Background

GSA, through its Federal Supply Schedule (FSS) program, makes  commonly used commercial items and services available to federal  agencies. MAS, the largest FSS program, is designed to provide federal  agencies with a simplified method for acquiring varying quantities of a  wide range of commercially available goods and services, such as office  furniture and supplies, personal computers, scientific equipment, library  services, network support, and laboratory testing services. The MAS  program provides several advantages to both federal agencies and  vendors. Agencies can use a simplified method of acquisition and avoid  other procurement methods to purchase these items, which can be time- consuming and administratively costly. Vendors can receive wider  exposure of their commercial products and expend less effort to sell their  products.
In administering the MAS program, GSA is responsible for ensuring that all  procurement regulations are followed and MAS prices reflect the  government’s aggregate buying power. GSA awards indefinite-quantity  contracts to multiple vendors supplying comparable commercial goods  and services and provides the contracts categorized under various  schedules to federal agencies.  MAS contract awards are based on the  results of price negotiations between contract negotiators and individual  vendors. GSA negotiators seek to obtain discounts from a vendor’s  commercial price list, which are equal to or greater than the vendor’s most  favored customer’s discounts. The most favored customer is a customer or  category of customers that receives the best discounts from the vendor’s  commercial price list when purchasing quantities comparable to the  government’s under similar terms and conditions. Vendors provide  catalogs and price lists to federal agencies, which in turn order the  particular goods or services directly from the vendors that best meet their  needs.

		MAS Program Changes

In August 1997, GSA revised its acquisition regulations to expand access to  commercial products and services and to implement greater use of  commercial buying practices and streamline purchasing for customers.  GSA believed that these changes would lead to more participation in the  MAS program by both large and small businesses—procedures more  consistent with commercial practice would increase competition and  thereby provide federal agencies a wider range of goods and services at  competitive prices. Beginning in the late 1990s, MAS program sales  increased significantly (see fig. 1).
In fiscal year 2004, the Information Technology Acquisition Center had the  largest MAS sales volume with more than $18 billion (about 56 percent) of  total MAS sales. Figure 2 shows the MAS sales for fiscal year 2004 by GSA  acquisition center. (See app. II for a description of the products and  services offered through each of the acquisition centers.)
As MAS sales volume skyrocketed over the last decade, the number of  contracts offering goods and services to federal agencies also increased.  For example, in the mid-1990s, GSA had about 5,200 MAS contracts. By  fiscal year 2004, this number had increased to over 16,000 MAS contracts  (see fig. 3).
As the number of MAS contracts managed increased, the number of FSS  contract specialists remained relatively stable, ranging from 512 in fiscal  year 1997 to 503 in fiscal year 2001. In the last 3 years, however, the  number of contracting specialists has risen from 540 in fiscal year 2002 to  593 in fiscal year 2004 (see fig. 4). As a result, more contract negotiators  are available to negotiate and administer an increasing workload.   Additionally, GSA has initiated some technology and process   improvements, such as E-Buy and E-Offer, to help contract negotiators  better manage the increasing workload.

		Negotiating Fair and Reasonable Prices

GSA’s goal is to obtain the offeror’s best price (the best price given to the  most favored customer).  However, the regulations recognize that there  may be legitimate reasons why the best price is not achieved.  Thus, the  regulation permits an award at prices greater than the most favored  customer price so long as the award is in the best interest of the United  States and the price is fair and reasonable.  To prepare for negotiations,  contract specialists conduct price analyses by comparing each vendor’s  proposed prices to (1) other vendors’ prices; (2) vendors’ commercial  customer prices; (3) competitor price lists, discount terms, or rebates; and  (4) market prices.  In performing a price analysis, the contracting officer  or an authorized representative (the GSA Office of Inspector General) also  has the right to conduct a pre-award pricing audit, in which the vendor’s  books, records, documents, papers, and other records are reviewed to  verify the pricing, sales, and other vendor-submitted data. Figure 5 shows  some of the tools that can be used by GSA during the MAS contract price  negotiation process.
Federal Acquisition Regulation (FAR) specifies that the complexity and  circumstances of each acquisition determine the level of analysis  required. For example, determining a fair and reasonable price for  professional services can be complex and would likely involve analyzing  labor rates for a variety of skill levels. Conversely, analyzing the price of a  ballpoint pen that is similar to many other pens already on a schedule  would, in most circumstances, be straightforward and require the use of  different tools such as catalogs. In addition, federal government sales and  performance histories are available to help evaluate prices when contract  extensions are considered.

	Use of Price Negotiation Tools May Not Ensure Best Pricing on MAS Contracts

According to negotiators at the four acquisition centers we visited, a  variety of tools are used to analyze vendor-supplied information and  negotiate contract prices that nearly always were at least equal to the  vendor’s most favored customer prices.  However, our analysis of a recent  GSA review of product and service contract files found that most lacked  sufficient and reliable documentation to establish clearly that prices were  effectively negotiated. In addition, we found that the use of pre-award and  postaward audits of pricing information—two key price negotiation tools  that, in the past, have helped GSA avoid or recover hundreds of millions of  dollars in excessive pricing—have declined dramatically.

		Reviews Showed Effectiveness of Tools Used Is Unclear

The MAS contract negotiators at the four acquisition centers we visited  used a variety of tools, including checklists, invoices, sales histories, and  pre-award audits to help them analyze and negotiate prices. While their  selection of tools was generally determined by the type of product or  service being purchased and the type of proposal, other factors---such as  GSA policies and procedures, resource availability, and performance  metrics—also affected the use of certain pricing tools. For example,  contract negotiators at the Services Acquisition Center were required to  use numerous standardized tools such as checklists, letters, prenegotiation  memorandums, and price negotiation memorandums to help them  evaluate proposals, while contract negotiators at the National Furniture  Center had more flexibility in selecting pricing tools.
Regardless of the pricing tools used, all of the contract negotiators whom  we spoke with stated that their negotiations nearly always resulted in  prices that were at least equal to vendors’ most favored customer prices.  However, GSA’s June 2004 file review of 62 MAS contracts awarded or  extended during 2003 at GSA’s seven MAS acquisition centers found that  37 of the contracts—nearly 60 percent—lacked sufficient documentation  to clearly establish that the contracts were effectively negotiated. Roughly  40 percent of the contracts lacked adequate price analyses or price  negotiation documentation. We analyzed GSA’s review of the 62 contracts  and developed a profile of the types of documentation weaknesses  identified in the review (see table 1).
While GSA’s June 2004 file review revealed weaknesses in the MAS  contract negotiation process, it often did not identify the specific causes  for the weaknesses.  For example, for some contracts, the reviewers  reported that the contract file documentation of the price analysis was  unacceptable, but did not report what made the documentation  unacceptable.
In September 2004, GSA completed a review of 28 additional MAS  contracts. These contracts were awarded or extended between November  2003 and June 2004 at the seven MAS acquisition centers. Again, the  preliminary results found that the documentation for 27 of the 28 contracts  was insufficient to clearly establish that the most favored customer price  objective was used for contract negotiations. As of January 21, 2005, GSA  had not issued a final report on its fiscal year 2004 quality reviews.

		Use of Pre-Award and Postaward Audits of Negotiation Information Has Declined Dramatically

In addition to the pricing tools available to contract negotiators, pre-award  and postaward audits of negotiation information conducted by the GSA  Inspector General have been valuable tools for ensuring the government is  not overpaying for items purchased under MAS contracts. However, the  use of these audits has dramatically declined in recent years. As the  number of pre-award and postaward audits performed decreased, so too  did the amount of negotiated cost savings and recoveries reported from  these audits.

			Pre-Award Audits

Pre-award audits enable contract negotiators to verify that vendor- supplied pricing information is accurate, complete, and current before the  contract is awarded. Historically, pre-award audits have allowed GSA to  identify and avoid hundreds of millions of dollars in overpricing.  For  example, in August 2001, the GSA Inspector General reported that a  photocopier vendor offered state and local governments a price that was  $5,582 less than its price to GSA for the same type copier; the Inspector  General estimated that the higher price paid by GSA customers could cost  them nearly $4 million more in just one year. In another example, the  Inspector General found that a major distributor of information  technology products sold its top 10 GSA-selling computer models to  commercial customers at an average price that was 6 percent less that the  price offered under the MAS contract. The Inspector General projected  that over the contract’s term, GSA customers would pay nearly $40 million  more for these products than they should have.
Despite the cost avoidance realized through pre-award audits, the number  of these audits decreased dramatically between fiscal years 1992 and  2003—from 130 to 14. Between fiscal years 1992 and 1996, the average  number of pre-award audits conducted annually was about 125; for fiscal  year 1998 through 2003, the average number of pre-award audits  conducted annually fell to 18. In 2004, pre-award audits rose slightly to 40  (see fig. 6).
As the number of pre-award audits performed decreased, so did the  amount of the negotiated cost savings. Between fiscal years 1992 and 1997,  the GSA Inspector General reported a total of nearly $496 million in  savings—an average of nearly $83 million per year. Between fiscal years  1998 through 2004, the total savings reported had dropped to about $125.9  million—an average of nearly $18 million per year (see fig. 7).
According to Inspector General and MAS contracting officials, the decline  in pre-award audits was largely due to an organizational culture that  stressed making awards quickly and because pre-award audits were not  emphasized institutionally in GSA. For example, the performance goal for  negotiating and awarding MAS contracts for the Office Supply and  Administrative Services Acquisition Center is 79 days—a goal that would  be difficult to meet if pre-award audits, which take on average 90 or more  days to complete, were to be conducted. GSA management officials also  noted that extending the contract performance period from one year—the  contract period in the mid-1990s—to 5 years has reduced the number of  opportunities for conducting pre-award audits.
Recently, MAS program and Inspector General officials formed a work  group to address the decline in pre-award audits. In June 2003, GSA issued  guidance that recognized the importance of pre-award audits to the  evaluation of MAS price proposals and a clear determination regarding fair  and reasonable pricing. The guidance instructs contract negotiators to  request audit assistance for new contract offers and extensions when the  dollar value for estimated sales exceeds $25 million for the 5-year contract  period. We applied the $25 million threshold to MAS contracts awarded or  extended in fiscal year 2003 and identified about 34 new contracts and 37  contract extensions that were subject to pre-award audits. However, only  14 pre-award audits—which identified about $4.1 million in negotiated  savings—were completed in fiscal year 2003. For fiscal year 2004, GSA  management and GSA Inspector General officials collaboratively selected  about 55 MAS contracts for pre-award audits; by the end of fiscal year, the  Inspector General had completed 40. For fiscal year 2005, the officials set  a goal of completing 70 pre-award audits. To help achieve this goal, the  FSS program has provided the Inspector General $2 million to hire more  auditors.

			Postaward Audits

From fiscal year 1990 through fiscal year 1994, the GSA Inspector General  reported that it recovered an average of $18 million each year in vendor  overcharges through postaward audits. Most of these recoveries were the  result of vendor failure to provide accurate, complete, or current  information in the negotiation of their MAS contracts and the vendors’  failure to report and offer price reductions. Inspector General officials told  us that they believe postaward audits of negotiation information are a key  pricing tool and a deterrent to vendor pricing abuse.
Despite the significant recoveries, postaward audits of pre-award pricing  information have not been conducted since 1997—when GSA issued a  final rule, changing its policy.  Specifically, GSA removed language from  the examination of records clause that automatically granted postaward  audit rights for pre-award pricing information in every MAS contract.  GSA expected the reduction in these postaward audits to be offset by an  increase in the number of pre-award audits. However, the anticipated  increased use of pre-award audits has not materialized.
While the policy changes greatly limited the use of postaward audits of  pre-award pricing information, we found that it did not expressly eliminate  its use. Under GSA’s revised regulations, the contracting officer can  modify the examination of records clause to provide for access to pre- award pricing information for 2 years after contract award or  modification. To modify the examination of records clause, the  contracting officer must, first, determine that there is a likelihood of  significant harm to the government without access to verify the  information.  Such determination must be made on a schedule-by-schedule  basis.  Secondly, the contracting officer must obtain the senior  procurement executive’s approval to modify the examination of records  clause of the contract. However, according to GSA management and GSA  Inspector General officials, no contract clause modification requests have  been sought or approved since the policy changes were made. These  officials said that GSA has not issued guidance to help contracting officers  determine the likelihood of significant harm to the government.

	Opportunities Exist to Improve Management Oversight of MAS Price Negotiations

In March 2003, GSA established the Acquisition Quality Measurement and  Improvement Program, a management control process for assessing and  improving the quality of contract negotiations. The program consists of  two initiatives—prenegotiation clearance panels and quality reviews of  contract files. While these initiatives are a good first step toward  establishing management controls for assessing the quality of MAS  contract price negotiations, opportunities exist to increase their  effectiveness.

		Use of Prenegotiation Clearance Panels Has Been Limited

GSA established prenegotiation clearance panels to help MAS acquisition  center management ensure the quality of its most significant contract  negotiations. Prior to initiating discussions with a vendor for a contract  award or modification that reaches a center’s dollar threshold, the  contract negotiators are required to seek advice and concurrence from the  clearance panel. Panel procedures may also be applied to sensitive actions  such as the first contract negotiations under new programs and contract  extensions with problematic performance or sales reporting histories.   However, since the initiative was implemented, few panels had been  conducted at the acquisition centers we visited, and those that had been  conducted had not been assessed at the agency level.
The Information Technology Center—which administered contracts with  more than $18 billion, or 56 percent, of fiscal year 2004 MAS sales—has yet  to conduct a clearance panel.  According to center management officials,  no panels have been held because no contract’s estimated annual sales  had exceeded the center’s $80 million threshold for conducting a panel.   However, we found five contracts that exceeded the threshold and,  therefore, were subject to a clearance panel.  Specifically, in fiscal year  2003, GSA awarded four contracts with total estimated sales values  ranging from $102.5 million to $700 million and extended one contract  with an estimated sales value of $20.3 billion. Each of these met the  threshold for a panel.
Each of the remaining three centers—which, combined, administered $6.5  billion, or about 20.1 percent, of fiscal year 2004 MAS sales—had  conducted a small number of panels in the past year.  The Office Supplies  and Administrative Services Center held 10 panels, the Services  Acquisition Center held 9 panels, and the National Furniture Center held 6  panels. According to the management officials and contract negotiators at  these centers, the panels helped prepare them to successfully negotiate  most significant MAS contracts. For example, officials at the Office  Supplies and Administrative Services Center stated that the panels helped  contract negotiators learn how to better negotiate large, sensitive, and  controversial contracts. The officials at all three centers also stated that  clearance panels helped in identifying inconsistencies in the  documentation and analyses used to develop their negotiation objectives.  The officials further noted that because these reviews have been a  valuable prenegotiation technique, they lowered the dollar threshold  required for a panel review to increase the number of panel reviews.  For  example, the Office Supplies and Administrative Services Center officials  reduced the center’s threshold from $5 million to $2 million so that more  contracts would qualify for panel review.
While these efforts helped centers prepare for negotiating their most  significant MAS contracts, GSA officials responsible for overseeing the  MAS program were unaware of the effectiveness of the panels.  GSA  officials acknowledged that they neither collected nor analyzed  information on the implementation of the panel initiative and did not  require the acquisition centers to report panel outcomes to MAS program  management.  However, they stated that they would implement a  procedure to collect panel information by the end of calendar year 2004.

		Scope of Quality Reviews Limited Their Effectiveness

In the first 2 years of its quality reviews, GSA identified a number of  deficiencies in the documentation supporting price negotiations and price  reasonableness determinations.  However, the scope of these reviews was  limited, minimizing their effectiveness. Moreover, GSA did not identify the  underlying causes of the deficiencies found or the specific actions to  address the causes—despite actions taken to improve the quality review  initiative.
Through its quality review initiative, GSA planned to select a  representative sample of MAS contracts at each of the acquisition centers   and assess the pre-award documentation—rating it as excellent,  satisfactory, marginally acceptable, or unacceptable---in the following  three pricing areas:     Price negotiation documents are to clearly establish that the pricing  information provided by the vendor was accurate, complete, and  current; the information was relied upon during negotiations; adequate  price analyses were conducted; reasonable negotiation objectives were  established; the amount of the total government’s requirements was  leveraged in negotiating prices; and the prices negotiated were fair and  reasonable considering the prices offered by the vendor to their most  favored customer.
Contract modifications documentation should support the conclusion  that all contract modifications were adequately reviewed to establish  that the terms proposed were in the interest of the government and that  prices for newly awarded items were determined fair and reasonable  considering the prices offered by the vendor to their most favored  customer.
Contract extension decisions are to be fully documented in compliance  with regulations, and the prices for the option established as fair and  reasonable with consideration of the prices offered by the vendor to its  most favored customer.
For the fiscal year 2003 quality review, GSA did not meet these criteria— largely because it had significantly reduced the scope of the review.  For  example, GSA completed its review at only one of its seven centers—the  Services Acquisition Center. According to MAS program managers, a lack  of resources and reviewers and concerns about the independence of the  available reviewers prevented them from conducting more reviews. In  addition, in its one review, GSA assessed 19 fiscal year 2003 contracts,  which did not make up a representative sample. GSA found that the price  negotiation documentation for 4 of the 19 contracts reviewed was  “unacceptable.”
For fiscal year 2004, GSA planned to review 10 contracts each quarter at  each of its seven MAS acquisition centers—a total of 280 MAS contracts— to improve the independence of the review team members, and refine the  review criteria and rating categories.  However, GSA completed only two  quarterly reviews of a total of 90 MAS contracts and eliminated the rating  system—instead, contract reviewers identified only strengths and  weaknesses of each contract negotiation. Moreover, reviewers did not  determine the underlying causes for identified pricing deficiencies or  develop plans to address the causes. For example, the negotiation  documentation for a contract with a dollar value of $3.5 million lacked an  adequate price analysis and did not identify the vendor’s most favored  customer price, but the cause of these deficiencies was not determined.  Similarly, the documentation of a contract with an estimated value of  $125,000 was insufficient in either the contract extension or the original  contract to determine if any of the pricing requirements had been met.   Again, however, the causes for these deficiencies were not identified.
In September 2004, GSA completed a review of 28 additional MAS  contracts that were awarded or extended between November 2003 and  June 2004 at the seven MAS acquisition centers. GSA’s preliminary  findings of these reviews are inconsistent. For example, GSA reported that  all 28 contracts contained sufficient documentation to establish clearly  that they met pricing requirements. However, the most favored customer  price was not established clearly for 27 of the 28 contracts. In addition,  GSA reported that one contract’s negotiation documents clearly showed  that reasonable negotiation objectives were established and an adequate  price analysis was conducted.  However, the review also stated, “While the  contract file contains several pages where, for each item offered, the  government price and discount is listed, as well as the commercial price,  the contract file does not contain a commercial pricelist. Thus, there is no  way to substantiate that the commercial prices shown in the tables  comparing commercial and government prices are, in fact, the published  commercial prices.” As of January 21, 2005, GSA had not issued a final  report on its fiscal year 2004 quality reviews.
According to GSA officials, several efforts to improve the quality review  process are to be implemented during fiscal year 2005.  Key efforts  include, providing on-line training with a module on price negotiation for  contract specialists, making contract quality a performance measure to  balance the contract negotiator’s focus on quality as well as timeliness,  and requiring each acquisition center to develop an individual  improvement plan.  While these efforts appear to be positive steps, their  effectiveness is uncertain.

	Conclusions

The MAS program has provided the government with a more flexible and  cost-effective approach to buying commercial items and services, and the  MAS’s popularity has increased significantly in recent years. However,  MAS contract negotiators do not use the full range of tools to ensure that  the government is effectively negotiating prices. While GSA has taken  steps to establish a program to assess the quality of its MAS contract  negotiations, all acquisition centers are not fully participating, and the  scope of the program is limited. Moreover, the program has not yet  determined why deficiencies it has identified thus far are occurring.  Until  GSA takes steps to ensure the appropriate use of available pricing and  negotiation tools, it will continue to miss opportunities to save the  government hundreds of millions of dollars in the procurement of goods  and services.

	Recommendations for Executive Action

We are making four recommendations aimed at helping GSA ensure that  prices are effectively negotiated for MAS contracts. We recommend that  the Administrator of the General Services Administration    ensure that pre-award audits are conducted when the threshold is met  for both new contract offers and contract extensions,    develop guidance to help contracting officers determine when  postaward audits are needed,     direct GSA program management to revise the Acquisition Quality  Measurement and Improvement Program to measure and report on the  performance of the prenegotiation clearance panels, and    direct GSA program management to revise the Acquisition Quality  Measurement and Improvement Program to broaden the scope of  quality review initiative to (1) determine the underlying causes for  contract pricing deficiencies and (2) develop appropriate plans to  implement corrective actions.

	Agency Comments

GSA provided written comments on a draft of this report.  GSA agreed  with our recommendations, and stated that it has already begun to take  the following actions:    FSS will work with the GSA’s Office of Inspector General to increase  and to improve the pre-award audit process.
GSA will work with the acquisition community to generate a discussion  about the role that postaward reviews should play in the acquisition  process.  To foster this discussion, GSA will have the Office of Chief  Acquisition Officer publish a Notice of Proposed Rulemaking.
FSS has already revised its program operating procedures to require  reports on prenegotiation clearance panels.
GSA is expanding an action plan to improve file documentation  pertaining to contract pricing and is placing strong emphasis on proper  negotiation.
While GSA agreed with our recommendations, it felt that our report fell  short in a few areas.  First, GSA thought that our report should have  described in more detail the MAS program.  We have provided the  information needed to understand the issues of concern in our review.   GSA provided additional details on the MAS program, which are reprinted  in appendix III.
Second, GSA asserted that the findings of its Acquisition Quality  Measurement and Improvement Program reviews should not be  interpreted to mean that FSS is not obtaining good pricing.  To illustrate  this point, GSA noted that it reexamined 8 of the 62 contracts covered by  the June 2004 quality review and now concludes that the contracts had  “excellent” pricing.  It is unclear how GSA’s examination of contract  documentation that was previously found to be inadequate supports such  a determination.  More important, we are concerned that GSA’s position  understates the seriousness of the problem it has in ensuring that GSA  contracting officials are effectively negotiating MAS contract prices.  In  addition to its own quality reviews, our report shows the use of pre-award  audits and the millions of dollars in savings from such audits have  declined dramatically in recent years.  We also reported that the use of  prenegotiation clearance panels, designed to ensure quality of significant  contract negotiations, has been limited.  Such problems are not new.  For  example, the GSA Inspector General reported in August 2001 that (1) GSA  contracting officials were not consistently negotiating most favored  customer prices, (2) contracts were being extended with little negotiation  or price analysis, and (3) pre-award audits had decreased significantly in  recent years.  Clearly, these problems are serious, longstanding, and have  significant financial consequences.  Thus, we believe GSA needs to place  priority attention on obtaining adequate documentation to ensure its  contracting officials are effectively negotiating MAS contract prices.
Third, GSA commented that while our report points to a significant decline  in the number of pre-award and postaward audits, it does not address the  factors that contributed to this decline.  We disagree. As discussed in our  report, MAS contracting officials and Inspector General officials identified  a number of factors that in the past contributed to the reduction of the  number of pre-award audits.  These factors include an organizational  culture that stresses making contract awards quickly and performance  measures that focus on timeliness.  The reduction of the number of  opportunities for conducting pre-award audits caused by the extension of  contract performance period from 1 year—the contract period in the mid- 1990s—to 5 years was also cited as a factor. However, according to GSA it  receives more than 3,000 new MAS contract offers each year.  Despite  these opportunities to conduct pre-award audits, the number of pre-award  audits has only increased from 14 in fiscal year 2003 to 40 in fiscal year  2004.
Fourth, GSA expressed concern about our understanding of the regulatory  framework required for postaward audits of commercial contracts and  that we underestimated the risk and overestimated the savings associated  with these postaward audits.  We are aware that the 1997 change to GSA’s  regulations stimulated substantial disagreement and discussion  concerning the extent of GSA audit authority.  GSA received numerous  comments asserting that the Clinger-Cohen Act (PL 104-106) eliminated its  authority to conduct postaward audits of pre-award pricing information.   Similar views were expressed in post enactment language by the House  Armed Services Committee in House Report 104-563.  Although GSA  concluded that it retained authority for postaward audits, GSA’s final rule  restricted the use of postaward audits.  Specifically, the final rule allows  the contracting officer to modify the Examination of Records by GSA  (Multiple Award Schedule) clause to provide for postaward audits only  “after the contracting officer makes a determination that there is a  likelihood of significant harm to the Government without access to verify  the information and obtains the Senior Procurement Executive’s  approval.”  We have not recommended that GSA change the postaward  audit restriction.  Rather, we have noted that contracting officers do not  understand the rule and need guidance to fulfill their responsibilities  under the rule.  Regarding the savings associated with postaward audits,  the estimates were produced and reported by GSA’s Inspector General.
Fifth, GSA commented that because the Acquisition Quality Management  and Improvement Program has yet to be fully implemented, it is not  reasonable to evaluate the adequacy of the program in achieving  improvements. This misses the point.  We believe that improvements  should be made when the need for them are identified regardless of the  program’s implementation stage.  For example, we found that the program  when it was launched in March 2003 was limited to two initiatives— prenegotiation panels and quality reviews—and that other initiatives key  to a successful improvement program, such as training, were not formally  included as an initiative under the program.  Coincident with our finding,  GSA has initiated a training program.
Finally, GSA commented that it had made a commitment to establishing a  culture of quality contracting and identified 12 improvement actions taken  since November 2001.  Our report identifies five of these actions:  establishing the Acquisition Quality Measurement and Improvement  Program; implementing a contract quality measure in the individual  performance plan for each contracting associate; developing on-line and  classroom training courses and modules for FSS contracting professionals  via FSS Center for Acquisition Excellence; forming an IG Working Group  to focus on the need for pre-award audits; and increasing the number of  contracting associates.  The remaining seven improvement actions either  were not directly related to the issues in our report or were implemented  after we completed our fieldwork.  Therefore, we are not in a position to  comment on these improvement actions.
GSA also made a number of technical comments, which we respond to in  appendix III.
As agreed, unless you publicly announce its contents earlier, we plan no  further distribution of this report until 30 days from its issue date. At that  time, we will send copies of this report to the Honorable Stephen A. Perry,  Administrator of the General Services Administration; appropriate  congressional committees; and other interested parties. We will also  provide copies to others on request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have questions concerning this report, please contact  me at (202) 512-4841 or by e-mail at cooperd@gao.gov or James Fuquay at  (937) 258-7963. Key contributors to this report were Sanford Reigle, Elaine  Boudreau, Sameena Ismailjee, Mary Jo Lewnard, Sylvia Schatz, and Karen  Sloan.

Appendix I: Scope and Methodology

To determine how GSA negotiates most favored customer pricing  objectives for MAS program contract awards and extensions, we  examined GSA policies and procedures for contract negotiation, including  information requirements for price negotiation memorandums, periodic  reviews focusing on the quality of MAS price negotiations, specific  guidance on contract price negotiations, and training given to contracting  officers and contract specialists. We discussed implementation of GSA  policies, procedures, and management controls with agency officials at  GSA’s Office of Acquisition Management in Arlington, Virginia; Office of  Performance Improvement and the Office of Government-wide Policy in  Washington, D.C.; and the GSA’s Office of Inspector General in  Washington, D.C. Also, we visited the Office Supplies and Administrative  Services Acquisition Center in New York, New York; and the National  Furniture Acquisition Center, Services Acquisition Center, and Information  Technology Center in Arlington, Virginia. We obtained and analyzed GSA  data on MAS contract awards and sales volume as recorded in the Federal  Supply Service Automated Supply System FSS-19 used by GSA to procure  and distribute supplies across the federal government. To help ensure  reliability of FSS-19 data, we reviewed the results of the GSA Inspector  General’s audit of the system’s internal controls and tests of application  controls completed in support of GSA’s fiscal year 2003 consolidate and  combined financial statements. Also, we reviewed GSA Inspector General  reports, analyzed cost avoidance and cost recovery estimates, and  discussed these data with GSA Inspector General officials.
Further, we reviewed contract files and discussed price negotiation  practices and tool use with management officials and contract negotiators  responsible for selected MAS contracts at four of GSA’s seven MAS  acquisition centers.  At these centers, we reviewed the contract files that  GSA had randomly selected for review under their Acquisition Quality  Measurement and Improvement Program. Based on our review of price  negotiation procedures and discussions with acquisition center  management officials concerning the GSA selected MAS contracts, we  developed a flowchart of the contract price negotiation process identifying  tools used and controls over their use.
To determine how GSA assesses the overall effectiveness of MAS contract  price negotiations, we reviewed GSA policies, procedures, and efforts to  evaluate the quality of MAS contract negotiations and awards, identify and  implement needed improvements, and communicate best practices  throughout the acquisition community. Also, we discussed management  controls established to assess the effectiveness of MAS contract  negotiations to obtain the most favored customer price objective with  agency officials at GSA’s Office of Acquisition Management in Arlington,  Virginia; and the Office of Inspector General in Washington, D.C. We  reviewed prior GAO and GSA Inspector General findings on GSA’s MAS  contract price negotiations. Further, we analyzed the 2003 and 2004 results  of GSA’s Post Award Contract Reviews and for selected contracts,  interviewed responsible acquisition center and contract negotiation  officials to evaluate the quality of GSA’s review, identify underlying cause  for unacceptable price negotiations, and document corrective actions  taken.

Appendix II: MAS Acquisition Centers’ Products and Services

Appendix III: Comments from the General Services Administration

	GAO Comments

1.  The language in our report is consistent with the language in the  General Services Administration Acquisition Manual (GSAM).   Specifically, GSAM 538.270 Evaluation of multiple award schedule  (MAS) offers states :“(a) The Government will seek to obtain the  offeror’s best price (the best price given to the most favored  customer).  However, the Government recognizes that the terms and  conditions of commercial sales vary and there may be legitimate  reasons why the best price is not achieved.”  Further, GSA states in the  supplementary information to its final rule, 62 Fed. Reg. 44,518, 44,519  (August 21, 1997) that; “The pursuit of “most favored customer” pricing  as a goal is consistent with commercial practice and totally consistent  with the objective of negotiating a fair and reasonable price.”   2.  Technical revision has been made.  3.  Technical revision has been made.  4.  The language in our report is consistent with the language cited in  comment 1; however, we added the language that notes GSA’s pricing  goals.  Also, while GSA encourages its customer agencies to negotiate  further discounts at the time they place an order, the focus of our work  was on how GSA negotiates MAS contract prices, not on the  responsibilities of GSA’s customer agencies.  5.  The language in our report is consistent with the language cited in  comment 1.    6.  Technical revision has been made.  7.  Without documentation that establishes clearly that the contract  negotiations were conducted using accurate, complete, and current  pricing information and adequate price analyses; GSA cannot ensure  that negotiation objectives were properly established and the prices  were effectively negotiated. Historically, pre-award audits have  allowed GSA to avoid hundreds of millions of dollars in overpricing.   Between fiscal years 1992 and 1997 the GSA Inspector General  averaged about 125 pre-award audits each year and reported a total of  nearly $496 million in savings—an average of nearly $83 million per  year.  In August 2001, as pre-award audits continued to decline, the  Inspector General reported that contracting officers were not  consistently negotiating most favored customer pricing because they  often failed to evaluate and quantify differences between commercial  pricing and schedule terms and conditions.  As discussed in our report,  the Inspector General provided specific examples of overpricing with  millions of dollars in potential overpayments by GSA customers. While  the number of pre-award audits GSA completed increased from 14 to  40 between fiscal years 2003 and 2004, we do not view this increase as  significant—especially given the skyrocketing MAS sales.    8.  In fiscal year 2003, GSA was to complete quality reviews of 11 GSA  activities, including all 7 of the MAS acquisition centers.  However,  GSA completed and reported on only one center—the Services  Acquisition Center.  According to GSA officials, the results of its fiscal  year 2004 review would be issued in October 2004.  This date slipped  several times to December 31, 2004, to January 7, 2005, and now to  sometime in February 2005.  We believe that better oversight early in  the program’s implementation could have helped the program better  meet its established milestones.     9.  Our review focused on how GSA negotiates most favored customer  prices for MAS contracts and assesses the overall effectiveness of  these price negotiations.  We did not look at how GSA’s customer  agencies order items and services from MAS contracts.  10.  The language in our report is consistent with the language cited in  comment 1.    11.  Technical revisions have been made.  12.  We support the use of quality reviews and believe they are a good first  step to improved MAS contact negotiations, as we noted in our report.   However, we also believe that identifying specific causes of  documentation deficiencies and the requirement for action plans  addressing these causes would increase the effectiveness of GSA’s  quality reviews.
GSA asserts that the improvement in contract documentation at the  Service Acquisition Center is a direct result of their quality reviews.   The evidence we have been provided does not support this assertion.   While GSA’s June 2004 quality review of the Service Acquisition Center  found that contract documentation had improved since its fiscal year  2003 review, we learned during the course of our review that the  Service Acquisition Center began a continuous improvement program  about 4 years ago and that one of the Center’s divisions had been  developing tools and standardized documents to have an audit trail of  the information that was used and how decisions were made in  negotiating the contract.  Because the Center’s efforts pre-date GSA’s  quality reviews, it is unclear to what extent the Center’s improvement  efforts and the reviews had on the documentation improvements.
GAO recognizes that GSA has initiated a number of efforts to better  ensure contract quality, and our report identifies those that are  relevant to our review.  However, because these efforts were recently  implemented, we did not assess and cannot comment on their  effectiveness.  13.  Our findings are based on the 28 contract reviews completed as of  September 2004.  For these reviews, the GSA reviewers stated that  most favored customer pricing was not clearly established for 27.  The  additional seven reviews and reexaminations were expected in  October 2004, they were not completed until February 2005.   Therefore, we have no basis to comment on either GSA’s additional  seven reviews or their reexamination of the September 2004 consensus  reports.   14.  Our report describes the use of pre-award audits and their conduct by  the GSA Inspector General for contract negotiators.  15.  As discussed in our report, MAS contracting officials and Inspector  General officials identified a number of factors that in the past  contributed to the reduction of the number of pre-award audits.  These  factors include an organizational culture that stresses making contract  awards quickly and performance measures that focus on timeliness.   The reduction in the number of opportunities for conducting pre- award audits caused by the extension of contract performance period  from 1 year—the contract period in the mid-1990s—to 5 years was also  cited as a factor.  However, despite the 5-year contract period, GSA  increased the number of pre-award audits from 14 in fiscal year 2003 to  40 in fiscal year 2004 and plans to complete 70 in fiscal year 2005.   Moreover, according to GSA, it received more than 3,000 new MAS  contract offers each year, presenting GSA with numerous  opportunities for pre-award audits.  Therefore, we do not believe that  the extension of MAS contracts from 1 to 5 years was a major  underlying cause of the dramatic decline in pre-award audits over the  last decade.  16.  We asked contract negotiators why they did not request pre-award  audits on new contract offers, as required by GSA.  According to the  contract negotiators, the performance goal for awarding a new  contract did not allow enough time for pre-award audits. While we  agree that establishing a performance measure to reduce cycle times  may be warranted, it must be balanced with other measures of quality,  as GSA points out.
We also agree that increasing the number of pre-award audits from 14  to 40 shows progress; however, we do not believe that this increase  can be characterized as “significant”—especially when an average of  125 audits were completed annually in the early 1990s and GSA  receives more than 3,000 new schedule offers annually.  17.  We agree with GSA’s proposed actions.  18.  Identifying underlying or “root” causes is essential for correcting  process deficiencies.  While GSA notes that FSS management intends  to identify such causes, we believe GSA missed an opportunity to do so  through its formal review. Further, it is unclear how FSS management  plans to identify the underlying causes.  Regardless, we believe that  expending resources to resolve deficiencies without first determining  the causes of the deficiencies unnecessarily increases the risk that  improvement efforts will not succeed and resources spent will be  wasted.  19.  The acquisition letter implementing the quality reviews identifies the  seven critical factors.  While all of these critical factors could involve  contracting pricing in some manner, only three factors specifically  address pricing.

Summary:
Why GAO Did This Study

Federal agencies can directly purchase more than 8 million commercial products and services through the General Services Administration's (GSA) multiple award schedules (MAS) contracts. Over the past 10 years, MAS contract sales have increased dramatically--with sales jumping from $4 billion to $32 billion. In addition to simplifying the procurement process, the MAS program is designed to take advantage of the government's significant aggregate buying power. While GSA seeks to negotiate best pricing for its MAS contracts by analyzing vendor-provided information--such as discounts given to other customers and recent sales data for the same or similar items--past reports have found that GSA has not always used pricing tools effectively and that management controls for better ensuring fair and reasonable pricing had been reduced. This report discusses GSA's process for negotiating most favored customer prices for MAS contracts and its efforts to improve the overall quality of negotiations.

What GAO Found

Contract negotiators at the four MAS acquisition centers that GAO reviewed use a variety of tools for obtaining most favored customer pricing--that is, the prices vendors offer their best customers. However, the GAO analysis of GSA's review of selected fiscal year 2004 MAS contract files found that nearly 60 percent lacked the documentation needed to establish clearly that the prices were effectively negotiated. Specifically, the contract documentation did not establish that negotiated prices were based on accurate, complete, and current vendor information; adequate price analyses; and reasonable price negotiations. GSA's efforts to ensure most favored customer pricing have been hindered by the significant decline in the use of pre-award and postaward audits of pre-award pricing information, two independent pricing tools that have helped GSA avoid or recover hundreds of millions of dollars in excessive pricing. In fiscal year 1995, GSA conducted 154 pre-award audits; by 2004 the number of pre-award audits fell to 40. Postaward audits--which resulted in an average annual recovery of $18 million in the early 1990s--were discontinued in 1997 when GSA revised its MAS contract audit policies to increase the use of pre-award audits--an increase that has not materialized. In March 2003, GSA established the Acquisition Quality Measurement and Improvement Program, initiating the use of prenegotiation panels and postaward quality reviews of contracts. However, the effectiveness of these initiatives has been limited due to insufficient oversight. For example, three of the MAS acquisition centers that GAO visited had not reported the results of their 2003 prenegotiation panels--information needed by management to identify problems and make needed improvements. Moreover, the fourth acquisition center--which accounted for about 56 percent of the fiscal year 2004 MAS sales--has yet to hold a panel. While the postaward quality reviews--the second program initiative--have identified deficiencies in contract file documentation, they did not determine the underlying causes of these deficiencies or prescribe actions needed to address them. As a result of these weaknesses, GSA cannot be assured that fair and reasonable prices have been negotiated for its MAS contracts.