Contract Management: Agencies Can Achieve Significant Savings on Purchase Card Buys
Published: 2004-03-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: From 1994 to 2003, the use of government purchase cards exploded from $1 billion to $16 billion. Most purchase card transactions are for small purchases, less than $2,500. While agencies estimate that using purchase cards saves hundreds of millions of dollars in administrative costs, the rapid growth of the purchase card presents opportunities for agencies to negotiate discounts with major vendors, thereby better leveraging agencies' buying power. To discover whether agencies were doing this, we examined program management and cardholder practices at the Departments of Agriculture, Army, Navy, Air Force, Interior, Justice, Transportation, and Veterans Affairs. GAO also examined why agencies may not have explored these opportunities.
section_title: What GAO Found
paragraphs: Although some agencies have begun to take actions to achieve savings through their purchase card programs, most have not identified and taken advantage of opportunities to obtain more favorable prices on purchase card buys--opportunities that could yield hundreds of millions of dollars in savings. For example, most agencies have established some discount agreements with major purchase card vendors (those vendors with whom they did more than $1 million in purchase card business in fiscal year 2002), but these agreements cover only a few of the hundreds of major vendors and a limited number of products. Further, because agency purchase card training programs lack practical information to help cardholders take advantage of existing discount agreements or GSA's Federal Supply Schedule contracts, cardholders paid higher prices than necessary. The agencies that have taken steps to obtain better prices by negotiating discounts with their major vendors have achieved notable savings on purchase card buys. For example, in fiscal year 2003, the Agriculture Department negotiated a discount agreement for office supplies that yielded savings of $1.8 million--about 10 percent off Schedule contract prices--and the Interior Department recently negotiated agreements with information technology vendors for discounts up to 35 percent off Schedule prices. A conservative approach indicates that, if the agencies we reviewed obtained discounts of only 10 percent with their major vendors, annual savings of up to $300 million could be achieved. Most agencies have not more aggressively pursued savings through the purchase card because of a lack of management focus--simply put, this issue has not been the center of attention for managers. Further, the Office of Management and Budget has not leveraged its governmentwide oversight role by collecting and disseminating information on the successful initiatives some agencies have undertaken. Agency officials also expressed concerns that imposing additional requirements on cardholders would undermine the program's intent to streamline acquisitions and that pursuing discount agreements with large suppliers would limit their ability to provide opportunities for small businesses. They also cited poor data as a barrier to identifying savings opportunities. However, as individual agencies have demonstrated, these concerns are not insurmountable. For example, the Air Force's Air Mobility Command provides its cardholders a list of community vendors--many of which are small businesses--that offer discounts, making it easy for the cardholders to obtain discounts from local small businesses. Despite data limitations, information such as vendor sales reports could be used to identify major vendors with whom to pursue discount agreements and to provide insight into cardholder activity.

section_title: Letter
paragraphs: The introduction of government purchase cards fundamentally changed  the way agencies make small, routine purchases of goods and services.   The vast majority of purchase card transactions are micropurchases,  purchases in amounts not greater than $2,500.  Purchase card use has  increased significantly over the past decade—from less than $1 billion in  fiscal year 1994 to more than $16 billion in fiscal year 2003. This explosive  growth has presented both challenges and opportunities. While estimates  indicate that the use of government purchase cards could save taxpayers  hundreds of millions of dollars in administrative costs over time, our office  has reported that inadequate controls over purchase card programs left  agencies vulnerable to fraud, waste, and abuse. Agencies are working,  under the guidance of the Office of Management and Budget (OMB), to  strengthen these controls.
Given the rapid growth of this program, we and agency inspectors general  have recently raised concerns about whether agencies and individual  cardholders are seizing the opportunity to obtain discounts commonly  available in the commercial marketplace for large volume purchasers.  Recognizing the potential for increased savings, you asked us to (1)  determine whether agencies are taking advantage of opportunities to help  cardholders obtain more favorable purchase card prices and (2) if not,  identify the reasons why.
We examined purchase card program management practices at eight  federal agencies that account for over 85 percent of the government’s  purchase card spending: the Departments of Agriculture; the Interior;  Justice; Transportation; Veterans Affairs; and within the Department of  Defense (DOD), the Departments of the Army, Navy, and Air Force. In  addition, we reviewed selected fiscal year 2002 purchase card  transactions, at or below the micropurchase level, with major vendors at  the eight agencies and compared prices paid to prices available through  the General Services Administration’s (GSA) Federal Supply Schedule  (Schedule) and telecommunications contracts. Although these  transactions were selected at random from the population of micro- purchase transactions with vendors having the highest purchase card  sales at the eight agencies, we cannot project the results to the population  of transactions governmentwide. We also engaged the Dun and Bradstreet  Corporation to perform a spend analysis of the Interior Department’s fiscal  year 2002 purchase card transactions to illustrate how a detailed analysis  could begin to identify opportunities for purchase card savings. We  conducted our work in accordance with generally accepted government  auditing standards.  For more information on our scope and methodology,  see appendix I.
subsections: section_title: Background
paragraphs: Through the purchase card program, agency personnel can acquire the  goods and services they need directly from vendors. GSA, which manages  the purchase card program governmentwide, has awarded contracts to  banks to provide standard commercial charge cards for use by federal  employees. When GSA first pilot-tested the purchase card in the late 1980s,  its use was restricted to procurement personnel. In 1994, however, the  Federal Acquisition Streamlining Act (FASA) defined micropurchases as  purchases in amounts not greater than $2,500. The act authorized  cardholders to make micropurchases without obtaining competitive  quotations if they considered the price reasonable and directed that  purchases be distributed equitably among qualified suppliers. The Federal  Acquisition Regulation (FAR) designated the purchase card as the  preferred method of making micropurchases. By shifting authority for  small purchases from procurement offices to individual cardholders,  agencies dramatically improved their ability to acquire quickly and easily  items that were needed for day-to-day operations and to reduce  administrative costs.
Since the passage of FASA, the dollar value of goods and services acquired  through the purchase card has exploded, as figure 1 shows. This growth  was accompanied by an increase in the number of personnel using the  purchase card.
Table 1 provides information on fiscal year 2002 purchase card activity for  the eight agencies we reviewed. Purchase card transactions at these  agencies account for over 85 percent of the government’s purchase card  spending. While purchase cards may be used to make payments under  established contracts in addition to making micropurchases, an  overwhelming majority of transactions are micropurchases. At the eight  agencies reviewed, micropurchases represented 98 percent of transactions  and accounted for 63 percent of the dollars expended. Appendix VI  provides additional information on purchase card activity at the agencies  we reviewed.
GSA, whose mission is to help federal agencies better serve the public by  offering acquisition services at the best value, has created several tools  that can help cardholders obtain more favorable pricing for goods and  services. The most common of these is the Schedule program, which  offers discounted prices on a wide range of commercial goods and  services from multiple vendors. The GSA Advantage on-line shopping  service allows agencies to compare prices under various Schedule  contracts, place orders, and make payments over the Internet. In addition,  GSA has awarded contracts that offer federal agencies discounted prices  on telecommunications services.
Our prior work found that weak internal controls left purchase card use at  DOD and several civilian agencies vulnerable to fraud and abuse. The list  of Related Products at the end of this report identifies recent work in this  area. To address these concerns, Congress has enacted legislation that  directs DOD to improve program management by limiting the number of  purchase cards, providing appropriate training to purchase card officials  and cardholders, monitoring purchase card activity, disciplining  cardholders who misuse the purchase card, and assessing the credit  worthiness of cardholders. We recently reported that DOD has taken a  number of actions to improve the controls over the purchase card program  based on congressional action and our recommendations. To improve  management of the purchase card program governmentwide, the proposed  Purchase Card and Travel Card Accountability Act of 2003 would require  the Administrator of the Office of Federal Procurement Policy to prescribe  a governmentwide policy regarding the appropriate and inappropriate uses  of the purchase and travel cards. In addition, the proposed Credit Card  Abuse Prevention Act of 2003 would require civilian agencies to  promulgate regulations to establish safeguards and internal controls to  prevent fraud, misuse, and abuse.
section_title: Agencies Generally Have Not Taken Advantage of Opportunities to Obtain Savings
paragraphs: Although we found some initiatives under way to obtain vendor discounts  from major purchase card vendors, agencies generally had not seized  opportunities to obtain more favorable prices on purchase card buys— opportunities that could yield hundreds of millions of dollars in savings.  Agency efforts to obtain more favorable prices for purchase cardholders  had generally been limited to a few agencywide agreements with major  vendors—that is, vendors with whom an agency spent $1 million or more  in fiscal year 2002. Further, training for cardholders usually focused on  internal controls and regulatory policies and did not provide practical  information about steps cardholders can take to get better prices. As a  result, cardholders often paid higher prices than necessary. The successful  initiatives taken within some agencies demonstrate that, if agencies  negotiated effective discount agreements with major purchase card  vendors and improved communications to cardholders about how to  obtain more favorable prices, significant savings could be realized.
subsections: section_title: Scope and Coverage of Negotiated Discount Agreements Varied
paragraphs: We found a wide variation in the number of agencywide discount  agreements that the eight agencies we reviewed had negotiated with their  major purchase card vendors. For example, Veterans Affairs had  negotiated agencywide discount agreements with 37 of its 196 major  purchase card vendors—the largest number of any of the agencies  reviewed. The Army, Navy, and Air Force each had agencywide  agreements with several major information technology vendors and one or  more office supply vendors. Agriculture, Interior, and Justice each had a  few agencywide agreements, which covered information technology  products or office supplies. Transportation’s senior procurement  executive told us this agency had no discount agreements that could be  used agencywide. As shown in table 2, cardholders at the agencies we  reviewed are using the purchase card to a great extent to buy items from  major purchase card vendors, an indication that opportunities exist to  negotiate additional discount agreements with these vendors.
The effectiveness of the agreements that are in place also varied widely,  and we found a number of ways in which agencies had not maximized  their agreements’ potential to capture additional savings. First, agencies  did not always take full advantage of competitive forces to ensure that  their discount agreements with large vendors offered the most favorable  prices, as shown in the following examples.
Second, some agency discount agreements covered a limited range of  products and therefore did not provide cardholders more favorable prices  on all the items they purchase from a vendor. Overall, in 18 of the 27  transactions we reviewed where agencies had a discount agreement in  place, the agreement did not cover the specific items that cardholders  purchased, as demonstrated in the following examples.
Finally, some discount agreements were not well-coordinated within the  agency, creating the potential for overlap, as shown in the following  example. Representatives of a number of agency components told us that,  while they believed that their regional and local organizations had  negotiated some discount agreements, they had no information on these  agreements.
section_title: Most Guidance and Training Did Not Provide Practical Information on Obtaining Favorable Pricing
paragraphs: Each of the agencies we reviewed had developed guidance and training  programs for their cardholders that focused on regulatory policies and  internal controls intended to prevent misuse of the purchase card.  However, most of the guidance and training programs did not provide  cardholders with practical information to help them get better pricing by  using Schedule contracts or agency discount agreements, as in the  following examples.
Some training programs, however, had successfully communicated  practical information to their cardholders on how to seek better prices, as  in the following examples.
section_title: Lacking Information, Cardholders Paid More Than Necessary
paragraphs: Dun and Bradstreet’s analysis of fiscal year 2002 Interior transactions,  conducted on our behalf, illustrates that cardholders frequently paid more  than necessary. For example, the company analyzed Interior purchases  from three office supply vendors that provided product descriptions along  with their purchase card billing information. This analysis showed that ink  cartridges were the most frequently purchased product. For one specific  model of ink cartridge, 411 of 791 purchases were made at prices higher  than the Schedule prices the vendors offered, indicating that cardholders  had generally not taken advantage of discounts available through Schedule  contracts. The prices paid for the same cartridge model ranged from  $20.00 to $34.99.
Our review of selected transactions also showed that, because they lacked  practical information on how to achieve savings on purchases,  cardholders paid more than necessary, as highlighted in the following  examples. Some cardholders we talked to were simply unaware of the  savings potential of using Schedule contracts or agency discount  agreements. Of the transactions we reviewed where items were available  through a GSA contract, a number of cardholders were unaware that the  items could have been purchased through the GSA contract.
Some cardholders appeared to not understand their fundamental  responsibility for getting reasonable prices, as in the following examples.
Other cardholders purchased products that were not available through the  particular vendor’s Schedule contract. Because the cardholders did not  consider whether products that met their needs were available from other  Schedule vendors, they were unable to take advantage of lower,  discounted prices these vendors might have offered, as shown in the  following examples. Of the 135 transactions we reviewed, 70 included  items that were unavailable through the selected vendor’s GSA contract.
Other cardholders appeared to be confused about whether they were  getting favorable prices.
We also found cardholders who were not aware that they had received  significant discounts, as in the following cases.
section_title: Experience at Some Agencies Suggests Significant Savings Are Possible
paragraphs: Several agencies or agency components reported significant savings from  their initiatives to leverage their buying power by negotiating discount  agreements with major vendors, suggesting the potential for significant  savings governmentwide. In all cases, the discount agreements are  available to cardholders. Several examples follow.
While the scope of our work did not include developing a governmentwide  estimate of the potential savings from leveraging purchase card buying  power, these examples indicate that the potential for savings could be  significant. Given the range of savings under discount agreements  currently in place with major vendors (8 to 35 percent) at the agencies we  reviewed, a conservative approach indicates that, if these agencies were to  achieve savings of just 10 percent on their purchase card expenditures  with major vendors, annual savings of $300 million could be realized.
section_title: Lack of Management Focus Has Limited Efforts to Capture Savings
paragraphs: The primary reason that agencies have not taken advantage of potential  opportunities to capture savings through the purchase card program is the  lack of management focus on this issue. Further, OMB has not leveraged  its governmentwide oversight role by collecting and disseminating  information on the successful initiatives some agencies have undertaken.  In addition, agency officials identified several challenges that, in their  view, have hindered them from more aggressively pursuing savings  through the purchase card program. First, they noted that the purchase  card is intended to streamline buying, and they are reluctant to impose  requirements on cardholders that would undermine the simple, quick  purchase card buying process. Officials also cited the need to balance  governmentwide socioeconomic requirements—including providing  opportunities for small businesses and purchasing products manufactured  by non-profit agencies for the blind or severely handicapped (referred to  as “JWOD” products)—with efforts to get better purchase card prices.  Finally, officials noted that little detailed information is available on the  specific products and services purchased through the purchase card,  hampering efforts to analyze trends in order to achieve more savings.  Although agency officials consistently identified these challenges, our  review suggests that the challenges are not insurmountable, as evidenced  by individual agency initiatives to address them.
subsections: section_title: Agencies and OMB Have Not Focused on Opportunities for Savings
paragraphs: Agency purchase card managers have yet to turn their attention to  capturing opportunities for savings in their purchase card programs. In the  mid-1990s, managers were focusing on capturing the savings in  administrative costs that use of the purchase card made possible and  reengineering administrative processes that discouraged use of the card.  In more recent years, our work and the work of agency inspectors general  highlighted weaknesses in internal controls that left purchase card use  vulnerable to fraud and abuse. Agency managers have made a concerted  effort to address these internal control weaknesses, but have not paid  similar attention to capitalizing on opportunities for savings on purchase  card buys. In general, the agency management structures and processes do  not establish departmentwide goals for the effectiveness of micropurchase  activity, such as savings goals.
To monitor agencies’ progress in implementing better internal controls,  OMB requires agencies to report quarterly on such topics as investigations  of potential fraud, disciplinary actions for fraudulent or improper card use,  and initiatives to improve program management. However, OMB’s  reporting requirement does not include gathering information on agency  efforts to save money on purchase card buys. Consequently,  governmentwide information on opportunities to achieve savings is not  available.
OMB representatives stated that they would consider the benefits of  having agencies share information on leveraging purchasing power. They  believe that increased focus on purchase card pricing issues is appropriate  and mentioned that periodic cross-agency forums, sponsored by GSA,  could be one mechanism for agencies to share successes they have had in  negotiating discounts with major vendors. They also acknowledged that  the currently-required quarterly reports could be used to gather  information on the steps agencies are taking to better leverage their  purchase card buying. Most of the agency officials we met with expressed  interest in learning of steps being taken within the government to capture  purchase card savings, particularly in light of the challenges discussed  below.
section_title: Steps to Capture Savings Need Not Burden Cardholders
paragraphs: Several agency officials noted that promoting—or in some cases,  requiring—the use of specific vendors with whom they have negotiated  discount agreements could hinder cardholders from meeting their needs in  the simplest, most expeditious manner. They fear that cardholders, who  are generally not procurement officials, would be expected to spend more  time seeking better prices—time that should be spent meeting mission  requirements. While the FAR requires agencies to obtain reasonable  prices, it limits the actions agencies need to take to verify price  reasonableness. Given the wide variety of missions that cardholders must  meet on a daily basis, they must retain the flexibility to make their  purchases in a way that meets their needs. Our work showed that in some  cases, as those shown below, Schedule contracts and discount agreements  were not effective in meeting cardholder needs. In these cases, the  cardholders took advantage of the purchase card’s flexibility to find other  ways to fill their requirements.
On the other hand, some cardholders were pleased with the Schedule  contracts and agency discount agreements they used. Cardholders were  able to easily place orders with the vendor, and the vendor filled their  orders promptly and reliably, as in the following examples.
GSA is working to further simplify cardholder access to discounted prices.  To receive Schedule discounts, cardholders generally must place orders  with a vendor through the GSA Advantage on-line shopping service or  other designated ordering procedures. Some of GSA’s Schedule contracts,  however, provide vendors the option of offering cardholders discounts at  the point of sale in the vendors’ retail stores. For example, one GSA  contracting officer modified a vendor’s contract to provide for point-of-  sale discounts. The vendor then programmed cash registers in its retail  stores to recognize a federal government purchase card when a shopper  presents one and to apply the appropriate Schedule discount to the  shopper’s order. GSA has partnered with DOD purchase card program  officials to explore ways to increase the number of vendors that offer  point-of-sale discounts to federal purchasers. Civilian agency officials  expressed strong interest in this approach to facilitating cardholder access  to Schedule discounts.
section_title: Concerns about Balancing Governmentwide Socioeconomic Policies with Purchase Card Savings Initiatives Can Be Mitigated
paragraphs: Balancing governmentwide socioeconomic policies—such as providing  federal contracting opportunities to small businesses—with initiatives to  leverage agency buying power has also been a recurring concern for  agencies. Although agencies are not required to reserve micropurchases  for award to small businesses, officials we met with repeatedly noted that  because large national vendors would be in the best position to win  agencywide discount agreements, concerns would be raised that  opportunities for small, local vendors could be reduced. Officials similarly  raised concerns about the effect agencywide discount agreements would  have on their ability to meet requirements to purchase JWOD products.
Despite these concerns, some agencies have been able to leverage  purchasing power while providing opportunities for small businesses, as  highlighted in the following examples.
Further, agency experience indicates that appropriately structured  discount agreements can help ensure that cardholders purchase JWOD  products when required, as in the following cases.
section_title: Available Data, Though Limited, Can Be Used to Identify Potential Savings
paragraphs: Agency officials point to the lack of adequate data as a barrier to taking  steps to analyze purchase card activity. They raised concerns about their  ability to analyze purchase trends due to a lack of detailed information on  the specific products and services purchased, known as “level 3” data.  The banks that provide the agencies’ purchase cards generally do not have  such data. For example, our analysis of Interior’s fiscal year 2002  transaction data indicated that less than 15 percent of all transactions  included descriptions of the items and services purchased. Dun and  Bradstreet found that many merchants have not invested in the electronic  point-of-sale devices needed to transmit item descriptions along with other  transaction information. A common reason offered by major vendors for  not providing level 3 data is that their customers—the ordering agencies— have not requested it. Agency officials told us, however, that they have  made clear to the banks that issue their purchase cards that access to level  3 information would be very helpful to them in gaining an understanding  of what their cardholders are buying.
GSA and other agencies are pursuing initiatives to provide agencies better  data on their purchase card activity. GSA’s contracts with the banks that  provide purchase cards, for example, require summary and analytical  reports on agency purchase card activity, including information on the top  100 vendors by agency and on the types of vendors. According to the GSA  purchase card program manager, these reports were intended to provide  GSA with data it could use to help agencies gain insight into their purchase  card expenditures and identify opportunities to leverage their purchasing  power. The program manager indicated, however, that reports from the  banks have frequently not been provided, not been provided timely, or not  been provided in a format that facilitates analysis. For example, until the  most recent reporting period, GSA had not received even basic  information, such as the top 100 purchase card vendors, from some banks.  The GSA program manager is pursuing efforts to encourage the banks to  provide more useful reporting so that GSA will be able to provide more  effective assistance to agencies, such as negotiating point-of-sale  discounts with vendors. Other initiatives are also in place. GSA is working  with DOD and other agencies to determine what barriers limit the level 3  data agencies receive and to explore ways to overcome these barriers. In  addition, the Air Force Materiel Command is piloting a system intended to  accumulate more consistent and specific information on purchase card  transactions.
While the lack of level 3 data is a valid concern, agencies can use the  information that is available to start taking steps to get better prices. For  example, we obtained from the banks a listing of all fiscal year 2002  purchase card transactions for each agency we reviewed. Using this  listing, we summarized information on the vendors with whom  cardholders at each agency had done $1 million or more in business during  fiscal year 2002. All agencies have access to these data. When we shared  this information with agency officials, several indicated that simply being  able to identify major vendors was a useful first step in identifying  opportunities to leverage their buying power.
Several agencies have taken the initiative to begin analyzing their purchase  card expenditures to identify opportunities for additional savings,  although these initiatives in some cases had limitations, as in the following  examples.
While analyses conducted by agency components can provide useful  insight into opportunities to leverage their purchasing power, they do not  reflect the bigger picture of agencywide expenditures or agencywide  opportunities to capture savings.
Several of the agency discount agreements we reviewed require vendors to  report periodically on sales made under discount agreements.  This  information can help agencies determine whether cardholders are taking  advantage of favorable pricing.
section_title: Conclusions
paragraphs: Agencies have just begun to tap the potential of leveraging the purchase  card for better pricing. If greater management attention were paid to  capitalizing on the opportunities to obtain more favorable prices,  hundreds of millions of dollars in savings could be realized annually. Given  the volume of purchase card activity, agencies could take advantage of  these opportunities without sacrificing the ability to acquire items quickly  or compromising socioeconomic goals. If agencies were to build on their  initial experiences and duplicate these steps governmentwide, they would  have the opportunity to save the taxpayer almost $300 million annually.  OMB should take the lead in focusing management attention on this  opportunity and guiding agencies towards capturing these savings.
section_title: Recommendations for Executive Action
paragraphs: We are making the following eight recommendations to OMB, GSA, and  the agencies we reviewed:  To focus governmentwide management attention on taking advantage of  opportunities to achieve savings on purchase card buys, we recommend  that the director of OMB take the following two actions:    Require agencies to report—either through the current quarterly  reports or another mechanism—on the steps they are taking to  leverage their purchase card buys in areas such as    negotiating discount agreements with major purchase card vendors,  implementing initiatives to better inform cardholders of  opportunities to achieve savings,    conducting analyses to identify such opportunities, and    assessing, through mechanisms such as vendor reports, whether  cardholders are taking advantage of savings opportunities.
Annually report to Congress on the government’s progress in  identifying and taking advantage of opportunities for savings on  purchase card micropurchases.
To assist agencies in identifying opportunities to achieve savings on  purchase card buys and to facilitate cardholder access to discounted  prices, we recommend that the administrator of GSA direct the purchase  card program manager to take the following three actions    continue efforts to improve reporting by the banks that provide  purchase cards so that GSA will have the data it needs—including basic  information such as top vendors and level 3 data where feasible—to  assist agencies in effectively identifying opportunities to leverage their  purchasing power;    work with GSA’s acquisition center contracting officers to pursue  point-of-sale discounts with large vendors; and    as part of the existing cross-agency forums for purchase card  discussions, encourage agencies to share information on their  successes in leveraging the purchase card to obtain better prices as  well as strategies for overcoming challenges that could hinder  agencies’ ability to achieve purchase card savings.
To more effectively capture the significant potential for savings that  agencies can achieve, we recommend that the Secretaries of Agriculture,  Defense, the Interior, Justice, Transportation, and Veterans Affairs direct  their purchase card program managers—in coordination with officials  responsible for procurement, finance, small business utilization, and other  appropriate stakeholders—to take the following three actions:    Develop mechanisms that provide cardholders more favorable pricing  from major vendors or for key commodity groups, such as agencywide  discount agreements with major vendors or simpler mechanisms that  capitalize on trade discounts offered by local merchants. In designing  such mechanisms, purchase card program managers should consider  the need to  take full advantage of competitive forces to assure the most  favorable prices,    ensure that agreements cover an adequate range of the products  cardholders are likely to buy,    coordinate negotiation activities within the department to reduce  duplication of effort, and    ensure that agreements appropriately support agencies’ efforts to  meet governmentwide socioeconomic requirements.
Revise programs for communicating with cardholders to ensure that  the programs provide cardholders the information they need to  effectively take advantage of mechanisms the agency has established to  achieve savings. Such information would include telling cardholders  about  the GSA Schedule contracts or agency-specific agreements chosen  as vehicles for leveraging the agency’s buying power, and    procedures cardholders should follow to access and use these  vehicles when they plan to make a purchase from these vendors.
To the extent possible using available data, such as information on  major vendors, analyze purchase card expenditure patterns to identify  opportunities to achieve additional savings and to assess whether  cardholders are getting good prices. Where available data are not  sufficient for such analyses, investigate the feasibility of gathering  additional information. In evaluating options for gathering additional  information, purchase card program managers should carefully  consider the costs and benefits of obtaining comprehensive  information and imposing unwarranted burdens on cardholders,  vendors, and other stakeholders.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from DOD, GSA,  the Department of the Interior, and the Department of Veterans Affairs.   We received comments via e-mail from the Departments of Agriculture and  Transportation. The Department of Homeland Security, the Department of  Justice, and OMB did not provide comments.
DOD concurred with our recommendation that the department develop  mechanisms that provide cardholders more favorable prices, but stated  that negotiating agencywide discount agreements might impede achieving  the department’s small business goals. Accordingly, DOD intends to  emphasize installation-level initiatives to obtain discounts from local  vendors and to pursue point-of-sale discounts with larger vendors. DOD  also concurred with our recommendation to revise programs for  communicating with cardholders and partially concurred with our  recommendation to analyze purchase card expenditure patterns to identify  opportunities for savings. DOD stated that, until data on specific  purchases is widely available, the feasibility of developing informed and  cost-effective strategic sourcing decisions is questionable. Our  recommendation, however, contemplated agencies using readily available  data to gain insight into their purchase card expenditure patterns. Analysis  of available purchase card transaction data could provide agencies a  clearer understanding of which vendors are significant to their purchase  card program.  DOD’s written comments are reproduced in appendix II.
GSA concurred with our findings and recommendations and stated that  the report provides an objective analysis of the savings that agencies can  obtain through the Schedule program and purchase card program.  GSA’s  written comments are reproduced in appendix III.
The Department of the Interior did not specifically agree or disagree with  our recommendations, but offered several observations on our report.   The department took exception to our statement that lack of management  focus and oversight had led to agencies’ not taking advantage of  opportunities to capture purchase card savings. This statement was  intended to portray the general picture at all the agencies we reviewed,  and our report discusses the instances we noted where agencies had  focused management attention on capturing savings and the benefits  agencies obtained by doing so. Interior also commented that our  recommendation that departments develop mechanisms to provide  cardholders with more favorable prices should be directed to GSA rather  than Interior, and that GSA’s buying programs should be revised to  incorporate greater price reductions and be expanded to cover more  vendors. We did not audit GSA’s buying programs as part of this report;  however, recognizing the benefits of point-of-sale discounts, we have  made a recommendation to GSA to pursue these discounts with large  vendors.  At the same time, we found that individual agencies could  achieve savings in the short term by negotiating discount agreements, such  as Interior has done for information technology products.  Interior— pointing to convenience and simplicity as key benefits of the purchase  card program—also commented that we should further highlight in our  recommendations the need for purchase card managers to take into  account the costs and benefits of obtaining comprehensive information  and imposing unwarranted burden on cardholders and others.  We believe  that our recommendations, as stated, afford program managers sufficient  flexibility to develop mechanisms for more favorable pricing while not  inconviencing cardholders. Finally, Interior recommended that we  incorporate into the report a table of “best practices.” The scope of our  work did not include gathering information to verify that the agreements  agencies have negotiated represent best practices.  Interior’s written  comments are reproduced in appendix IV.
The Department of Veterans Affairs concurred with our recommendations  and cited a number of planned and ongoing actions intended to provide  cardholders with more favorable prices.  In addition, Veterans Affairs  expressed concern that our recommendation to OMB would impose a  cumbersome and costly data-gathering burden on agencies. Veterans  Affairs is apparently interpreting our recommendation as requiring  agencies to report on discounts obtained on specific transactions. We  agree that the availability of data to prepare such a report may be an issue  and therefore are not recommending that OMB require such a report.  Instead, we recommend that OMB require agencies to report on initiatives  they have taken, such as analyzing purchase card expenditure patterns and  negotiating discount agreements that cardholders can use. Veterans  Affairs also endorsed our recommendation that GSA pursue point-of-sale  discounts with large vendors and suggested that GSA consider  encouraging vendors to program point-of-sale devices to recognize that  federal purchases are exempt from sales taxes. Veterans Affairs’  comments are reproduced in appendix V.
In comments sent via e-mail, the Department of Agriculture concurred  with our recommendations and outlined a number of steps the department  will take to implement them.  Commenting on our finding that  Agriculture’s discount agreement for office supplies did not take full  advantage of competitive forces to ensure the most favorable prices,  Agriculture stated that it reviews this agreement annually and will re- compete the agreement when these annual reviews indicate that re- competition is warranted. We believe that periodic—but not annual—re- competitions would provide the best information for assessing whether  the agreement continues to offer the most advantageous prices for office  supplies.
In comments sent via e-mail, the Department of Transportation did not  specifically agree or disagree with our recommendations, but noted that  our report could benefit by explicitly recognizing that the greatest savings  could by achieved by pooling the buying power of the entire federal  government. We agree that leveraging governmentwide buying power  would result in the greatest savings. While this would be the best end- state, we see this as a long-term effort with many obstacles to be  overcome before it can be achieved.  Our work identified initiatives— relatively simple to implement—that agencies can begin now to start  achieving savings. In addition, Transportation commented that our report  does not adequately depict the fundamental difficulties of complying with  JWOD purchase requirements while at the same time achieving best value.   We believe our report appropriately reflects the concerns agency officials  expressed to us about complying with socioeconomic requirements,  including JWOD, and we provide several examples of how some agencies  have taken steps appropriately structure discount agreements so that they  help ensure that cardholders purchase JWOD products when required. In  addition, Transportation commented that the report should discuss some  of the positive accomplishments of the purchase card program. Our report  acknowledges that the purchase card has fundamentally changed the way  agencies make small, routine, purchases and we believe the report  appropriately reflects the administrative cost savings and convenience  purchase cards have provided. Finally, Transportation suggested a  technical correction, which we have incorporated in the report.
As arranged with your offices, 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  Secretaries of Agriculture, DOD, Homeland Security, the Interior, Justice,  Transportation, and Veterans Affairs; the director of OMB; the  administrator of GSA; and other interested congressional committees. We  will provide copies to others on request.  This report will also be available  at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staffs have any questions about this report or need  additional information please call David Cooper at (202) 512-4841  (cooperd@gao.gov) or Gregory Kutz at (202) 512-9505 (kutzg@gao.gov).  Key contributors to this report are acknowledged in appendix VII.
section_title: Appendix I: Scope and Methodology
paragraphs: We reviewed laws and regulations relating to the purchase card program,  held discussions with GSA officials responsible for governmentwide  program management and OMB representatives responsible for program  policy and oversight, and reviewed governmentwide policy and guidance  for the program. We also performed our work at the Departments of  Agriculture, Defense (DOD), the Interior, Justice, Transportation, and  Veterans Affairs. These agencies accounted for over 85 percent of  governmentwide purchase card expenditures during fiscal year 2002.  Within DOD, we focused our work at the Departments of the Army, the  Navy, and the Air Force, which represented 92 percent of all DOD  purchase card expenditures during fiscal year 2002.  We contacted all  major component agencies—referred to as major commands in the Army  and Air Force and as major claimants in the Navy. At the civilian  departments, we contacted the component agencies that were the largest  users of purchase cards.
To determine whether agencies had taken advantage of opportunities to  obtain more favorable purchase card prices, we held discussions with  officials responsible for the purchase card program at each department to  obtain information on (1) efforts to identify opportunities to obtain more  favorable prices, (2) efforts to negotiate discount agreements that made  more favorable prices available to cardholders, and (3) guidance and  training provided to cardholders to inform them of opportunities to obtain  more favorable prices. We reviewed policy and guidance manuals, training  materials, and other agency documentation that provided information on  these topics. We also contacted the components responsible for the largest  volume of purchase card activity within each department. Finally, to  assess cardholder buying practices and gain insight into whether they  were obtaining favorable prices, we selected a limited number of fiscal  year 2002 micropurchase transactions at each department for review. We  obtained and reviewed documentation relating to the transactions, such as  invoices, and discussed the transactions with cardholders.
To identify the reasons why agencies had not taken advantage of  opportunities to obtain more favorable purchase card prices, we discussed  these issues with officials responsible for departmental purchase card  programs and reviewed applicable agency documentation.
To select transactions for review, we first obtained data files of fiscal year  2002 purchase card transactions from the banks that provided purchase  cards to each of the departments reviewed. (In the case of the military  services, we obtained data files from the Defense Manpower Data Center,  which had previously obtained the files from the applicable banks.) We  reviewed these files to determine that they did not contain any apparent  erroneous data and then summarized the total number and dollar value of  transactions for each department. We reconciled these totals with totals  reported by GSA for each department. Having determined that the data  files were generally reliable, we summarized the data to determine the  total number and dollar value of transactions by vendor and identified  major purchase card vendors at each department. We defined major  purchase card vendors as those vendors where the department had  purchase card expenditures of $1 million or more in fiscal year 2002.
We then combined the data on major purchase card vendors for the eight  departments and summarized the number and dollar value of transactions  by vendor to identify those vendors where the eight departments had the  highest purchase card expenditures. From this combined listing, we  determined that vendors providing information technology products,  office supplies, and cellular telecommunications services were among the  top vendors at all eight departments. Accordingly, we selected two of the  top information technology vendors, two of the top office supply vendors,  and two of the top cellular telecommunications service providers as the  vendors for which we would select transactions for review.
For each department, we identified the population of micropurchase  transactions with the selected vendors. If a department did not have $1  million or more in micropurchase transactions with the vendor, we  excluded that vendor’s transactions from further analysis at that  department. We then identified, for each vendor, the subpopulation of  micropurchase transactions valued at $100.00 or more for information  technology and office supply vendors or $25.00 or more for cellular  telephone service providers at each department. We selected—using a  random selection process—3 transactions with each vendor at each  department for a total of 135 transactions. Although these transactions  were selected at random, we cannot project the results of the selected  transactions to the population of transactions.
To assess the prices cardholders had paid on a transaction, we ascertained  whether the vendor had a GSA contract or agency-negotiated discount  agreement applicable to the items or services purchased. We obtained  information on prices for the items or services under these contracts or  agreements and used these prices as benchmarks for assessing whether  the cardholder had obtained favorable pricing. In addition to making these  price comparisons, we contacted the cardholders to discuss the  transaction and gain insight into their buying practices and awareness of  vehicles that provide favorable pricing.
To assess the potential magnitude of savings that agencies can achieve by  negotiating discount agreements with their major purchase card vendors,  we considered the discounts individual departments had obtained on the  agencywide discount agreements we reviewed during our work. Discounts  offered under these agreements varied—for example, 8 percent under an  Interior agreement for desktop computers, 10 percent under an  Agriculture agreement for office supplies, and 35 percent under an Interior  agreement for laptop computers. We considered the 10 percent discount  that Agriculture obtained to represent a reasonable and conservative  benchmark for the potential discounts departments could obtain from  their major vendors.
Our analysis showed that the agencies reviewed spent about $2.8 with  major purchase card vendors in fiscal year 2002. Although some of these  expenditures would have been covered by discount agreements the  departments had negotiated, we found that agency discount agreements  often did not cover all the items that cardholders purchased from those  vendors. Further, we found that cardholders did not always know of, or  take advantage of, the discounts agreements agencies had negotiated. A  number of the transactions we reviewed were made at retail prices. If the  agencies we reviewed obtained discounts of about 10 percent on the $2.8  billion spent with their major purchase card vendors, their savings would  amount to about $282 million. Actual discounts would vary with factors  such as sales volume, profit margin, and competitiveness of the industry. If  agencies obtained discounts equivalent to the high end of the range we  saw during our work, savings would amount to almost $1 billion, although  it is unrealistic to expect savings of this magnitude. Nonetheless, we  believe it is reasonable to anticipate that the federal government could  save hundreds of millions of dollars if agencies negotiated discounts with  major purchase card vendors.
Finally, we engaged the Dun and Bradstreet Corporation to perform a  spend analyses of Interior’s fiscal year 2002 purchase card transactions to  illustrate how a detailed analysis could begin to identify opportunities for  purchase card savings. In addition to performing analyses of Interior’s  purchase card transactions, Dun and Bradstreet gathered information on  the costs and benefits to merchants and other stakeholders of providing  “level 3” data—which includes descriptions of the items and services  purchased—and on barriers to vendors providing this information.
We conducted our review between March 2003 and January 2004 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: Comments from the General Services Administration
section_title: Appendix IV: Comments from the Department of the Interior
section_title: Appendix V: Comments from the Department of Veterans Affairs
section_title: Appendix VI: Information on Purchase Card Expenditures
section_title: Appendix VII: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to the individuals named above, Robert Ackley, Victoria  Klepacz, James Moses, Jerrod O’Nelio, Monty Peters, Jose Ramos, Harold  Reich, Sanford Reigle, Kenneth Roberts, Sylvia Schatz, Quan Thai,  Najeema Washington, and Gary Wiggins made key contributions to this  report.
section_title: Related GAO Products
paragraphs: Products concerning purchase card internal controls:  Purchase Cards: Steps Taken to Improve DOD Program Management,  but Actions Needed to Address Misuse, GAO-04-156 (Washington, D.C.:  Dec. 2, 2003).
Audit Guide: Auditing and Investigating the Internal Control of  Government Purchase Card Programs, GAO-04-87G (Washington, D.C.:  Nov. 1, 2003).
Forest Service Purchase Cards: Internal Control Weaknesses Resulted in  Instances of Improper, Wasteful, and Questionable Purchases,   GAO-03-786 (Washington, D.C.: Aug. 11, 2003).
HUD Purchase Cards: Poor Internal Controls Resulted in Improper and  Questionable Purchases, GAO-03-489  (Washington, D.C.: Apr. 11, 2003).
FAA Purchase Cards: Weak Controls Resulted in Instances of Improper  and Wasteful Purchases and Missing Assets, GAO-03-405  (Washington,  D.C.: Mar. 21, 2003).
Purchase Cards: Control Weaknesses Leave the Air Force Vulnerable to  Fraud, Waste, and Abuse, GAO-03-292  (Washington, D.C.: Dec. 20, 2002).
Purchase Cards: Navy Is Vulnerable to Fraud and Abuse but Is Taking  Action to Resolve Control Weaknesses, GAO-02-1041 (Washington, D.C.:  Sept. 27, 2002).
Purchase Cards: Control Weaknesses Leave Army Vulnerable to Fraud,  Waste, and Abuse, GAO-02-732  (Washington, D.C.: June 27, 2002).
FAA Alaska: Weak Controls Resulted in Improper and Wasteful  Purchases, GAO-02-606  (Washington, D.C.: May 30, 2002).
Government Purchase Cards: Control Weaknesses Expose Agencies to  Fraud and Abuse, GAO-02-676T (Washington, D.C.:  May 1, 2002).
Purchase Cards: Control Weaknesses Leave Two Navy Units Vulnerable  to Fraud and Abuse, GAO-02-32  (Washington, D.C.: Nov. 30, 2001).
Products concerning strategic purchasing:  Contract Management: Restructuring GSA’s Federal Supply Service and  Federal Technology Service, GAO-04-132T (Washington, D.C.:  Oct. 2,  2003).
Best Practices: Improved Knowledge of DOD Service Contracts Could  Reveal Significant Savings, GAO-03-661 (Washington, D.C.: June 9, 2003).
Contract Management: Taking a Strategic Approach to Improving  Service Acquisitions, GAO-02-499T (Washington, D.C.: Mar. 7, 2002)
Best Practices: Taking a Strategic Approach Could Improve DOD’s  Acquisition of Services, GAO-02-230  (Washington, D.C.: Jan. 18, 2002)