Contract Management: Opportunities to Improve Pricing of GSA Multiple Award Schedules Contracts
Released: 2005-03-14T00:00:00

Letter

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.