Contract Management: Opportunities Continue for GSA to Improve Pricing of Multiple Award Schedules Contracts
Published: 2005-07-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Each year, federal agencies spend billions of dollars to buy commercial products and services through the General Service Administration's (GSA) Multiple Award Schedules program. The program has grown significantly over the past several years. Currently, federal agencies can directly purchase, through more than 16,000 schedule contracts, over 8 million products from more than 10,000 commercial vendors. In fiscal year 2004, purchases from these contracts totaled more than $32 billion. The multiple award schedules program is designed to take advantage of the government's significant buying power. To maximize savings, GSA negotiates discounts that are equal to or greater than those given to the vendor's most favored customers. This testimony focuses on GSA's historic use of two proven negotiation tools to improve the pricing of schedules contracts--pre-award audits and postaward audits of pre-award information. Pre-award audits allow GSA to avoid potential overpricing by verifying vendor pricing information before contracts are awarded. Postaward audits allow GSA to identify overpricing of awarded contracts and recover overcharges.
section_title: What GAO Found
paragraphs: Historically, GSA has used pre-award and postaward audits sporadically, thereby minimizing its ability to avoid excessive pricing and recover overcharges and potentially save millions of federal dollars. For more than 25 years, GAO has reported on GSA's multiple award schedules program pricing problems. In March 1977, we reported that pre-award information on 6 of 15 contract proposals was not accurate, complete, or current. In 1979, we again reported that pricing information submitted by some vendors was unreliable. Moreover, only 1 pre-award audit and 10 postaward audits had been conducted during fiscal years 1977 and 1978 of which 9 found inaccurate sales information had been reported by vendors or the availability of better discounts had not been disclosed. These problems continued throughout the 1980s. In the early 1990s, GSA made good use of pre-award and postaward audits, negotiating nearly $480 million in cost savings and recovering about $90 million in vendor overcharges over 5 years. However, in August 1997, GSA revised its acquisition regulations and effectively eliminated the use of postaward audits. While GSA expected pre-award audits to increase, this increase never materialized. In August 2001, the GSA Inspector General reported that GSA was not consistently negotiating most favored customer pricing. For just one contract, the Inspector General projected that over the contract's term, GSA customers would pay nearly $40 million more than they should have. In February 2005, we completed our most recent review of the multiple award schedules program and found that pricing problems persist and that the number of pre-award audits continued to decline. We concluded that GSA was continuing to miss opportunities to save hundreds of millions of dollars.

section_title: Letter
paragraphs: Thank you for inviting me here today to discuss the General Services  Administration’s (GSA) use of pre-award and postaward audits in pricing  its multiple award schedules contracts. Each year, federal agencies spend  billions of dollars to buy commercial products and professional services  through GSA’s multiple award schedules program. The program is  designed to take advantage of the government’s significant buying power  when purchasing a wide range of commercially available products—such  as office furniture and supplies, personal computers, and tools—and a  variety of professional services. Through more than 16,000 contracts,  federal agencies can directly purchase more than 8 million products from  more than 10,000 commercial vendors. The multiple award schedules  program has grown significantly over the past several years. In fiscal year  2004, federal agencies purchased more than $32 billion of products and  services through the program.
To get the most out of each taxpayer dollar, GSA seeks to leverage the  government’s immense buying power by negotiating discounts from the  vendor’s price list that are equal to or greater than the vendor’s most  favored customers. These negotiations have a direct bearing on how  economically government agencies procure products and services. Today,  my statement will focus on GSA’s historic use of two proven negotiation  tools to improve the pricing of schedules contracts—pre-award audits and  postaward audits of pre-award information. Pre-award audits allow GSA  contract negotiators to avoid potential vendor overpricing by verifying  pricing information before contracts are awarded. Postaward audits allow  negotiators to identify overpricing of awarded contracts and recover  overcharges.
In summary, GSA has used these two key price negotiation tools on a  limited basis. When GSA has used pre-award and postaward audits, it has  been able to avoid or recover hundreds of millions of dollars in  overcharges. In recent years, however, the use of these pricing tools has  declined dramatically—despite dramatic increases in program sales.  Consequently, GSA has less assurance that vendor-supplied pricing  information is accurate, complete, and current, and its ability to deter  overpricing and recover overcharges has been minimized. By delaying  action to address its contract pricing problems, GSA continues to miss  opportunities to minimize prices paid for goods and services and save  significant sums of federal dollars.
subsections: section_title: Background
paragraphs: GSA established the Federal Supply Schedule (FSS) program in 1949 to  facilitate federal agencies’ purchase of common products and services  from commercial vendors through schedule contracts. The multiple award  schedules program, the largest FSS program, was designed to provide  agencies with a simplified method for purchasing varying quantities of a  wide range of commercially available products, such as office furniture  and supplies, personal computers, scientific equipment, network support,  and various professional services. The schedules program provides  advantages to both federal agencies and vendors. By using this simplified  method of procurement, agencies can avoid using other more time- consuming and administratively costly procurement methods. Vendors  receive wider exposure of their commercial products and services and  expend less effort to sell them.
In administering the multiple award schedules program, GSA is  responsible for ensuring that negotiated prices reflect the government’s  aggregate buying power. GSA contracting officials seek discounts from a  vendor’s price list that are equal to or greater than the vendor’s most  favored customer’s discounts. GSA awards contracts to multiple vendors  supplying comparable commercial products and services. Federal  agencies order products and services directly from the vendors that best  meet their needs. Prices paid by federal agencies include a fee for GSA to  recover program costs, including contract administration and program  support.
In the mid-1990s, GSA had about 5,200 schedules contracts. By fiscal year  2004, this number had increased to over 16,000 contracts. As the number  of contracts offering products and services to federal agencies increased,  the sales volume skyrocketed. Between fiscal years 1995 and 2004,  program sales increased more than sixfold, from $4.9 billion to about $32.5  billion (see fig. 1).
Because prices that agencies pay for schedule products and services are  the result of negotiations between GSA and individual vendors, the pricing  of products and services being offered is key to the contract negotiation  process. GSA contracting officials use various tools to analyze vendor  offers and establish negotiation objectives. Tools commonly used include  market research, sales histories, invoices and references, and competitor  price lists. Of all the pricing tools available for contract negotiation, two  tools—pre-award audits and postaward audits of pre-award information— are specifically designed to protect the government from overpricing. Pre- award audits enable contract negotiators to verify that vendor-supplied  pricing information is accurate, complete, and current before the contract  is awarded. Postaward audits serve as a deterrent to overpricing and a  primary tool for recovering vendor overcharges.
section_title: Historically, GSA Has Not Consistently Made Good Use of Pre-award and Postaward Audits
paragraphs: GSA’s use of pre-award audits and postaward audits of pre-award  information has been sporadic—a finding we have reported for more than  25 years. For example, in March 1977, we reported that although sales  from multiple award schedules contracts amounted to $840 million,  vendor proposals were rarely independently audited and the veracity of  the information submitted was suspect. We found that sales and discount  information submitted on 6 of 15 contract proposals was not accurate,  complete, and current. Further, we found that 25 pre-award audits done in  fiscal years 1973 and 1974 had resulted in recommendations of $962,000 in  savings. Eighteen postaward audits done in the same years resulted in GSA  claims of more than $1.4 million. In 1979, we again reported that price  information submitted by some vendors was unreliable. Also, our  comparison of 29 products available through four states’ annual contracts,  as well as GSA schedules, found that prices were on average 20 percent to  57 percent lower under the state contracts. We estimated that had GSA  obtained the same discounts as did the states, $5.8 million would have  been saved in fiscal year 1978 on purchases of calculators, dictating  equipment, typewriters, and lamps from the same manufacturers.  Moreover, of the 11 audits (1 pre-award and 10 postaward) that had been  done during fiscal years 1977 and 1978, all but 2 found inaccurate sales  information had been reported by vendors or the availability of better  discounts had not been disclosed.
Pricing problems continued throughout the 1980s, and GSA’s use of pre- award audits and postaward audits of pre-award information was limited.  For example, in 1986, we again reviewed GSA’s price negotiations for the  multiple award schedules program, which at that time consisted of about  3,300 contracts with sales of about $2.3 billion. Our review of 20 contracts  found that while the prices GSA obtained appeared to be fair and  reasonable, action was needed to obtain better prices. On one multiple  award schedules contract, where the vendor did not offer the government  discounts comparable to the most favored customer, a reopening of  contract negotiations resulted in an estimated savings of $1.6 million. We  also found that the number of pre-award audits decreased between fiscal  years 1984 and 1985. The decrease was attributed to reductions in the  Inspector General’s staff, a shift in resources to audits of higher dollar  value contracts, and the change from single-year to multiple year  contracts. In response to our concern about the continuing decline in the  number of pre-award audits, GSA agreed to take actions to provide  adequate audit coverage, including shifting resources from other GSA  offices to the Inspector General’s office, as well as within the office, and  an increase in the Inspector General’s fiscal year 1987 budget.
In the early 1990s, schedules sales remained relatively stable, ranging  between $4 billion and $5 billion, annually. During this period, GSA  successfully performed a significant number of pre-award and postaward  audits. For example, from fiscal years 1992 through 1996, the GSA  Inspector General conducted 624 pre-award audits—an average of 125  each year. These pre-award audits resulted in nearly $480 million in  negotiated cost savings for GSA’s customers. Additionally, from fiscal  years 1990 through fiscal year 1994, the GSA Inspector General reported  that it recovered an average of $18 million each year in vendor  overcharges. Most of these postaward audit recoveries were the result of  vendor failure to provide accurate, complete, and current information in  the negotiation of their contracts and their failure to report and offer price  reductions.
section_title: Despite Skyrocketing Sales, Pricing Problems and the Overall Decline in the Use of Pre-award Audits Have Continued
paragraphs: In August 1997, GSA revised its acquisition regulations to expand access to  commercial products and services and implement greater use of  commercial buying practices. As part of this revision, GSA specifically  removed language from the examination of records clause that  automatically granted postaward audit rights for pre-award pricing  information in every schedules contract. To offset the reduction in these  postaward audits, GSA proposed to increase emphasis on the use of pre- award audits. According to GSA, this approach would provide the  contracting officer a mechanism for verifying information submitted by  vendors and avoid pricing problems instead of uncovering problems after  contract award. However, recent GSA Inspector General and GAO reviews  have shown that GSA’s long-standing pricing problems have continued and  the plan to increase the use of pre-award audits never materialized.
subsections: section_title: GSA’s Inspector General and GAO Continue to Identify Pricing Problems
paragraphs: In August 2001, the GSA Inspector General reported that while schedules  program sales had grown dramatically, certain program fundamentals— including pricing objectives and other pricing tools—had been  marginalized. Specifically, the Inspector General found that contracting  officers were not consistently negotiating most favored customer pricing  or adequately performing price analyses. For example, the Inspector  General reported that a major distributor of information technology  products sold its top 10 GSA-selling models to commercial customers at an  average price that was 6 percent lower than the price offered to federal  agencies. The Inspector General projected that over the contract’s term,  GSA customers would pay nearly $40 million more for these products than  they should.
In February 2005, we completed our most recent review of the multiple  awards schedules program and found that contract pricing continues to be  a problem. Table 1 summarizes the extent of the problems found with 62  contracts in June 2004.
We found that a GSA review of 62 contract files identified 37 contracts— nearly 60 percent—that lacked sufficient documentation to clearly  establish that the contracts were effectively negotiated. Twenty-six of the  62 contracts—roughly 40 percent—lacked adequate price analyses or  price negotiation documentation.
section_title: Decline of Pre-award Audits Continued
paragraphs: Between fiscal years 1997 and 2004, GSA completed only 155 pre-award  audits—an average of about 19 each year, compared to the average of 125  pre-award audits annually for the prior 5 years (see fig. 2). During this  same 8-year period, schedules sales increased nearly five-fold from about  $6.6 billion in fiscal year 1997 to $32.5 billion in fiscal year 2004.
As the number of pre-award audits performed continued to decline, so too  did the amount of 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 and 2004, the total savings reported had dropped to about $126  million—an average of only $18 million per year (see fig. 3).
According to GSA Inspector General and contracting officials, the decline  in pre-award audits was largely due an organizational culture that stresses  making award decisions quickly and because pre-award audits were not  emphasized institutionally in GSA. Also, GSA management officials told us  that they believe increasing the contract length from 1 year in the mid- 1990s to the 5 years of today has also limited pre-award audits because the  number of opportunities for pre-award audits has been reduced. We  believe, however, that the potential for pre-award audits is substantial.  Since the mid-1990s, the number of schedules contracts awarded  increased from about 5,200 in fiscal year 1995 to over 16,000 in fiscal year  2004, significantly increasing the potential for pre-award audits.
While conducting our review, we tested GSA’s assertion that longer-term  contracts reduced the opportunity for pre-award audits, applying GSA’s  guidance to contract negotiators on when to request audit assistance. As  we reported in February 2005, we found that 71 contracts awarded or  extended in fiscal year 2003 met the pre-award audit threshold, but GSA  only completed 14 pre-award audits—57 fewer than we identified as  potential audits. In fiscal year 2004, GSA selected 55 contract offers for  pre-award audits. The GSA Inspector General completed 40 of these  audits.
In our most recent review, we also found that GSA has not conducted  postaward audits of pre-award information since 1997—when GSA revised  its policy on the use of such audits. The revised policy had the effect of  eliminating the use of postaward audits. With the dramatic increase in  sales and the continuing decline in pre-award audits, the potential for  significant recoveries of vendor overcharges could be substantial.
section_title: Recent GSA Actions to Improve Price Negotiations
paragraphs: In our February 2005 report, we made three recommendations aimed at  helping GSA ensure that prices are effectively negotiated for schedules  contracts. We recommended that the GSA Administrator (1) ensure that  pre-award audits are conducted when the threshold is met for both new  contract offers and contract extensions, (2) develop guidance to help  contracting officers determine when postaward audits are needed, and    (3) direct GSA program management to revise its quality control program  to (a) determine the underlying causes for contract pricing deficiencies  and (b) develop appropriate plans to implement corrective actions.
GSA management officials agreed with our recommendations, and stated  that GSA would    continue to work with the Inspector General to increase and improve the  number of pre-award audits,   publish an advance notice of proposed rulemaking in the Federal Register  to request comments on the role of postaward audit reviews in the  acquisition process, and   evaluate the results of the fiscal year 2004 contract file review and that this  evaluation would involve a discussion and identification of the underlying  reasons for any weaknesses.
We believe that GSA’s actions are a good first step toward addressing its  long-standing pricing problems with multiple award schedules contracts.  However, unless these actions are effectively implemented the risk of  pricing problems will continue.
In conclusion, while GSA’s schedules program has provided the  government with a more flexible and cost-effective approach to buying  commercial items, our work has shown that the program has long been  fraught with problems of contract overpricing—resulting in millions of  taxpayer dollars being wasted. Historically, pre-award and postaward  audits have proven their value in deterring overpricing and recovering  vendor overcharges. 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.
Mr. Chairman and Members of the Subcommittee, this concludes my  prepared statement. I will be happy to address any questions you may have  at this time.
section_title: Contact and Acknowledgments
paragraphs: For further information, please contact David E. Cooper at (202) 512-4841  or by e-mail at cooperd@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this testimony. Individuals making key contributions to this testimony  include James Fuquay, Sanford Reigle, Victoria Klepacz, Karen Sloan, and  Sylvia Schatz.
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