr 14, 2011 an agency program coordinator

i oversee a purchase card program: 1-caution should be used when procuring services with a purchase card. if there is no statement of work or contract in the event of a dispute the bank will resolve it in the merchant’s favor because there is no statement of work or contract; 2-recurring services should not go on a purchase card because merchants will automatically charge an account when they shouldn’t and places the cardholder at risk for an anti-deficiency violation; 3-31 U.S.C. § 3324 does not allow the government to pay for goods or services in advance of receipt, hence the monthly/quarterly billings in arrears



Thu, Apr 14, 2011 Steve Kelman

Jim, thanks for your comment. I'm going to pass it on to Dan Gordon at OFPP, and let's see if it's possible to do something about this.

Thu, Apr 14, 2011 Jim Fleshman Bethesda, MD

Yes, the purchase card program has certainly been a huge win for the government and the taxpayers. One part of the procurement world, however, remains off-limits to the purchase card, and that is the purchase of maintenance agreements. Of particular interest to me, as an IT manager, are IT hardware and software support. I recently had to ask our procurement people to issue a purchase order for $62.25 to buy support for a software package required by one of my customers. The procurement people tell me that the FAR requires that support costs be billed in arrears on a monthly or bimonthly basis. Obviously no company in their right mind is going to do that for an order of less than $100. And probably not for an order of a few thousand dollars. The easy fix would be to create an exception to this requirement for purchases up to the $3000 micropurchase threshold. Does that make too much sense?

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