Contract Management: Agencies Can Achieve Significant Savings on Purchase Card Buys
Released: 2004-04-28T00:00:00

Letter

Background

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.

Agencies Generally Have Not Taken Advantage of Opportunities to Obtain Savings

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.

Scope and Coverage of Negotiated Discount Agreements Varied

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.

Most Guidance and Training Did Not Provide Practical Information on Obtaining Favorable Pricing

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.

Lacking Information, Cardholders Paid More Than Necessary

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.

Experience at Some Agencies Suggests Significant Savings Are Possible

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.

Lack of Management Focus Has Limited Efforts to Capture Savings

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.

Agencies and OMB Have Not Focused on Opportunities for Savings

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.

Steps to Capture Savings Need Not Burden Cardholders

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.

Concerns about Balancing Governmentwide Socioeconomic Policies with Purchase Card Savings Initiatives Can Be Mitigated

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.

Available Data, Though Limited, Can Be Used to Identify Potential Savings

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Appendix I: Scope and Methodology

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.

Appendix II: Comments from the Department of Defense

Appendix III: Comments from the General Services Administration

Appendix IV: Comments from the Department of the Interior

Appendix V: Comments from the Department of Veterans Affairs

Appendix VI: Information on Purchase Card Expenditures

Appendix VII: GAO Contacts and Staff Acknowledgments

GAO Contacts

Acknowledgments

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.

Related GAO Products

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)