This is a position paper by the Office of Inspector General, U. S.
General Services Administration, addressing the effect of procurement
reform proposals on some aspects of the Multiple Award Schedule program.

**[EXECUTIVE SUMMARY]{.underline}**

The recent round of procurement legislation, as embodied in the Federal
Acquisition Streamlining Act of 1994 (FASA), as well as proposed
legislation now pending before Congress, has produced many laudable
reforms that have streamlined the procurement process and moved the
government away from government-unique specifications and toward the
acquisition of commercial products. We need to insure, though, that in
making this transition, we do not ignore the lessons we have learned
about how to buy these commercial products intelligently. Buying
commercially is not new to the government; commercial product
acquisitions already amount to billions of dollars each year. In the
context of the Multiple Award Schedule (MAS) program alone, under which
agencies make individual purchases of relatively smaller quantities of
commercial items, government purchases of commercial items exceed \$9
billion annually.

A number of safeguards \-- such as certifications, disclosure
requirements and audit rights \-- have been built into the MAS
procurement process in response to General Accounting Office (GAO)
recommendations and evidence of contractor abuses. These safeguards help
insure that when the government buys commercial products, it does so in
a manner that provides a fair process and guarantees that the
government, and thus the taxpayer, gets a good deal. As we shift toward
far greater reliance on commercial product acquisitions to meet the
government\'s needs, it is critically important that we not discard
those mechanisms that have proven essential to getting the fairest deal
for the government and protecting the taxpayer\'s interests.

In relying on these mechanisms, particularly in the context of the MAS
program, the government operates in the same manner as do large
corporate purchasers. Despite abundant lobbying rhetoric to the
contrary, the fact is that large corporate purchasers use these very
same safeguards in conducting procurements with their own commercial
suppliers. Like the government in the MAS program, corporate purchasers
take maximum advantage of their potential purchasing power, seeking to
obtain from their suppliers such terms as most-favored customer
treatment and audit access when their volume of purchases so permits.
When industry representatives have testified before Congress about the
so-called burdens of the federal procurement process, they have spoken
from the perspective of sellers of goods; they have not addressed how
they acquire commercial goods when they act as purchasers.

We agree that many of the reforms of the commercial product acquisition
process are salutary, but caution against painting with too broad a
brush. Not all commercial product acquisitions are the same. If the goal
of acquisition reform is to make the government operate more like a
business, then the MAS program should serve as a model rather than as an
object of government reform. The MAS program has already developed the
safeguards necessary to insure that the taxpayer\'s interests are fully
protected. We need to insure that the current reform efforts do not take
those safeguards away.

This paper explores some of these themes in the context of specific
procurement reform initiatives as applied to the MAS program.

 [Background of the MAS program]{.underline}

The MAS program, which is administered by the General Services
Administration (GSA) and the Department of Veterans Affairs (VA),
provides federal agencies with a simplified procedure for acquiring
commonly used supplies and services at prices that generally reflect the
discounts to which the government ought to be entitled given its large
volume of purchases. The MAS program has been recognized by industry and
government users alike as an effective mode of procurement. MAS prices
are relied on as benchmarks in Department of Defense cost contracts and
by state and local governments.

 [Key safeguards in the MAS procurement process]{.underline}

Four key safeguards have been built into the MAS procurement process
over time to protect against loss of taxpayer dollars \-- disclosure
requirements, certifications, price reduction requirements and audit
rights. Long-standing industry proposals to curtail or eliminate them
have been incorporated into or discussed in the context of recent
procurement initiatives.

 Data disclosure requirements \-- Unlike many procurements, MAS
procurements ordinarily do not require detailed cost data from
contractors, but rather simply require the disclosure of sales and
discount information. This data requirement is the principal means by
which GSA and the VA insure that the prices they negotiate are fair and
reasonable. Pending legislation would create an MAS pilot program which
would eliminate disclosure requirements. This pilot program would,
through the establishment of an electronic marketplace mechanism, rely
on competitive market forces to determine prices for a billion dollar
MAS computer supply program. Because of the nature of MAS contracting,
we do not believe that such a mechanism can always effectively
substitute for disclosure requirements and price negotiation as an
assurance of reasonable prices.

 Certifications \-- Recent legislation would eliminate or curtail the
use of certifications in connection with procurements. It has been our
experience that certifications relating to sales and pricing disclosures
have proven necessary to insure that contractors accurately disclose
information to the government. Notwithstanding industry protestations
that these certification requirements are overly burdensome and are
driving contractors away from federal contracting, the fact is that the
number of contractors who do business with the government on MAS
contracts generally has risen.

 Price reduction requirements \-- Such requirements insure that the
government retains current market pricing during a contract. Price
reduction mechanisms are particularly important in MAS contracts, which
are mainly of a three to five year duration.

 Audit rights \-- Pending legislation would effectively eliminate the
government\'s statutory authority to audit all commercial item
contracts, including MAS contracts. Eliminating audit rights would strip
the government of one of the most important tools it has to detect and
recover for contractor overpricing, whether accidental or deliberate,
and would hand contractors \"carte blanche\" to violate contract terms.

 [The government as a business]{.underline}

The success of industry in garnering support for many of its procurement
initiatives is reflective of the popular misconception that the
government operates in ways significantly different than the ways in
which industry operates. We examined the terms and conditions contained
in a sampling of commercial agreements between large volume purchasers
and their commercial suppliers. The agreements were obtained in the
course of audits conducted by both the GSA and VA Offices of Inspectors
General. All of the agreements contained at least one of the following
safeguards \-- most-favored customer requirements, price reduction
clauses, and the right to audit the records of suppliers. It is apparent
that large volume purchasers in the private sector take maximum
advantage of their size and potential purchasing power to obtain the
most favorable terms possible in the marketplace.

 [Recommendations]{.underline}

We recommend specific legislative or regulatory actions to address the
concerns we raise in this paper. Our principal recommendations include:

 A clear statement that the government shall have reasonable audit
access rights for a period of three years after final contract payment;

 At a minimum, a retention of all certifications relating to pricing
disclosures presently required on acquisitions, including MAS
acquisitions, exempt from TINA cost or pricing data requirements;[^1]

 A statement recognizing that the price reduction clause is commonly
included in private sector commercial contracts and will be included in
MAS contracts.

**[INTRODUCTION]{.underline}**

The ongoing process of federal procurement reform, which most recently
resulted in the passage of the Federal Acquisition Streamlining Act of
1994 (FASA), Pub. L. 103-355, has its genesis in very legitimate
concerns over the increasing complexity and often contradictory nature
of the rules and regulations governing the federal procurement process.
In recent years, the need for procurement reform has been raised by a
number of procurement review panels and commissions. For example, in
1986, the President\'s Blue Ribbon Commission on Defense Management
(known as the Packard Commission) stated that new legislative
initiatives were needed to recodify federal procurement laws and create
\"a single, consistent, and greatly simplified procurement
statute.\"[^2] More recently, the Advisory Panel on Streamlining and
Codifying Acquisition Laws (the Section 800 Panel)[^3] recommended a
number of changes to the government\'s acquisition of commercial
technologies, including a broadened definition of commercial items and
stronger policy language in favor of using nondevelopmental items.

The conclusions of the Section 800 panel were reiterated in 1993 by the
government-wide National Performance Review (NPR). The NPR report
recommended an increased reliance on the acquisition of commercial
items, and an increased simplified acquisition threshold, among other
streamlining measures. Billed as a \"comprehensive\" overhaul of the
federal acquisition process and based in part on the conclusions reached
in all of these reports, FASA enacted provisions aiming to increase the
government\'s access to products developed in the commercial sector,
consolidate or eliminate some procurement requirements, encourage
performance-based contracting, and create a new simplified acquisition

threshold, which is used to exempt smaller dollar procurements from a
variety of procurement laws.[^4]

Although the Federal Acquisition Regulation (FAR) implementation of FASA
is not yet complete, the procurement reform movement has continued into
the present Congress. On February 27, 1995, the Federal Acquisition
Improvement Act of 1995 (FASA II) was introduced into Congress as S. 669
and H.R. 1388. Among other things, the bills would substantially
increase the approval thresholds for conducting procurements without
full and open competition and would raise again, this time to \$1
million, the simplified acquisition threshold for certain procurements
of services. Another pending bill, S. 675, aims to automate and
streamline ordering and contracting procedures for the acquisition of
certain commercial items. Introduced on May 18, 1995, the Federal
Acquisition Reform Act of 1995, H.R. 1670, would give all commercial
item procurements a new across-the-board exemption from the various
truth in negotiation requirements which are designed to allow the
government to purchase at the lowest possible price.

A primary focus of FASA and many of the current reform initiatives, as
well as past acquisition reform recommendations, has been on efforts to
make the federal government operate more like the private sector in the
acquisition arena, particularly in the procurement of commercial
products. We particularly applaud Congressional efforts, as embodied in
FASA, to move toward a performance- based, results-oriented acquisition
process and to delegate procurement functions from agency heads to lower
level officials, which should promote flexibility in procurement
decisions. Another result of the recent procurement initiatives has been
the push to increase commercial item acquisitions so as to reduce the
expensive and time-consuming process of procuring government-unique
items whenever possible, and to replace them with common-use items which
may be purchased in mass quantities, at significant volume discounts.
This is entirely appropriate and will be a significant accomplishment of
the procurement reform movement.

We are concerned, however, that to meet industry\'s concerns, the
pendulum of procurement reform has begun to swing too far and, in so
doing, we have lost our focus on who should be the primary beneficiary
of any federal procurement reform \-- the American taxpayer. In response
to industry complaints regarding purported burdens on the contracting
process, FASA and other reform initiatives seek, in part, to loosen
information disclosure requirements, curtail or eliminate audit rights
and eliminate enforcement mechanisms. The numerous safeguards
painstakingly built into the contracting process, such as most-favored
customer status, the Truth in Negotiations Act, defective pricing and
price reduction clauses, and the right to audit for contract overpricing
and for fraud, are in place because of a real and demonstrated need to
protect the taxpayer from potential contractor abuse. While industry
strenuously argues that such safeguards are incompatible with commercial
sales practices, our own documented experience is that large private
sector purchasers consistently require the same types of safeguards in
their own contracts as does the federal government.

One of the rallying cries of the current reform initiatives is that the
federal government should conduct purchases the way an individual does
in a discount retail establishment such as Office Depot or Wal-Mart.
However, we believe that the government, as the nation\'s largest single
potential purchaser, spending about \$200 billion annually in goods and
services, is in a position to obtain much more favorable pricing and
conditions than an individual making small, one-time purchases at a
Wal-Mart. It has been our experience that large corporate purchasers
conduct their procurements in this manner whenever possible, taking
maximum advantage of their potential purchasing power.

One of the most important vehicles by which the buying power of the
federal government is harnessed in the procurement of commercial
products is the Multiple Award Schedule (MAS) program. The program
allows government agencies to make individual purchases of relatively
small quantities of commercially available, common-use, off-the-shelf
items and services while securing the benefits of the government\'s
aggregate purchasing power. Aside from its importance to direct
government users (both civilian and military agencies), the prices
negotiated in MAS contracts are often used by state agencies and even
large private-sector purchasers as benchmarks for the reasonableness of
prices in other commercial item procurements.

Although FASA and its predecessor reform proposals did not focus
directly on the MAS program, many of the FASA-inspired changes to
commercial items acquisitions now being implemented through regulatory
changes, including disclosure requirements and curtailment of audit
rights, may severely impair the program. Other current initiatives
confront the MAS program directly. For example, S. 675 proposes a
four-year \"pilot program\" encompassing all computer-related MAS
contracts, under which contracting officers would be able to negotiate
terms and conditions, but not prices. Another recently introduced bill,
H.R. 1670, would eliminate certain contractor certifications and may
effectively remove audit rights for MAS contracts. Other industry
proposals not yet introduced as legislation would eliminate the price
reduction clause under

which the government receives price adjustments during the terms of MAS
contracts.[^5]

This paper examines the recent reform initiatives in the context of the
MAS program.

 First, we provide some background on the MAS program. We examine the
bases for the MAS pricing mechanism and discuss the GAO reports which
forced the government to reexamine its negotiation objectives to focus
on maximizing the government\'s total buying power. We also present some
testimonials to the importance and usefulness of the MAS program from
both government users of the program and contractors who supply products
under it.

 Second, we review some specific proposals contained in current reform
initiatives which, if applied to the MAS program, will significantly
increase the cost of acquisitions to taxpayers. Specifically, we examine
four safeguards \-- disclosure requirements, certifications, price
reduction requirements, and audit rights \-- in the context of current
or pending proposals which would curtail or eliminate them. These
safeguards have been built into the MAS procurement process over the
years in response to GAO recommendations and documented instances of
contractor abuse.

 Third, we examine the principal faulty assumption on which many of the
procurement reform proposals relating to commercial products are based
\-- that the government imposes special requirements on the contracting
community that are different from those the contracting community seeks
from its own commercial suppliers. We show that, in fact, in the key
areas of most-favored customer requirements, price reductions and audit
access, government practices through the MAS program are very much the
same as those found in the commercial arena. We show that in the
competitive marketplace large volume purchasers can and do set
conditions like the government does because it is in their economic
interest to do so.

 Fourth, we offer recommendations which we believe better balance the
competing interests of cost to the taxpayer and burden on industry. We
offer recommendations related to audit rights, price reduction and other
requirements, both generally and as related to specific legislative
proposals.

**[THE MULTIPLE AWARD SCHEDULE PROGRAM]{.underline}**

**Background**

The supply schedule program provides federal agencies with a simplified
procedure for acquiring small quantities of commonly used supplies and
services at lower prices while obtaining discounts associated with
volume buying. Administered primarily by the General Services
Administration (GSA), the program consists of both single award and
multiple award schedules. In FY 1994, the Multiple Award Schedule (MAS)
program generated over \$9 billion annually in sales through roughly
7,500 contracts covering approximately 135 different commodity
schedules, with products ranging from office furniture to mainframe
computers and scientific equipment.[^6] Under authority delegated by the
Administrator of GSA, the Department of Veterans Affairs (VA)
administers multiple award schedule contracts for the supply of
pharmaceuticals and medical/surgical supplies and equipment which are
purchased primarily by VA and Department of Defense (DOD) hospitals and
other government medical facilities.

MAS contracts are negotiated contracts established with more than one
contractor for the delivery of comparable commercial supplies or
services. All responsible contractors may submit offers in response to a
solicitation for MAS contracts; for the most part, there is no
head-to-head competition between contractors. Contracts are awarded to
contractors supplying the same generic types of items or services at
varying prices for delivery within the same geographic areas. Federal
agencies then simply order supplies or services from the schedules (or
catalogs) at the prenegotiated prices and pay the contractors directly
for their purchases. Agencies thus avoid using cumbersome and
administratively costly traditional procurement procedures in their
purchases of commercially available, common use items. By having GSA and
the VA negotiate schedule contracts, agencies, as well as contractors,
also avoid the cost of duplicating procurements for common use items.

Under the MAS program, prices are most often based on negotiated
discounts from contractors\' commercial price lists. In the late
1970\'s, the General Accounting Office (GAO) issued a series of reports
critical of the existing policy of negotiating discounts for MAS
contracts based on the size of individual orders from agencies rather
than on total annual purchases.[^7] The GAO found that the failure to
focus on the government\'s consolidated annual buying volume rather than
individual order sizes caused the government to pay higher prices. In
response to the reports, GSA redefined MAS policy so that the goal was
to obtain discounts from a contractor\'s commercial price list equal to
or greater than the contractor\'s most-favored customer\'s discounts.
The most-favored customer is that customer who receives the best
discounts from the contractor\'s commercial price list when purchasing
quantities comparable to the government\'s under similar terms and
conditions.[^8]

**Industry and Government Support for the MAS Program**

The MAS program has been repeatedly recognized by industry as well as
federal and state government agencies as an effective and economical
mode of procurement. For example, in October 1993, the Council for
Procurement Reform, which is comprised of leaders of industry, stated:

\"We believe the Multiple Award Schedule program has proven to be an
effective, efficient procurement vehicle which offers government buyers
an easy way to buy small quantities of commercial goods at fair and
reasonable prices. It is the single most important commercial product
procurement program in the federal government.\"

Similarly, in a January 5, 1995 letter to Vice President Gore, the
Coalition for Government Procurement, an industry trade association
representing hundreds of vendors of commercial goods to the government,
stated:

\"The Coalition also strongly supports the Multiple Award Schedule (MAS)
program. The MAS program is the government\'s best commercial products
acquisition vehicle. It allows agencies to easily and quickly purchase
small quantities of commercial goods at fair and reasonable prices.
Through the MAS program, users can choose the product that best meets
their needs from a wide variety of goods. The Coalition estimates that
the Multiple Award Schedule program saved the government \$2.3 billion
in 1992 alone. These savings came as a result of the significant price
reductions GSA was able to negotiate with vendors based on
government-wide purchasing volumes and through reduced administrative
costs over having agencies conduct their own procurements.\"

The MAS program also serves as an important source of commercial
products for DOD. In an October 27, 1988 memorandum, the Office of the
Assistant Secretary of Defense stated,

\"DOD considers those Federal Supply Schedules (schedules) which are
optional for DOD to be \'preferred sources of supplies and services\'. .
. There is no statutory or regulatory need to synopsize requirements,
seek further competition, determine price reasonableness, or comply with
small business-small purchase set-aside requirements when schedules are
used. . . The use of GSA schedules offers DOD a quick and efficient way
of obtaining needed requirements. This advantage led to the DOD policy
that maximum use should be made of schedules.\"

The efficacy of the MAS program is also attested to by the reliance of
state agencies and large private-sector purchasers, as well as DOD in
its cost contracts, on GSA and VA schedule prices as the benchmark for
price reasonableness when they procure goods and services. In addition,
vendors frequently advertise that they offer \"schedule pricing\" as an
inducement to purchasers.

**[KEY FEATURES OF RECENT PROCUREMENT INITIATIVES]{.underline}**

Many of the safeguards that have been built into the MAS procurement
process over the years to insure low prices and to guard against loss of
taxpayer dollars have become targets in the recent and still ongoing
round of procurement reform initiatives. Industry has long argued
against audit rights and certification requirements, but until recently
those arguments have fallen mainly on deaf ears. However, recently,
under the guise of \"reinventing government\" and \"streamlining
procurement,\" industry proposals designed to eliminate or render
ineffective key safeguards in the procurement process have found a home
in FASA or in other legislation now pending before Congress. We examine
four of these safeguards

\-- disclosure requirements, certifications, price reduction
requirements, and audit rights \-- in the context of FASA and pending
proposals.

**Data Disclosure Requirements**

**a. Generally**

The primary data disclosure requirements related to government
procurement are found within the Truth in Negotiations Act (TINA),[^9]
which requires the submission and certification of cost or pricing data
in negotiated contracts over a certain dollar threshold.[^10] MAS
contracts are negotiated under an exemption to the TINA
requirements,[^11] although GSA and the VA are nevertheless required by
regulation to conduct a price reasonableness analysis.[^12] As part of
this analysis, these agencies require the submission of information on
discounts and other concessions granted to commercial customers of
offerors. The agencies then seek to obtain the best discount that a
commercial customer with similar buying power obtains from that
contractor.

The contracting community has long voiced its concerns about the MAS
program\'s general data requirements. Some contractors have urged at the
broadest level that GSA and the VA should not require them to provide
any information on the discounts they provide to their customers,
arguing that such disclosures are an unreasonable burden on
contractors.[^13] Although neither FASA nor the prospective regulations
implementing FASA would limit data disclosure requirements, other
pending proposals may affect these requirements. For example, S. 675
would authorize a pilot program of all MAS schedules for computer
equipment (with an annual value of approximately \$1.7 billion) for a
four-year period, under which GSA could negotiate (and presumably
require the disclosure of) only terms and conditions, but not price.

What is ignored by those seeking to alleviate purportedly \"burdensome\"
disclosure requirements is that the MAS program simply seeks the
disclosure of commercial sales information that most contractors have
readily available. For the most part, MAS contracts do not require
detailed cost information. More important for purposes of protecting the
taxpayer, the MAS disclosure requirements are the means by which GSA and
the VA insure that they have a reasonable prospect of meeting their
negotiation objectives and that the prices negotiated are fair and
reasonable. In general terms, disclosure requirements seek to place the
government negotiator and a contractor on equal footing at the
bargaining table by requiring disclosure of all data available to the
contractor that may pertain to the negotiation process. There is no
requirement that the government be given the best price, but only that
such information as is given be accurate, complete and current. It is
then up to the government negotiator to obtain the best deal possible
for the government.

As we have discussed, the goal of GSA and the VA in negotiating MAS
contracts is to obtain discounts from a contractor\'s commercial price
list which are equal to or greater than the contractor\'s most-favored
commercial customer. In this manner, GSA and the VA are able to maximize
the government\'s buying power to achieve prices commensurate with what
commercial companies buying with like terms and conditions and sales are
able to achieve. The inability to obtain disclosure of pertinent
discount information would severely handicap the

government in its attempts to obtain the best possible prices for the
goods and

services it procures.

**b. The Electronic Marketplace as a**

**Substitute for Disclosure Requirements**

One industry response to some of the concerns we raise here is the
\"electronic marketplace.\" Already partially implemented under the
electronic ordering procedures of the Federal Acquisition Computer
Network (FACNET) system put into place by FASA, the concept of an
electronic marketplace envisions that eventually contractors would list
products and prices electronically without those prices having been
negotiated by GSA and the VA, and agencies would electronically order
the lowest-priced item that met their needs. Contractors, at any time,
would be able to add new products and change prices. Such a system has
been proposed by pending bill, S. 675, on a four-year \"pilot basis\"
for all computer equipment MAS schedules administered by GSA, as
discussed above.

As a threshold matter, it seems more than a stretch to term a \"pilot
program\" one which covers a program worth \$1.7 billion annually for a
four-year duration. More fundamentally, though, we question the
assumption upon which the idea of an electronic marketplace is based \--
that direct price comparison can fully substitute for disclosure
requirements and price negotiation as the government\'s assurance of a
fair and reasonable price in the context of MAS procurements.

The reality of the MAS contracting process suggests that direct price
competition may be illusory. For most purchases by agency users under
MAS contracts, price is not the determining factor. The agency user
selects products based on a number of factors other than price,
including function, familiarity with the product and brand-specific
characteristics. Therefore, agency users do not, for the most part,
simply \"price shop.\" Rather, they look to buy a particular
contractor\'s product because that product has the capabilities and
functions it needs and not necessarily because it has the best price.
Moreover, for many, if not most, MAS sales, agency users purchase on
what is effectively a sole source basis either because additional
components are being added to an existing system or

because they are purchasing updates and maintenance of existing
software. In addition, for some products there is no real competitive
market, either because the

products are manufactured by only one company or because one company
effectively dominates a particular market.

Without the negotiation of prices by a central negotiating authority
such as GSA or the VA, the government may lose its ability to obtain
better prices based on its volume of purchases. As we have discussed,
MAS prices are negotiated based on what large commercial customers pay
for products and services and are usually substantially less than retail
prices. If, as is envisioned by the electronic marketplace mechanism,
agency users make individual buys of goods and services similar to buys
in a retail market, the government would have lost its ability to seek
large volume discounts. MAS prices may then rise to the level of retail
prices and one program where the government has been a \"smart shopper\"
would be lost.

In short, we believe that the price competition envisioned by the idea
of an electronic marketplace may be insufficient to insure that the
government receives favorable pricing for many schedule items. The
nature of agency MAS purchases is such that the key question is not what
does a competitor\'s roughly similar product sell for, but rather what
is the best price that this particular company sells this particular
product for. It has been our experience, based on years of auditing MAS
contracts and our knowledge of contract negotiations, that contractors
do not disclose the large volume corporate pricing unless required to do
so. An electronic marketplace should prove to be an invaluable means of
making MAS procurements more efficient; however, we believe it should
not become a substitute for price negotiations and mandated disclosures.
Without these tools, the government will not be in a position to
guarantee low prices to agency users of the MAS contracts.

**Certifications**

Recent Congressional attention has focused on government certification
requirements. Under FASA, particular certification requirements were
removed for certain acquisitions. Further, the proposed Federal
Acquisition Reform Act of 1995, H.R. 1670, would eliminate certain
statutory certifications and would require that all certifications
contained in the FAR or agency supplements to the FAR that are not
specifically required by statute be eliminated unless either the

FAR Council or the head of the promulgating agency justifies their
existence and

receives the approval of the Administrator of the Office of Federal
Procurement Policy.

The government requires certifications in many different contexts,
ranging from certifications supporting procurement integrity to those
accompanying the reporting of lobbying efforts. Of critical importance
to the procurement process are those certifications supporting data
disclosure requirements during the negotiation of contracts. TINA
requires contractors to certify to the accuracy of cost data they supply
to the government; so, too, contractors in MAS procurements are required
to certify to the accuracy of discount information they supply.

Such certifications have proven necessary to ensure that contractors
accurately disclose pricing (and discount) information, as well as terms
and conditions offered to the government and other customers so that the
contracting officer can make price reasonableness determinations based
on reliable information. In fact, certifications facilitate expeditious
contract awards. The government contracting officer can accept the
contractor\'s certified assertions without requiring the submission of
records in support of each disclosure and the resulting review of
voluminous documentation. Certifications also create a level playing
field among competitors by ensuring that all contractors are held
equally accountable for the accuracy of their disclosures on pricing
practices.

More importantly, certifications serve as an integral part of the proper
notice provided to the individual who signs the certification that the
government relies on the accuracy of the information provided and that
he or she will be held accountable for his or her failure to make a good
faith effort to insure the adequacy of the disclosures. The government
seeks from those who do business with it a good faith and reasonable
effort to determine and disclose pricing policies and practices.

Much controversy has centered around the use of certifications as a
government procurement safeguard. Industry has long argued that the use
of certifications deters contractors from responding to government
solicitations for fear that the government could potentially prosecute
them criminally for inaccurate information accidentally submitted to the
government. The reality, however, is very different. Notwithstanding the
numerous certifications now required in

government procurements, the number of contractors who do business with
the government on MAS contracts generally has risen.[^14]

Furthermore, the contention of the contracting community assumes in part
a lack of good faith in the exercise of government prosecutorial
discretion. In fact, few contractors have ever been prosecuted
criminally for the failure to accurately disclose pricing information
and practices. Contrary to what is sometimes asserted, violations of
certifications are not judged under a \"strict liability\" standard. The
burden of proof remains on the government to establish beyond a
reasonable doubt that the contractor intended to defraud the government
by submitting false statements or false claims, a stringent threshold
which discourages abusive prosecutions. Nor does the government lightly
pursue contractors civilly for false statements and claims, which, even
in a civil context, require the government to show much more than a mere
accidental nondisclosure of information.

Contractors have also suggested that since a high percentage of
contractors have been found through Inspector General and GAO audits not
to have accurately disclosed their pricing information, certifications
themselves have had no positive impact on the quality of disclosures
over the years. On the contrary, our experience has shown that
certifications are integral in providing notice to the contractor of the
government\'s expectation of forthright disclosures and negotiations. We
believe that without certifications the quality of information
disclosures would drop dramatically and inevitably lead to overpricing,
while, at the same time, the government would be left without the
appropriate remedies for

recovering taxpayer monies lost due to contractor fraud, which last
fiscal year alone reached a record-breaking \$1.09 billion in civil
fraud recoveries.[^15]

Although this number is large, it represents only a fraction of the
\$200 billion the federal government spends each year on procuring goods
and services. Despite suggestions to the contrary, most contractors take
their certification and disclosure obligations seriously. The ones who
do not do so and who do not \"play fair\" either with the government,
their own suppliers or their competitors, ought not be free now to do so
with impunity.

**Price Reduction Requirements**

GSA has long prescribed a price reduction clause for use in all MAS
solicitations and contracts.[^16] As we have discussed, MAS contracts
are negotiated on the basis of, and prices are expressed as a discount
from, a contractor\'s commercial price list. Contracting officers
determine prices to be fair and reasonable by comparing the discounts
which a contractor offers to the government with the discounts the
contractor gives to its commercial customers and aligning the government
to a comparable customer or category of customers.

Such a clause simply assures that the government maintains throughout
the life of the contract the relative price/discount advantage
negotiated in relation to the contractor\'s commercial customer upon
which the contract award is predicated. Specifically, the price
reduction clause provides that if a contractor sells any item covered by
the contract at a price below the negotiated MAS contract price to the
identified comparable customer, then the contractor must give the
government an equivalent price reduction on all subsequent government
orders for the balance of the contract period or until the price is
further reduced. This, of course, assumes

that the comparable customer and the MAS contract have similar terms and
conditions.

Some in the contracting community have been critical of what they term
the \"burdensome\" aspects of the clause\'s reporting requirements. To a
large extent, GSA has been responsive to these concerns and has taken
recent steps to alleviate some of the reporting requirements. For
example, on August 18, 1994, GSA relaxed requirements so that
contractors now need not report price decreases to the commercial
customers which did not serve as the basis of contract award, but only
price decreases to those commercial customers which formed the basis of
award.

Predictably, others in the contracting community continue to oppose the
government\'s use of the price reduction clause on any basis, arguing
that the clause is unnecessary and not in accordance with standard
commercial practice.[^17] Aside from the reality that price reduction
requirements, in fact, are standard commercial practice for many large
volume purchasers, which we discuss below, to eliminate such a clause
would be to eliminate an important means by which the government insures
that it receives the best pricing. As MAS contracts are often three to
five years in length, price reductions insure that the government is
receiving current market prices in response to changes in market demand
and technology. It is really the very existence of the price reduction
clause which allows MAS contracts to be of longer duration than the more
typical one-year supply contract. Absent such a clause, the government
would be forced to enter into contracts of shorter duration in order to
maintain current pricing. The administrative costs and other burdens
associated with more frequent negotiations would be increased for
contractors and government alike.

The need for a price reduction clause is all the more critical for
contracts of longer duration in light of FASA\'s new definition of what
constitutes a commercial product. FASA broadened the definition of
commercial products to encompass items which have not yet been offered
to the public but are expected to be placed on the market. Although
FASA\'s goal of trying to facilitate the government\'s ability to obtain
cutting edge technology is laudable, the fact remains that these
innovative products have not been purchased by the public and do not
have an established fair and reasonable price. The price reduction
clause would be an important mechanism in contracts for commercial items
without actual sales to assure that the government does not pay an
exorbitant price compared to that established by current market
conditions.

**Government audit rights**

The government\'s long-standing audit rights, as embodied in the GAO\'s
Examination of Records clause and agencies\' audits clauses, have
allowed audits of government contracts up until three years after final
payment on a contract, in order to allow time for examination of
contractor records after completion of contract performance.[^18]
Carving out an exception to these requirements, FASA limited audits of
certain commercial product acquisitions, but not necessarily MAS
acquisitions, to two years after contract award.[^19] Recently
introduced legislation, H.R. 1670, would amend FASA and would appear to
effectively eliminate the government\'s statutory authority to audit all
procurements of commercial products, including MAS contracts.[^20]

Eliminating audit rights would strip the government of one of the most
important tools it has to detect and recover contractor overpricing and
leave it effectively at the mercy of the good intentions of the
contracting community. This would be particularly critical in the
context of the MAS program. Most of the MAS contracts are of a three to
five year duration, and there is discussion within GSA of increasing the
terms of MAS contracts even further.[^21] Even just limiting audit
rights to two years after contract award, as some have proposed, would
obviously leave a large portion of the contract period unauditable.
Removing those audit rights entirely, as espoused by H.R. 1670, would
render meaningless any ability the government may still have to monitor
defective pricing or price reduction requirements or even to discover
and recover for simple billing errors. Eliminating such rights would be
tantamount to handing the contractors \"carte blanche\" to violate
contract terms. With overall federal procurement expenditures running at
\$200 billion a year and MAS acquisitions alone amounting to over \$9
billion annually, eliminating this basic means of protecting the
taxpayer\'s interests would not be good government, nor would it make
good business sense.

The magnitude of the inevitable loss to the taxpayer that would result
from the elimination of audit rights is reflected in the results of
recent audits of MAS contracts issued by our Offices, as well as by GAO.
These reports show that, in spite of existing built-in assurances such
as certification requirements, contractors often tend to submit, either
inadvertently or purposefully, incomplete and inaccurate
disclosures.[^22] In the past seven years alone, the GSA Office of
Inspector General issued postaward audits of MAS contracts which
resulted in the recovery of over \$100 million in civil fraud
settlements and judgments with contractors,[^23] largely due to
inaccurate and incomplete disclosures of discount information and price
reductions by contractors.[^24] These figures are only a drop in the
bucket compared to the \$1 billion recovered last year by the Department
of

Justice for civil fraud cases. Of this amount, fully \$578 million
constitutes the recovery related to defense procurement fraud
cases.[^25]

Industry has complained about the supposedly unreasonable burden imposed
on contractors by the government\'s right to examine contractor books
and records. The argument is commonly made that providing these records
is both time consuming and expensive to the contractor. However, the
reality of modern audit

techniques is that almost all of the information required by government
auditors is down-loaded from computer sales tapes already maintained by
most vendors. Information such as discount structure is necessarily
maintained by most businesses in order to determine profit margins and
sales practices. The majority of MAS audits require no more than two
weeks of audit work at the contractor site in order to obtain the
required information. Therefore, the burden on contractors can hardly be
accurately labelled as excessive. Moreover, as discussed more fully in
the next section, audit access is consistent with common industry
practice for large volume purchasers.

**[THE GOVERNMENT AS A BUSINESS]{.underline}**

The success of industry in garnering support for many of its procurement
initiatives is reflective of the popular misconception that the
government operates in ways that are significantly different than does
industry. Certainly, in some cases the government does operate
differently, particularly in areas designed to promote socio-economic
goals, such as prevailing wage requirements or the promotion of small
and minority-owned businesses, like the 8(a) contracting program. In
many other areas, though, particularly when economic self-interest is at
issue, government and industry operate fairly similarly, except that
industry aims to maximize profit while the government aims to reduce
taxpayer costs.

Industry has long argued that data disclosure requirements,
certifications and audit rights are the antithesis of standard
commercial practice and that such requirements add significantly to the
cost of doing business with the government. Industry, instead, has
touted the competitive marketplace as the [sine]{.underline}
[qua]{.underline} [non]{.underline} of fair and reasonable procurement
practices and as the best guarantee the government

has that it will obtain the lowest possible prices for the goods and
services it purchases.

It is, however, the reality of this competitive marketplace which
dictates that large volume purchasers can and do set many conditions for
signing a contract. Among the conditions contractors set when they act
as purchasers are requirements very much the same as those conditions
contractors have so vociferously argued against in their government
contracts when they are acting as sellers. It has been

our experience based on years of auditing commercial contractors that
large volume purchasers conduct their own procurements in the same
manner as do GSA and the VA in MAS procurements \-- they seek to take
maximum advantage of their potential purchasing power whenever possible,
seeking such most-favored customer treatment, information disclosures
and audit rights as may be justified by their volume of purchases from a
particular seller.

Based on information disclosed in audits conducted by both the GSA and
VA Offices of Inspector General, we have examined the terms and
conditions contained in a representative sample of agreements between
large volume purchasers and their commercial suppliers. Standard in the
forty-one commercial purchase agreements we examined are the following
types of clauses:

 [Most-favored customer requirements]{.underline}: Of the forty-one
agreements we examined, fully twenty of them contained most-favored
customer requirements very similar to those contained in MAS contracts.
These agreements typically provided that the buyer would receive prices
better than or equal to any other buyer during the term of the contract.
One agreement provided the following:

\"\[the seller\] represents and warrants that the terms of this
Agreement are not less favorable to \[the buyer\] than those given to
any other of \[the seller\'s\] customers under like terms, conditions
and quantity.\"

Another example includes the following:

\"Supplier warrants and agrees that each of the charges, terms,
warranties or benefits granted to \[the buyer\] pursuant to this
Agreement or in any Purchase Order are comparable to or better than the
equivalent Charge, term, warranty or benefit being offered by

Supplier to any other commercial customer of Supplier procuring the

same product, at the same time, pursuant to similar terms and
conditions.\" [^26]

 [Price reduction clause]{.underline}: Twenty-three of the agreements
also contained provisions by which a seller would commit to giving the
buyer the benefit of any decreases in prices for the subject products
during the term of the agreement. One typical clause provides as
follows:

\"In the event the Seller\'s prices are reduced, as of the date of
reduction, the reduced prices shall apply to all current and future
rentals and purchases.\"

Another agreement we looked at contained the following language:

\"Seller agrees to extend at all times to Buyer and promptly make any
price reductions or changes to terms necessary to give Buyer the benefit
of as low and/or as favorable prices, terms, and conditions offered or
given by Seller at any time during the life of this

Agreement to others of similar classifications as Buyer buying items of
the same quality and substantially the same quantity.\"[^27]

 [Audit rights]{.underline}: Sixteen of the commercial agreements we
examined contained audit clauses much like the government\'s, by which
buyers not only required sellers to keep applicable records but also
retained the right to examine those records to verify pricing.
Interestingly, many of these clauses continued this obligation for a
period of time after the term of the agreement. One agreement provided
as follows:

\"Vendor will keep complete and accurate records of sales and net sales
to \[buyers\] for the period of the Agreement, and for one (1) year
thereafter. Vendor agrees to allow an independent accountant, agreed to
by both parties, the right to examine Vendor\'s books and records to
verify the marketing fee. . .\"

Another agreement provides as follows:

\"Supplier shall maintain complete and accurate records of all amounts
billable to and payments made by Customer hereunder in accordance with
recognized accounting practices. Supplier shall retain such records for
a period of one (1) year from the date of final payment for Products
covered hereby . . . During the terms of this Agreement and the
respective periods in which Supplier is required to maintain such
records, Customer and its authorized agents and representatives shall
have access to such records for purposes of audit during Supplier\'s

normal business hours. The correctness of Supplier\'s billing shall be
determined as a result of such audits.\"[^28]

It is obvious that large companies purchase in ways quite similar to the
federal government and require many of the same protections against
overpricing that they seem so reluctant for the government itself to
have. It is equally obvious that large volume purchasers take maximum
advantage of their size and potential purchasing power to obtain the
most favorable terms possible in the marketplace. In short, industry
includes provisions such as price reduction clauses and audit rights
because the provisions make good economic sense. We do not believe there
is any reason why the government, as the single largest procurer of
goods and services, should be denied the same protections.

**[CONCLUSION]{.underline}**

In sum, recent procurement initiatives have made great progress in both
streamlining the procurement process and moving away from
government-unique specifications toward commercial product acquisitions.
In so doing, however, these initiatives threaten to dilute the concept
that the government should use its volume purchasing power in order to
take advantage of economies of scale. The taxpayer clearly expects the
government to get the best prices available in the marketplace, and GAO
reports have consistently recommended that the government take advantage
of its paramount bargaining position. The MAS program has demonstrated
that, with its significant buying power, the government can and does
purchase at prices significantly lower than individual consumers at
discount stores. We should not jeopardize the government\'s ability to
continue doing so as we move to increase the government\'s reliance on
commercial products to meet the government\'s needs.

In order to effectively harness its buying power as it does in the MAS
program, the government needs to maintain the necessary tools to guard
against contractor overpricing. These tools include some of the
mechanisms we have discussed here \-- audit rights, price reduction and
disclosure requirements and certifications. Although industry maintains
that such requirements do not \"add value\" to the procurement process,
we believe that the facts are otherwise. Most obviously, the value of
these mechanisms lies in their ability to help the government insure
that it is getting a fair and reasonable price for the goods and
services it procures. To those who would say that the competitive
marketplace is the single best mechanism for regulating price for the
government as well as industry, we respond that industry itself does not
depend solely on the competitive marketplace to determine pricing, but
instead relies on many of the very same audit, most-favored customer and
price reduction requirements which it would deny the government.

**[RECOMMENDATIONS]{.underline}**

The OIG recommends the following legislative/regulatory actions to
address the concerns expressed in this paper:

 A clear statement that the government shall have audit access rights

for a period up to three years after final contract payment in all
negotiated procurements;[^29]

 At a minimum, a retention of all certifications relating to pricing or
related information disclosures presently required on acquisitions,
including MAS acquisitions, exempt from TINA cost or pricing data
requirements;[^30]

 A statement recognizing that the price reduction clause is commonly
included in private sector commercial contracts and will be included in
all MAS contracts;[^31]

 A requirement for price review and adjustment after a reasonable
period for commercial item contracts for cutting-edge technologies which
do not yet have actual sales; and

 The following changes to S. 675:

 The establishment of clear limitations on the scope and duration of
the \"pilot\" automation program proposed in Section 2 of S. 675,
including the inclusion of maximum dollar values.

 The amendment of Section 2(b) of S. 675 to clearly allow GSA the
discretion to conduct price negotiations in the event it determines that
the lack of competition for a particular item on a schedule would
warrant it.

 The amendment of the price adjustment language of Section 2(b)(2) of
S. 675, to indicate clearly that during the pendency of any pilot
program, contractors may adjust their prices on covered MAS contracts
only downward, in order to protect the government from unjustified price
increases.

 The inclusion of a mechanism to alert potential users of lower prices
for that same item offered to the public or to another federal agency.

**Attachment 1**

**[GSA MAS Postaward Audits]{.underline}**

**[FY]{.underline}** **[Recoveries]{.underline}**

Note 1

1995\* \$8,423,651

1994 4,029,446

1993 22,272,360

1992 27,837,094

1991 20,122,593

1990 15,772,766

1989 4,389,397

Total \$102,847,307

\* Through 5/31/95

1\. This column reflects recoveries (settlements or judgments) based on
audit reports that had been referred to the Department of Justice for
civil fraud prosecution. Virtually all of the recoveries are the result
of contractors\' failure to disclose

accurate, complete, or current data in the negotiation of their multiple
award schedule contracts and their failure to report and offer price
reductions.

**Attachment 2**

**[VA MAS Postaward Audits]{.underline}**

**[FY]{.underline}** **[Recoveries]{.underline}**

Note 1

1995\* \$7,943,730

1994 24,800,000

1993 170,000

1992 196,000

1991 910,000

1990 11,090,000

1989 5,083,000

Total \$50,092,730

\* Through 6/21/95

1\. This column reflects recoveries (settlements or judgments) based
primarily on audit reports that were referred to the agency for
administrative settlement. It also includes several that had been
referred to the Department of Justice for civil fraud prosecution.
Virtually all the recoveries are the result of contractors\' failure to
disclose accurate, complete, or current data for their multiple award
schedule contracts and their failure to report and offer price
reductions.

**Attachment 3**

**[GSA MAS Preaward Audits]{.underline}**

**[Funds Put To Better Use (Avoidance)]{.underline}**

**[FY]{.underline}** **[Mgmt. Commitments]{.underline}**

Note 1

1995\* 51,490,267

1994 141,940,648

1993 43,285,136

1992 117,769,567

1991 109,340,891

1990 56,033,971

Total 519,860,480

\* Through 5/31/95

1\. This column represents the amount of Funds Put to Better Use that
were recommended in OIG audit reports because of inaccurate or
incomplete disclosures of data; these savings to the government were
sustained by contracting officers in negotiations with offerors for MAS
contracts.

**Attachment 4**

**The remaining attachments are actual**

**clauses that have been taken verbatim**

**from commercial contracts. XXX indicates**

**redacted privacy sensitive information.**

**MOST-FAVORED CUSTOMER CLAUSES**

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

Seller represents and warrants that the prices established as the result
of the discount(s) set forth in this Agreement are as low as those
Seller has charged to its other customers for the same or similar
Product/Service of the same quantity/type for delivery/Service during
the same periods of time in the same general geographical area and under
the same or similar conditions. In the event that during the period of
this Agreement Seller reduces said prices or increases said discounts to
any of its other customers or Buyer\'s organizations for the same or
similar Products/Service of the same quantity/type for delivery during
the same periods of time in the same general geographical area and under
the same or similar conditions, then Seller shall notify Buyer in
writing of such reductions and Buyer shall modify in writing the
discount(s) specified in this Agreement to reflect the reduced prices or
increased discounts effective as of the date of the lower price(s)\...

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[MOST FAVORED CUSTOMER]{.underline}

XXX represents and warrants that the terms of this Agreement are not
less favorable to XXX than those given to any other of XXX\'s customers
under like terms, conditions, and quantity. If more favorable terms are
provided to any other customer, then equivalent terms will be offered
promptly to XXX under this agreement, without any requirement to modify
this Agreement in any other respect.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

AS FAVORABLE CUSTOMER

XXX agrees that the prices offered in this XXX to XXX for the Products,
Distributed Software and Services purchased hereunder will be as
favorable as those made available to any other commercial customer
contemporaneously purchasing the same Products, Distributed Software and
Services in like quantities under similar terms, conditions, and
circumstances. This provision shall not apply when such lower price is
given to meet the price offered by a competitor of XXX to the other
customer.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[PRICES]{.underline}

The initial prices listed in Exhibit D are not subject to increase
during the first 12 months after the effective date of this Agreement.
Supplier represents that the initial prices for Products and services
set forth in the applicable Schedule or Order, and any increases
thereof, are and shall be as low as those offered by Supplier to any of
its other similarly situated commercial customers for comparable
products and services during the term of this\...

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

Prices, charges and rates applicable to this Contract are contained
within the attached Appendices. Prices are for the duration of this
Contract. All prices contained within Section VII, Appendix A, are net
prices.

Seller warrants that any unit prices charged herein do not exceed the
unit prices charged by Seller to the Government or other customers in
substantially similar transactions.

Seller represents and warrants that the prices in the attached
Appendices are as low as those Seller has charged its other customers
for the same or similar products or service of the same quality for
delivery during the same periods of time in the same geographical area
and under the same or similar conditions. In the event that during the
same period of this Contract, Seller reduces said prices to any of its
other customers or Buyer\'s organization for the same or similar
products or services of the same or similar quantity for delivery within
the same geographical area and under the same or similar conditions,
then Seller shall notify Buyer in writing of such reductions or
increases.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

Seller warrants that the prices charged for the Products are not in
excess of the lowest prices charged by Seller to other similarly
situated customers for similar quantities of products of like quality.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[MOST FAVORED NATION PROVISION]{.underline}

All of the prices, warranties, benefits and terms granted by Seller to
Buyer hereunder are hereby warranted by Seller to be comparable to, or
more favorable to Buyer than, the equivalent prices for specified
quantities, warranties, benefits and material terms that: (a) have been
offered by Seller to any of its other customers purchasing/renting any
copiers and supplies or (b) are being and will be offered by Seller to
any of its other customers purchasing/renting any copiers and supplies
developed therefrom during the agreement Period. If at any time during
the Agreement Period the Seller shall contract, or have contracted, with
any other customer purchasing/renting any copiers and supplies developed
therefrom on a basis that provides prices, warranties, benefits or terms
to such other customer more favorable than those provided to Buyer
hereunder, then (I) Seller shall within thirty (30) calendar days after
the effective date of such other contract notify Buyer in writing of
such fact, explaining the more favorable basis in detail, and (II)
regardless of whether such notice is sent by Seller or received by
Buyer, this Agreement shall be deemed to be automatically amended,
effective retroactively to the date of such separate Agreement, to
provide the same prices, warranties, benefits, or terms to Buyer;
provided that Buyer shall have the right and option at any time to
decline to accept any such change and provided that the granting of such
lower price to Buyer would not be in violation of law in which event
such automatic amendment shall be deemed to be null and voice effective
retroactively to the date of a separate agreement and (III) Buyer may
terminate this Agreement in whole or in part without liability
providing, however, that the Seller is first given an opportunity to
meet such competitive prices or services. The provisions of this Article
shall survive the termination of this Agreement in regard to any
Purchase Order issued prior to the termination of this Agreement.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[SELLERS REDUCTION]{.underline}

CONTRACTOR agrees that it will not provide MATERIALS and SERVICES
comparable or superior to those covered herein to third parties
(excluding U. S. government) at better terms or at fees lower than those
set forth herein, without offering such terms or fees to XXX.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

Seller warrants that the prices shown on Pricing Schedule A and the
price charged for any Goods not presently shown on Schedule A but for
which a Purchase Order is issued under this Master Agreement, will be
priced in accordance with the Schedule A published as an addendum to
this Master Agreement. Seller further warrants that if at any time the
nationally published price for any Goods listed in Pricing Schedule A
decreases, Seller shall immediately notify Buyer in writing, and the
price on Pricing Schedule A shall be modified accordingly. Seller
further warrants that the price to Buyer for any Goods ordered under
this agreement shall be no higher than the price charged any other
customer of Seller who purchases a comparable volume of Goods from
Seller.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[MOST FAVORED CUSTOMER]{.underline}

XXX represents that the discounts received herein by XXX are no less
than those routinely offered to a competitor of XXX for like Products
and quantities under similar terms, conditions, and circumstances; XXX
will advise XXX in writing in the event greater discounts are offered
XXX\'s competitors for like Products and quantities under similar terms,
conditions, and circumstances.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[Discount]{.underline}. XXX shall sell and barter all XXX product to XXX
at a price with at least as favorable a discount off list price as XXX
or any of its affiliates grants on sales to non-XXX affiliates of
comparable quantities of the given product (the end user destination for
which product is within the Territory) during the sixty day period
beginning thirty days prior to any particular order by XXX and ending
thirty days following any such order by XXX and ending thirty days
following any such order (collectively, where appropriate, with \"Barter
Value\", as defined in the Master Agreement, \"Best Pricing\"). Where a
representative quantity of such XXX product has not been ordered by a
non-XXX affiliate within the sixty day period used to calculate Best
Pricing, Best Pricing shall be at least as favorable a discount off list
price as XXX or any of its affiliates grants on sales or comparable
product to non-XXX affiliates at comparable quantities. In all events,
quantities of XXX purchases and barter of given XXX product lines shall
be calculated on at least as favorable a basis to XXX as an annualized
basis. XXX shall deliver to XXX an estimate in writing of its
prospective purchases or barter of XXX product over the next\...

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[Provision of Most Favorable Terms]{.underline}. Supplier warrants and
agrees that each of the Charges, terms, warranties or benefits granted
to XXX pursuant to this Agreement or in any Purchase Order are
comparable to or better than the equivalent Charge, term, warranty or
benefit being offered by Supplier to any other commercial customer of
Supplier procuring the same product, at the same time, pursuant to
similar terms and conditions. If Supplier shall enter into arrangements
with any customer of Supplier providing for more favorable Charges,
terms, warranties or benefits, then this Agreement or the applicable
Purchase Order shall thereupon be deemed amended to incorporate the more
favorable Charges, terms, warranties or benefits and supplier shall
immediately notify XXX of such more favorable Charges, terms, warranties
or benefits.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

XXX warrants that prices charged hereunder are not in excess of the
lowest prices charged by XXX to other purchasers of the same products in
like quantities and under similar circumstances. In the event XXX makes
lower prices available to another purchaser in equal or lesser
quantities under the same or similar conditions, XXX shall promptly
notify XXX each time that this occurs and such lower prices shall
immediately be made available to XXX on each such occasion. Such lower
pricing shall apply to all products then on order and to those
subsequently ordered by XXX during the period of time the lower price is
in effect.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

Favored Customer Pricing. Notwithstanding anything to the contrary
contained herein, Vendor will insure that XXX will have the most
competitive national pricing, terms and conditions structure offered to
any healthcare organization, excluding the U. S. Federal Government,
during the duration of this Agreement, which does not have a committed
program.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[Most Favored Customer Status XXX Technology]{.underline}

XXX agrees to sell to XXX equipment products at prices that are equal to
or less than XXX\'s lowest price to other customers buying like items at
like volumes and at similar contractual commitments.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[Favored Customer Pricing]{.underline}. Notwithstanding anything to
contrary contained herein, the prices for each Product will be no
greater than the lowest price charged by Vendor for such Product during
the term hereof for comparable quantities except to local, state and
federal government purchases.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[Pricing]{.underline}

The Vendor represents and warrants that the prices contained in the Bid
are neither (i) higher than the prices charged a comparable purchaser
within the past \_\_\_\_\_ months no (iii) higher than the prices
offered to any Eligible Participant within the past \_\_\_\_\_ months.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

[CERTIFICATION OF PRICE QUOTATIONS]{.underline}

AT THE TIME OF THESE PRICE QUOTATIONS, WE HEREBY CERTIFY THAT THE PRICES
HEREIN SUBMITTED ARE AS LOW AS PRICES CURRENTLY QUOTED TO ACCOUNTS IN
THE SAME CLASS OF TRADE, UNDER THE SAME CONDITIONS OF SALE. EXISTING
CONTRACTS FOR THE SAME CLASS OF TRADE MAY BE LOWER BASED ON THE PRICES
AT THE TIME OF EXECUTION, AS WELL AS ANNUAL VOLUME.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

The Bidder represents and warrants that the product prices set forth in
its Bid are not higher than:

i\. The prices it charged any distributor within the past sixty days.

ii\. The prices it charged any comparable purchaser within the past
sixty days.

iii\. The prices offered to XXX within the past sixty days. \"Past sixty
days\", as used herein, shall mean the sixty days immediately preceding
the posted date of the Bid.

If, from the Bid Opening Time until the expiration of the Term of the
Purchasing Agreement, the Vendor offers XXX a price for products of the
type covered by the Purchasing Agreement that is lower than the Award
Price, then the Award Price shall automatically be amended to reflect
the lower price.

\* \* \* \* \* \* \* \* \* \*

SAMPLE MOST-FAVORED CUSTOMER CLAUSE

XXX Corporation certifies that the prices bid are as low as any other
bid prices offered in like quantity reflecting market conditions at time
of offer.

[Favored Customer Pricing]{.underline}. Notwithstanding anything to the
contrary contained herein, the price for each Product under this
Agreement will be no greater than the lowest price charged by Vendor
during the term hereof for such Product or any product which, except for
the labeling thereof, is identical to such Product.

**Attachment 5**

**PRICE REDUCTION CLAUSES**

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

Seller represents and warrants that the prices established as the result
of the discount(s) set forth in this Agreement are as low as those
Seller has charged to its other customers for the same or similar
Product/Service of the same quantity/type for delivery/Service during
the same periods of time in the same general geographical area and under
the same or similar conditions. In the event that during the period of
this Agreement Seller reduces said prices or increases said discounts to
any of its other customers or Buyer\'s organizations for the same or
similar Products/Service of the same quantity/type for delivery during
the same periods of time in the same general geographical area and under
the same or similar conditions, then Seller shall notify Buyer in
writing of such reductions and Buyer shall modify in writing the
discount(s) specified in this Agreement to reflect the reduced prices or
increased discounts effective as of the date of the lower price(s)\...

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

[MOST FAVORED CUSTOMER]{.underline}

XXX represents and warrants that the terms of this Agreement are not
less favorable to XXX than those given to any other of XXX\'s customers
under like terms, conditions, and quantity. If more favorable terms are
provided to any other customer, then equivalent terms will be offered
promptly to XXX under this agreement, without any requirement to modify
this Agreement in any other respect.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

Prices, charges and rates applicable to this Contract are contained
within the attached Appendices. Prices are for the duration of this
Contract. All prices contained within Section VII, Appendix A, are net
prices.

Seller warrants that any unit prices charged herein do not exceed the
unit prices charged by Seller to the Government or other customers in
substantially similar transactions.

Seller represents and warrants that the prices in the attached
Appendices are as low as those Seller has charged its other customers
for the same or similar products or service of the same quality for
delivery during the same periods of time in the same geographical area
and under the same or similar conditions. In the event that during the
same period of this Contract, Seller reduces said prices to any of its
other customers or Buyer\'s organization for the same or similar
products or services of the same or similar quantity for delivery within
the same geographical area and under the same or similar conditions,
then Seller shall notify Buyer in writing of such reductions or
increases.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

In the event Seller\'s prices are reduced, as of the date of reduction
the reduced prices shall apply to all current and future rentals and
purchases.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

[MOST FAVORED NATION PROVISION]{.underline}

All of the prices, warranties, benefits and terms granted by Seller to
Buyer hereunder are hereby warranted by Seller to be comparable to, or
more favorable to Buyer than, the equivalent prices for specified
quantities, warranties, benefits and material terms that: (a) have been
offered by Seller to any of its other customers purchasing/renting any
copiers and supplies or (b) are being and will be offered by Seller to
any of its other customers purchasing/renting any copiers and supplies
developed therefrom during the agreement Period. If at any time during
the Agreement Period the Seller shall contract, or have contracted, with
any other customer purchasing/renting any copiers and supplies developed
therefrom on a basis that provides prices, warranties, benefits or terms
to such other customer more favorable than those provided to Buyer
hereunder, then (I) Seller shall within thirty (30) calendar days after
the effective date of such other contract notify Buyer in writing of
such fact, explaining the more favorable basis in detail, and (II)
regardless of whether such notice is sent by Seller or received by
Buyer, this Agreement shall be deemed to be automatically amended,
effective retroactively to the date of such separate Agreement, to
provide the same prices, warranties, benefits, or terms to Buyer;
provided that Buyer shall have the right and option at any time to
decline to accept any such change and provided that the granting of such
lower price to Buyer would not be in violation of law in which event
such automatic amendment shall be deemed to be null and voice effective
retroactively to the date of a separate agreement and (III) Buyer may
terminate this Agreement in whole or in part without liability
providing, however, that the Seller is first given an opportunity to
meet such competitive prices or services. The provisions of this Article
shall survive the termination of this Agreement in regard to any
Purchase Order issued prior to the termination of this Agreement.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

[SELLERS REDUCTION]{.underline}

CONTRACTOR agrees that it will not provide MATERIALS and SERVICES
comparable or superior to those covered herein to third parties
(excluding U.S. government) at better terms or at fees lower than those
set forth herein, without offering such terms or fees to XXX.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

Seller warrants that the prices shown on Pricing Schedule A and the
price charged for any Goods not presently shown on Schedule A but for
which a Purchase Order is issued under this Master Agreement, will be
priced in accordance with the Schedule A published as an addendum to
this Master Agreement. Seller further warrants that if at any time the
nationally published price for any Goods listed in Pricing Schedule A
decreases, Seller shall immediately notify Buyer in writing, and the
price on Pricing Schedule A shall be modified accordingly. Seller
further warrants that the price to Buyer for any Goods ordered under
this agreement shall be no higher than the price charged any other
customer of Seller who purchases a comparable volume of Goods from
Seller.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

PRICE PROTECTION FOR PRODUCT IN XXX INVENTORY - In the event XXX
decreases pricing on Product, which at the time of the decrease is
contained in XXX\'s inventory in the XXX in XXX shall provide XXX with a
credit for the difference between the XXX purchase price of the Product,
purchased within the past thirty (30) days of the price announcement
date, and the new price of the Product.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

Seller agrees to extend at all times to Buyer and promptly make any
price reductions or changes in terms necessary to give Buyer the benefit
of as low and/or as favorable prices, terms, and conditions offered or
given by Seller at any time during the life of this Agreement to others
of similar classifications as Buyer buying items of the same quality and
substantially the same quantity.

Seller represents that the prices to be charged Buyer pursuant to this
Agreement are, to the extent that the same may be lower than those
charged other customers of Seller, justified by the differences in the
methods of selling and delivering products to this Agreement.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

MOST FAVORED NATIONS/COMPETITIVE PRICING

If during the term of this Agreement Seller shall sell to any third
party, excluding Seller\'s subsidiaries and affiliates, for the same end
use, any Products in the United States, of identical quality and grade,
in like quantities, and upon the same terms and conditions, but at a
lower price (F.O.B. shipping Point) than that which a Purchasing Entity
is required to pay under this Agreement, then Seller shall adjust said
price to Buyer and the operating facility for such Product to such lower
price. In determining whether a third party sale shall have been made
upon the same terms and conditions, Seller may take account of
differences in the cost of delivery resulting from differing methods in
which such Products are shipped and/or delivered to any third party
purchaser thereof, as well as factors which may influence price such as,
but not limited to, the term of the contracts, differing credit or
payment terms or commitment for minimum or take-or-pay quantities or
packaging and/or special promotional activities. The foregoing also
shall not apply to (a) discounted models and/or (b) sales to local,
state, or federal government or to any other quasi-government entity.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

[Provision of Most Favorable Terms]{.underline}. Supplier warrants and
agrees that each of the Charges, terms, warranties or benefits granted
to XXX pursuant to this Agreement or in any Purchase Order are
comparable to or better than the equivalent Charge, term, warranty or
benefit being offered by Supplier to any other commercial customer of
Supplier procuring the same product, at the same time, pursuant to
similar terms and conditions. If Supplier shall enter into arrangements
with any customer of Supplier providing for more favorable Charges,
terms, warranties or benefits, then this Agreement or the applicable
Purchase Order shall thereupon be deemed amended to incorporate the more
favorable Charges, terms, warranties or benefits and supplier shall
immediately notify XXX of such more favorable Charges, terms, warranties
or benefits.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

XXX warrants that prices charged hereunder are not in excess of the
lowest prices charged by XXX to other purchasers of the same products in
like quantities and under similar circumstances. In the event XXX makes
lower prices available to another purchaser in equal or lesser
quantities under the same or similar conditions, XXX shall promptly
notify XXX each time that this occurs and such lower prices shall
immediately be made available to XXX on each such occasion. Such lower
pricing shall apply to all products then on order and to those
subsequently ordered by XXX during the period of time the lower price is
in effect.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

If published prices are decreased on any or all models during the
Contract period, Customer is eligible to receive these price decreases
with corresponding adjustments to the terms, conditions, and contract
concessions.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

For the period of this Agreement, Manufacturer agrees to keep prices
competitive with the general market, with regard to market price
erosion. In the event that the market price of a contracted product
declines, the Manufacturer will be given the first right of refusal to
respond to the new market conditions. After notification, Manufacturer
will have two (2) weeks in which to respond to XXX. If the Manufacturer
chooses not to respond to the market change, it forfeits its right to
the contract award of the product(s) in question and XXX may, at its
discretion, award the product(s) to an alternate manufacturer.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

The prices established herein shall prevail\--be maximum\--for the term
of this agreement with the benefit of any general reduction in commodity
price during said period being passed onto XXX.

If during the term of any resulting agreement, a lower price is offered
by awardee to any other purchasing group similar to XXX awardee agrees
to make that same lower price available to XXX members.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

The manufacturer/supplier agrees that if, during the contract period,
they offer to sell any products awarded to them by XXX to any
participating institution at a lower price than that which has been
provided to XXX on this contract, it will simultaneously reduce the
price on the same products to XXX in its entirety.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

If, from the Bid Opening Time through the Term of the Purchasing
Agreement, the Vendor offers to any Eligible Participant a price for
goods or services of the type subject to the Purchasing Agreement that
is lower than the price for such goods or services under the Purchasing
Agreement, then the price provision of the Purchasing Agreement shall
automatically be amended to reflect such lower price.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

The Bidder represents and warrants that the product prices set forth in
its Bid are not higher than:

i\. The prices it charged any distributor within the past sixty days.

ii\. The prices it charged any comparable purchaser within the past
sixty days.

iii\. The prices offered to XXX within the past sixty days. \"Past sixty
days\", as used herein, shall mean the sixty days immediately preceding
the posted date of the Bid.

If, from the Bid Opening Time until the expiration of the Term of the
Purchasing Agreement, the Vendor offers XXX a price for products of the
type covered by the Purchasing Agreement that is lower than the Award
Price, then the Award Price shall automatically be amended to reflect
the lower price.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

BID PRICES AND DELIVERY POINT: Prices quoted shall be maximum and the
State shall be protected against any increase in price during the life
of the contract. However, should there be a reduction in the price or
prices during the life of the contract, it is agreed that the State
shall receive any price decrease which may occur during the contract
period. In the event of any price reduction, the vendor shall advise
this department in writing. Also, if during the contract period the
vendor establishes a lower price to a purchasing group similar to our
group, it is agreed that price is to be given to our group.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

Should Supplier at any time during the term of the Group Purchasing
Agreement contact any XXX member institution (whether or not such
institution has purchased any Contract Items) and offer to that
institution a price lower than those quoted in its Proposal to XXX in
response to this Request for Proposal, Supplier shall offer similar
pricing arrangements to all XXX member institutions. Failure to extend
the same pricing arrangements to XXX member institutions under the Group
Purchasing Agreement shall be grounds for immediate termination of the
Group Purchasing Agreement and may result in the suspension of Supplier
from any future XXX bidding processes.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

Should a successful Contractor offer any individual participant a
contract price lower than the group\'s contracted price, that price will
then become XXX\'s contract price throughout the term of the contract.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

The prices indicated are firm and binding for the entire Bid Period.
However, XXX will be kept \"market competitive\" during the entire
Contract Period.

\* \* \* \* \* \* \* \* \* \*

SAMPLE PRICE REDUCTION CLAUSE

[Price Reduction]{.underline}. The parties agree to meet, at the request
of either party, no less frequently than once in any ninety (90) day
period during the term of this Agreement to discuss whether or not a
price reduction for any Product can be agreed upon by both parties.

**Attachment 6**

**AUDIT RIGHTS CLAUSES**

**\* \* \* \* \* \* \* \* \* \***

**SAMPLE AUDIT RIGHTS CLAUSE**

Buyer shall have the right at all times with reasonable notice to Seller
to inspect Seller\'s published price books, invoices and documentation
to substantiate the correctness of the invoices and catalogs pertaining
to this Agreement and work hereunder, and shall have the right to
determine the correctness and propriety of the charges billed by Seller.
Buyer shall be limited to verification of catalog pricing and proper
discount allowances. The Seller\'s price list, a catalog regularly
maintained by the Seller, is the primary source of pricing information.
If any such inspection discloses any mispricing resulting in overpayment
by Buyer, the amount thereof shall be refunded to Buyer promptly upon
demand. Buyer may, as its option, withhold such overpayment from any
amounts otherwise due from Buyer to Seller.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

Seller shall maintain a copy of all pricing, catalogs, and supporting
documentation utilized for pricing under this Agreement for at least
four (4) years after the expiration date of this Agreement.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

[RECORDS AND AUDITS]{.underline}

Supplier shall maintain accurate records of all matters which relate to
Supplier\'s obligations hereunder in accordance with generally accepted
accounting principles and practices uniformly and consistently applied
in a format that will permit audit. Supplier shall retain such records
for a period of four years from the date of final payment, made by XXX
under this Agreement, to which such records relate. XXX and its
authorized representatives shall have access to such records for
inspection and audit at reasonable times during normal business hours.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

RECORDS

Supplier shall maintain complete and accurate records of all amounts
billable to and payments made by Customer hereunder in accordance with
recognized accounting practices. Supplier shall retain such records for
a period of one (1) year from the date of final payment for Products
covered hereby. Supplier agrees to provide reasonable supporting
documentation concerning any disputed amount of an invoice to Customer
within thirty (30) days after Customer provides written notification of
the dispute to Supplier. Supplier shall retain Contract documentation
for a period of seven (7) years from date of inception.

During the term of this Agreement and the respective periods in which
Supplier is required to maintain such records, Customer and its
authorized agents and representatives shall have access to such records
for purposes of audit during Supplier\'s normal business hours. The
correctness of Supplier\'s billing shall be determined as a result of
such audits.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

Audit Rights

Notwithstanding any termination or expiration of the DEA, XXX shall
retain the information specified in Subparagraph 2.27.1 for a period of
at least two (2) years from the date of resale, and the information
specified in Subparagraph 2.27.2 for the duration of XXX\'s license of
any sublicense granted by XXX, whichever is longer. If XXX requests
reports from XXX as provided in the Software License Paragraph of the
U.S. Standard Terms and Conditions, XXX may, at its option, require that
such reports be certified by an officer of XXX or XXX.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

[RECORDS AND AUDIT]{.underline}

Seller shall maintain until three years after final payment under this
Agreement, complete and accurate books, records, documents and other
evidence of the time worked, costs, expenses, and allowance pertaining
to this Agreement (hereinafter collectively called \"records\") to the
extent and in such detail as will properly reflect all net costs (direct
and indirect) of labor, materials, equipment, supplies and services and
other costs and expenses of whatever nature for which payment may be
claimed under the provisions of the Agreement. Such records shall be
made available to Buyer only in the case of an audit conducted by the
United States government.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

[Verification: Independent Accountants]{.underline}.

All costs and expenses billed to XXX under this Agreement shall be
subject to verification by representatives of XXX.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

who shall, for such purpose, be granted reasonable access during normal
business hours to all relevant books and records of XXX. XXX shall
maintain such books and records for at least two (2) years from and
after the date on which a related bill or statement is submitted to XXX.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

[Audit]{.underline} - Lessor and its subcontractors and vendors shall
maintain true and complete records in connection with the services and
all transactions related thereto and shall retain all such records for
at least 24 months after the end of the calendar year in which the
services are performed. In the event costs are to be reimbursed under
this Lease Agreement, Company may from time to time and at any time
during the foregoing period of record retention make an audit of all
records of Lessor and its subcontractors and vendors.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

[Books and Records, Audit]{.underline}. Vendor will keep complete and
accurate records of sales and net sales to XXX Members and Affiliates
for the period of the Agreement, and for one (1) year thereafter. Vendor
agrees to allow an independent accountant, agreed to by both parties,
the right to examine Vendor\'s books and records to verify the marketing
fee. The books and records shall be available for audit at any time, but
not more than once in any calendar year. The cost of this audit would be
shared equally by both parties, Vendor and XXX.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

[Books and Records, Audit]{.underline}. Vendor agrees to keep, maintain
and preserve complete, current and accurate books, records and accounts
of the transactions contemplated hereby and such additional books,
records and accounts as are necessary to establish and verify Vendor\'s
compliance hereunder. All such books, records and accounts shall be
available for inspection and audit by XXX and its authorized
representatives at any time during the term of this Agreement and for
two (2) consecutive twelve month periods and only during reasonable
business hours and upon reasonable notice. The exercise by XXX of the
right to inspect and audit is without prejudice to any other or
additional rights or remedies of either party hereto.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

Audit of Pricing

The Vendor shall allow XXX or its representatives to make periodic
visits for the express purpose of auditing invoices to ensure correct
pricing and performance under the Purchasing Agreement. All visits will
be at a mutually agreed upon time.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

AUDIT

Customer shall, at all times, keep and maintain accurate books, records
and files with respect to any information relative to the dispensing,
administration or sale of XXX\'s products. Upon customer\'s receipt of
written request from XXX customer shall make such information available,
through pharmacies or otherwise, in a manner mutually satisfactory to
XXX and customer, for inspection by XXX\'s representatives or its
designated auditors during regular business hours.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

[Books and Records, Audit]{.underline} - XXX agrees to keep, maintain
and preserve complete, current and accurate books, records and accounts
of the transactions contemplated hereby and such additional books,
records and accounts as are necessary to establish and verify XXX\'s
compliance hereunder, but in no event shall XXX be required to share any
books or records related to sales to non-XXX Members or Affiliates. All
such books, records and accounts shall be available for inspection and
audit by XXX and its authorized representatives at any time during the
term of this Agreement and for two (2) years thereafter, but no more
frequently than twice in any consecutive 12 month period and only during
reasonable business hours and upon reasonable notice. The exercise by
XXX of the right to inspect and audit is without prejudice to any other
or additional rights or remedies of either party hereto. XXX shall
provide XXX a monthly report of sales under this Agreement to member
hospitals by the 20th day after the close of each month.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

XXX agrees to supply products pursuant to any contract made as a result
of this proposal directly to any institution identified by XXX as an
Eligible Member so long as the institution: 1) has an account in good
standing with XXX or, if it does not have an account, meets XXX\'s
criteria for opening an account and in fact opens an account if it
chooses to purchase direct from XXX; 2) agrees in writing to make
available to XXX upon XXX\'s request access to all books and records
deems necessary to verify the volume of products shipped by XXX any
designated prime vendor or any other entity in connection with any
contract made as a result of this proposal and further that XXX shall
have the right to inspect such books and records during the term of any
such contract and for three (3) months thereafter; and 3) agrees in
writing that all product purchased directly from XXX or through a
designated prime vendor under any contract made as a result of this
proposal are for the institution\'s own use as therapy for inpatients or
for the vaccination of hospital employees.

\* \* \* \* \* \* \* \* \* \*

SAMPLE AUDIT RIGHTS CLAUSE

[Books and Records, Audit]{.underline}. Vendor agrees to keep, maintain
and preserve complete, current and accurate books, records and accounts
of the transactions contemplated hereby and such additional books,
records and accounts as are necessary to establish and verify Vendor\'s
compliance hereunder. All such books, records and accounts shall be
available for inspection and audit by XXX and its authorized
representatives at any time during the term of this Agreement and for
two (2) years thereafter, but no more frequently than twice in any
consecutive twelve month period and only during reasonable business
hours and upon reasonable notice. The exercise by XXX of the right to
inspect and audit is without prejudice to any other or additional rights
or remedies of either party hereto.

[^1]: ^ ^   ^?^ In this paper, we do not address certifications used by
    the government which do not relate to pricing and data disclosure
    requirements.

[^2]:     ^?^ President\'s Blue Ribbon Commission on Defense Management,
    [A Report to the President on Defense Acquisition, A Formula for
    Action]{.underline}, p. 18 (April 1986).

[^3]:     ^?^ The Advisory Panel was created by Section 800 of the
    National Defense Authorization Act, FY 1991, Pub. L. No. 101-510
    (1990). The Panel forwarded its findings in the [Report of the
    Advisory Panel on Streamlining and Codifying Acquisition
    Laws]{.underline} to the Congressional defense committees in January
    1993.

[^4]:     ^?^ S. Rep. 258, 103d Cong., 2d Sess. (1994).

[^5]:     ^?^ [See]{.underline}, [e.g,]{.underline} [Robert J. Sherry,
    Reinventing MAS Contracting & Pricing: Some Basic Problems & Simple
    Solutions]{.underline}, Cost, Pricing & Accounting Report (February
    1994). [See]{.underline} [also]{.underline} Hearings Before the
    Senate Armed Services Subcommittee on Acquisition and Technology,
    104th Cong., 1st Sess. (1995) (Statement of Peter DeMayo, Lockheed
    Martin Corporation and Acquisition Reform Working Group)(recommends
    the elimination of contractor certifications and government
    postaward audit rights).

[^6]:     ^?^ [See]{.underline}, [e.g.]{.underline}, [List of Federal
    Supply Service Publications]{.underline}, GSA Form 457 (contains
    list of MAS contracts). The sales and contract figures for the MAS
    program reflect the combined sales and numbers of contracts under
    both the GSA and VA programs.

[^7]:     ^?^ GAO, [Federal Supply Service Not Buying Goods At Lowest
    Possible Price]{.underline}, GAO/PSAD-77-69 (March 1977); GAO,
    [Ineffective Management of GSA\'s Multiple Award Schedule Program
    \-- A Costly, Serious, And Longstanding Problem]{.underline},
    GAO/PSAD-79-71 (May 1979).

[^8]:     ^?^ Multiple Award Schedule Policy Statement, 47 Fed. Reg.
    50,242, at 50,244 (1982).

[^9]:     ^?^ 10 U.S.C. § 2306a. With the enactment of the Competition
    in Contracting Act (CICA) in 1984 (Pub. L. 98-369, §§ 2701-2753),
    Congress made the TINA disclosure requirements statutorily
    applicable to civilian agency acquisitions as well as military
    procurements; prior to the enactment of CICA, these requirements
    were applied to civilian acquisitions by way of regulation and
    contract clauses. [See]{.underline}, [e.g.]{.underline}, 41 C.F.R. §
    1-3.814-1 (1984). TINA was first enacted in 1962 in response to a
    series of GAO reports which found that contractors were receiving
    unwarranted profits because data they had supplied to the government
    was inaccurate, incomplete or out of date. S. Rep. No. 1884, 87th
    Cong., 2d Sess. (1962) [reprinted]{.underline} [in]{.underline} 1962
    U.S. Code Cong. & Admin. News 2477.

[^10]:     ^?^ This threshold is \$100,000 for contracts entered into on
    or before October 13, 1994, and \$500,000 for contracts entered into
    after October 13, 1994.

[^11]:     ^?^ Exemptions to the general TINA disclosure requirements
    apply to contracts for which the price agreed upon is based on
    adequate price competition, established catalog or market prices of
    commercial items sold in substantial quantities to the general
    public, or prices set by law or regulation. FASA added an additional
    exemption for acquisitions of commercial items not falling under the
    previously existing exemptions. [See]{.underline} 41 U.S.C. §
    254b(d).

[^12]:     ^?^ 48 C.F.R. § 15.804-3(h).

[^13]:     ^?^ GAO, [Multiple Award Schedule Contracting - Changes
    Needed in Negotiation Objectives and Data Requirements]{.underline},
    GAO/GGD-93-123, pp. 66-72, note 10 (August 1993).

[^14]:     ^?^ [See]{.underline} GAO, [Multiple Award Schedule
    Contracting - Changes Needed in Negotiation Objectives and Data
    Requirements]{.underline} GAO/GGD-93-123 (August 1993) at 22-23, 26.
    This GAO study of the GSA MAS program found that the number of
    vendors under MAS contracts negotiated by the Federal Supply Service
    (that entity within GSA which administers most of the MAS contracts)
    increased from FY 1989 through FY 1992. [Id]{.underline}. at Figure
    1.6. The study also found that the number of offers from vendors
    under MAS contracts negotiated by the Information Technology Service
    (formerly the Information Resources Management Service, which
    administers contracts for computer products) declined during this
    same time period, [see]{.underline} Figure 1.10, but more recent
    information from GSA shows that the current trend in offers is on
    the increase.

[^15]:     ^?^ U.S. Department of Justice Press Release, \"A Record One
    Billion Dollars-Plus in Civil Fraud Awards, Settlements Recovered by
    the Justice Department in FY \'94,\" (October 11, 1994).

[^16]:     ^?^ The MAS price reduction clause is to be distinguished
    from the remedy contained in the Price Reduction for Defective
    Pricing Data clause which is available to the government for
    violations of the data disclosure requirements during the
    negotiation of an MAS contract. [See]{.underline},
    [e.g.]{.underline}, Basis for Price Negotiation, section (d),
    M-FSS-330 (April 1984).

[^17]:     ^?^ [See]{.underline}, [e.g.]{.underline}, Robert J. Sherry,
    [Reinventing MAS Contracting & Pricing: Some Basic Problems & Simple
    Solutions]{.underline}, Cost, Pricing & Accounting Report (February
    1994).

[^18]:     ^?^ GAO Examination of Records Clause, 48 C.F.R. § 52.215-1
    (February 1993); Audit Negotiation Clause, 48 C.F.R. § 52.215-2
    (February 1993).

[^19]:     ^?^ 41 U.S.C. § 254b(d)(3).

[^20]:     ^?^ H.R. 1670 would eliminate the existing TINA exemption for
    prices based on established catalog and market prices and substitute
    a blanket commercial item exemption in its place. Therefore, MAS
    contracts, which are let for the procurement of items that are
    defined by FASA as commercial, will be swept into the commercial
    item TINA exemption. The proposed legislation appears also to
    provide that these commercial items procurements would be treated
    like simplified acquisition threshold procurements in that they will
    be exempt from a variety of laws, including the government\'s
    general audit access and records examination authority. Sections
    101(b) and 202(b).

[^21]:     ^?^ GSA\'s Federal Supply Service, which administers and is
    responsible for MAS items other than computer related items, is
    currently proposing to extend the terms of current MAS contracts for
    an additional five years at the option of the contractor.

[^22]:     ^?^ [See]{.underline}, [e.g.]{.underline}, GAO, [Multiple
    Award Schedule Contracting - Changes Needed in Negotiation
    Objectives and Data Requirements]{.underline}, GAO/GGD-93-123
    (August 1993) at 66-67.

[^23]:     ^?^ [See]{.underline} Attachment 1 to this paper.

[^24]:     ^?^ This amount does not reflect the many postaward audit
    reports which are referred to the agency for administrative
    recovery. The VA Office of Inspector General has issued audit
    reports over the last seven years which resulted in over \$50
    million in recoveries for defective pricing, price reduction and
    related violations, most of which was recovered through
    administrative action. [See]{.underline} Attachment 2 to this paper.
    This amount also does not reflect the considerable cost savings
    achieved from preaward audits performed at the request of
    contracting officers. In the last six years, the GSA Office of
    Inspector General has issued audit reports which resulted in over
    \$500 million in cost savings achieved by contracting officers
    during the negotiation of MAS contracts. [See]{.underline}
    Attachment 3 to this paper.

[^25]:     ^?^ U.S. Department of Justice Press Release,
    [supra]{.underline} n. 15.

[^26]:     ^?^ The most favored customer clauses we found in the
    agreements we examined can be found in Attachment 4 to this paper.

[^27]:     ^?^ The price reduction clauses we found in the agreements we
    examined can be found in Attachment 5 to this paper.

[^28]:     ^?^ The audit rights clauses we found in the agreements we
    examined can be found in Attachment 6 to this paper.

[^29]:     ^?^ We suggest adding the following language to proposed
    Section 101(b) of H.R. 1670, as amended by Section 202(b) of the
    bill, to explicitly provide for the government\'s statutory right to
    audit with respect to Multiple Award Schedule contracts:

    \"(e) SIMPLIFIED PROCEDURES - (1)(A) In order to promote efficiency
    and economy in . . . , the Federal Acquisition Regulation shall
    provide for special simplified procedures for purchases of
    commercial items and property and services for amounts not greater
    than the simplified acquisition threshold.

    **(B) However, the Federal Acquisition Regulation shall not contain
    any restrictions on the government\'s authority to audit commercial
    item procurements above the simplified acquisition threshold.**

[^30]:     ^?^ We also propose deleting Section 302(b) of H.R. 1670
    which would prevent agencies from requiring certifications not
    specifically authorized by statute or approved by the Office of
    Procurement Policy Administrator. Although H.R. 1670 would not
    prohibit regulatory certifications per se, we believe the discretion
    to include certifications should be vested completely in particular
    agency heads. Agencies are in the best position to determine what
    certifications are necessary to protect the government\'s interest
    in the context of specific procurement programs.

[^31]:     ^?^ We suggest that the regulations to be promulgated
    pursuant to Section 1093 of FASA, intended to discourage the use of
    nonstandard clauses, identify the price reduction clause as a
    standard commercial clause.