Fudging on fees

Since 1995, the General Services Administration has financed its schedule purchasing program through the collection of a 1 percent (soon to be 0.75 percent) Industrial Funding Fee (IFF). This fee, which is incorporated into contractors' published schedule prices, is paid by purchasing agencies and then collected by contractors as part of the sales price. They pass it on to GSA on a quarterly basis.

Considerable confusion exists regarding whether contractors must pay the IFF on sales to federal purchasers outside GSA schedule contract buys. Such sales arise primarily in two contexts.

First, a contractor may sell a product from a schedule contract to a federal buyer under an unrelated federal contract. Second, a contractor may sell a nonschedule product to a federal buyer in conjunction with, but not as part of, a schedule sale (i.e., an "open-market" order).

GSA's guidance on those situations has been inconsistent. Some within the agency maintain that a contractor owes the IFF in both. Others argue that the fee is due only in the second scenario. But I submit that one would be hard-pressed to find legal support for an IFF payment in either situation.

In the first case, according to applicable federal regulations, a contractor's IFF payment is calculated on the value of sales "under [the schedule] contract." Obviously, a sale made under a different contract is not made under the schedule contract.

Purchasing agencies, however, do not always clearly identify the contract under which a purchase is being made. This puts contractors at a disadvantage because GSA takes the position — supported by some case law — that a federal purchase of products using a schedule contract is presumed to be a schedule purchase unless the agency says otherwise.

In the second scenario, a fee should not be owed, either. An open-market sale, by definition, is not a schedule sale.

Agencies must satisfy procurement competition requirements, and the purchase price typically does not include the IFF. Thus, a contractor should not have to remit the fee on such sales. Remember, it is supposed to be the agency that pays the IFF, not the contractor.

Against this background, it seems that a contractor can protect itself best by:

Instructing federal sales representatives to ask purchasers whether they are buying under the schedule contract. If not, they should reference the appropriate contract number on the purchase order and invoice.

Explicitly identifying open-market orders on GSA's price list and making clear that the price of such items does not include the IFF.

Maintaining clear and complete records regarding all federal sales.

Although these steps will not necessarily move GSA from its sometimes overly broad interpretation of the IFF clause, it will put contractors on more solid ground to defend themselves should the need arise.

Aronie is a partner in the government contracts group at Sheppard Mullin Richter & Hampton. He can be reached at jaronie@sheppardmullin.com.

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