Are GSA's MAS contracts for services legal?

A reader raised the following topic: Our company provides various services to commercial and government customers on an hourly basis. We would like to get on one of the new General Services Administration multiple-award schedule contracts for services. However we understand that MAS contracts are supposed to be limited to "commercial items." We have been told by some agencies that services sold on an hourly basis are not commercial items. If so how can GSA include such services on its MAS contracts? Are GSA's MAS contracts for services legal?

These are very interesting questions that have a somewhat convoluted answer. GSA's MAS contracts have always been limited to commercial items. Until late 1995 GSA interpreted the commercial-item requirement to exclude most services except those incidental to the supply of goods such as installation and maintenance services. GSA would not accept offers of support services on its MAS contracts even though the Federal Acquisition Regulation made it clear that services could be considered to be commercial items if the contractor billed its clients on an hourly basis that reflected established catalog or market prices.

In late 1995 however GSA issued Amendment No. 4 to its current MAS Schedule B/C solicitation for information technology resources. Under the amendment GSA began to award contracts that might consist exclusively of services that could be purchased on an hourly basis. GSA took this radical new step because it believed that services charged on an hourly basis could be considered to be commercial items. Ironically GSA adopted this new position only a few months after Congress passed the Federal Acquisition Streamlining Act which dictates the opposite result.

For many years FAR 15.804-3(c)(3) defined commercial items as "supplies or services regularly used for other than government purposes and sold or traded to the general public in the course of normal business operations." There were no restrictions on the use of hourly rates in the establishment of catalog or market prices. Indeed the Armed Services pricing manual on Page 9-7 includes the following relevant example:

"A market price might exist on a [time and materials] contract particularly where the work is done by a craftsman. For example the government may require a glass blower to make some specially designed items for laboratory work. The glass blower may charge $18 per hour plus materials. If the general public such as commercial laboratories hospitals and factories regularly pays $18 per hour for those services there is a market price for the services."

However in Section 8001 of FASA 41 U.S.C. 403(12) Congress set forth a new definition of a commercial item that states in part that the term includes "services offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog prices for specific tasks performed and under standard commercial terms and conditions." Although this definition does not directly address the question of hourly rates the House-Senate Conference Committee provided the following additional commentary:

In addition the Senate bill would include in the definition of commercial items those services that are procured for the support of a commercial item. The House amendment would include in addition to such services services that are offered and sold competitively in significant quantities in the commercial marketplace at established catalog prices or standard rates and under standard commercial terms and conditions.

The conference agreement would include those commercial services that are offered and sold competitively in substantial quantities in the commercial marketplace based on established commercial terms and conditions.The definition would cover only those commercial services that are sold based on established catalog prices for the specific tasks performed. It would not include services that are sold based on hourly rates without a fixed catalog price for a specific service performed ("H.R. Conf. Rep." No. 103-712 at 228-29 (1994) reprinted in 1994 "U.S.C.C.A.N." 2561 2658-59).

In response the FAR was amended to delete the prior definition of a commercial item from FAR Part 15 and to include a new definition at FAR 2.101 that specifically excludes "services that are sold based on hourly rates without an established catalog or market price for a specific service performed." One of the principal purposes of FASA was to broaden the definition of a commercial item. However in this instance it narrowed the definition in a critical way. There is no evidence that Congress realized it was imposing new limitations in this area. However the impact on companies that provide services on an hourly basis has been severe in many cases. Congress should fix this unintended consequence as soon as possible.

GSA has incorporated the new definition of a commercial item into its MAS solicitation. However GSA does not appear to follow this definition with respect to contracts for services invoiced on an hourly basis. Thus GSA's treatment of hourly contracts for services as commercial items is inconsistent with the terms of its own solicitation and out of step with the way most agencies interpret the statutory intent as reflected in the new FAR definition.

This issue has significant ramifications. If hourly services are not commercial items then GSA's inclusion of them in its MAS contracts is improper. By contrast if GSA properly may consider hourly services to be commercial items notwithstanding the statutory history then other agencies should be able to do the same.

The Office of Management and Budget recently announced its intention to issue regulations governing the placement of orders against GSA's MAS contracts for services. Before it does this however it needs to resolve the threshold question of whether such services are commercial items that may be included on the contracts at all.

-- Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn Washington D.C. This column addresses legal topics that arise in government acquisition and management of ADP resources. Readers are encouraged to submit topics by e-mail to carl@carl.com. This column discusses legal topics of general interest only and is not intended to provide legal advice. Should you have a specific question or legal problem consult an attorney.

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