FPI is a government corporation that is managed by Justice’s BOP. Congress created FPI to serve as a means for managing, training, and rehabilitating inmates. Operating on a nonappropriated-fund basis, FPI employs federal inmates at its factories, which are located within federal correctional institutions, to produce goods and services that are sold for profit to federal agencies. Under the trade name UNICOR, FPI markets about 150 types of products and services that are produced by 5 major product divisions: (1) electronics, (2) furniture, (3) graphics and services, (4) metals, and (5) textiles. At the end of fiscal year 1997, FPI employed over 18,400 inmates at 96 factories nationwide and had sales totaling $513 million. FPI retains earnings from its sales to fund inmate vocational education programs, provide inmate accident compensation, acquire and maintain plant facilities, and maintain a reserve for future uses. Congress recognized that FPI would compete directly with private sector companies for the federal government’s business. However, Congress did not intend for FPI’s activities to impose a hardship on private industry, force private vendors out of business, or have a significant adverse effect on private sector employment. Aspects of the law aimed at achieving these ends mandate that FPI can sell only to federal agencies, and FPI is required, so far as practicable, to produce a diversified line of products so that no single industry will face an undue burden of competition. Also, as a correctional program, FPI is required to train and employ as many inmates as feasible using labor-intensive methods of operation. FPI’s enabling statute (18 U.S.C. 4124) requires federal departments, agencies, and government institutions to purchase products from FPI, at prices not to exceed current market prices, if FPI’s products meet their requirements and are available. FPI’s mandatory source status is discussed in FAR Subpart 8.6 relating to acquisition from FPI, which states that federal agencies shall purchase required products from FPI at prices not to exceed current market prices. However, neither FPI’s legislation nor the FAR defines current market price or specifies how such a price is to be established. The FAR also encourages federal agencies to purchase services from FPI to the maximum extent practicable, but FPI is not a mandatory source for services. Over the years, supporters and critics of FPI have debated FPI’s mandatory source status and whether FPI provides products at a fair and reasonable price. In fact, even before FPI was established as a government corporation in 1934, federal agencies were required to buy products from prison industries, and there were challenges to the prices charged by prison industries. For example, our research found that in December 1930, the War Department challenged the prison industries’ price for brushes because it was considerably higher than the prices the Department had previously paid private vendors. Responding to this pricing dispute, the Board of Arbitration for Prison Industries issued a decision in February 1931 that prison industries did not have to set its price at the lowest bid price in order to comply with the current market price requirement. In our 1985 report, we relied upon the Board’s 1931 decision and the corresponding Comptroller General’s Decision (11 Comp. Gen. 75, 77 (1931)), which cited the Board’s decision, in concluding that the law and regulations governing FPI do not specify where in the market price range FPI’s prices should fall. The report concluded that the only limit the law imposes on FPI’s price is that it may not exceed the upper end of the current market price range. A more sweeping opinion on FPI’s status and how it may price products sold to federal agencies was issued by Justice in September 1993. In this opinion, Justice found that the mandatory preference granted FPI is an exception to the rules that normally govern the way products are procured by federal agencies, and therefore, procurements from FPI are not covered by the FAR’s standard provisions. The opinion specifically concluded that the provisions of the FAR governing the submission of certified cost or pricing data; the calculation of a reasonable price, other than market price; and the general FAR provisions for resolving pricing disputes do not apply to FPI. Also, the Justice opinion noted that nothing in FPI’s charter, or in the FAR, suggests that governmental entities may ignore the mandatory priority simply because FPI will not accede to all requested contract terms during negotiation. Thus, if FPI does not provide certified pricing data or does not reduce its price to what a federal agency considers a reasonable price, the agency must still abide by the mandatory priority and buy available products from FPI. Finally, the Justice opinion concluded that FPI may use any method that reliably estimates current market prices, subject to dispute by potential customers prior to purchase and arbitration under the applicable law. FPI’s overall policy is that its products should be sold at prices that (1) will keep the corporation financially self-sufficient and (2) are not in excess of current market prices. Despite recognizing the statutory requirement that its product prices should not exceed current market prices, FPI’s May 1995 policy and procedures that were in effect when we began our review did not adequately define current market price. Nor did the procedures specify how many prices should be checked to constitute a market or how frequently prices should be checked. In addition, FPI’s policy did not require the product divisions to document the market surveys or other methods they used when setting prices for FPI’s products. Consequently, FPI management was not in a good position to ensure that its products were priced in accordance with the statutory pricing standard, current market price. FPI’s procedures did provide general guidance for the product divisions to use when establishing prices for products. The procedures instructed the product divisions to determine current market price in the following ways: When a comparable product is found on GSA’s Federal Supply Schedule, the schedule prices should be used to determine the current market price. When a comparable product is not on GSA’s schedule but is generally available from private vendors, a review of private sector prices (market survey) should be the basis for establishing a range of current market prices. When comparable products cannot be identified or FPI has been the sole provider, current market price should be determined using FPI’s cost to manufacture (including applicable overhead and administrative costs) plus a reasonable profit, as determined by FPI management. The procedures also stated that when federal agencies request waivers to purchase products from other sources, a waiver should not ordinarily be issued when FPI’s price does not exceed current market price. However, according to FPI senior officials, their management philosophy is to operate in a more customer-focused fashion, and, thus, they do not require federal agencies to buy their products simply because FPI has mandatory source status. These officials said that, in practice, when they cannot offer prices comparable to private vendors’ prices, they often grant waivers allowing federal agencies to purchase products from private vendors. However, the decision to grant or deny a waiver remains in FPI’s control. The FAR outlines the circumstances under which waivers are ordinarily available from FPI and informs federal agencies about where to request a waiver. Specifically, FAR Part 8.604(c) states that when a contracting officer believes that FPI’s price exceeds the market price, the matter may be referred to the appropriate product division or to FPI’s headquarters office in Washington, D.C. FAR Part 8.605(b) states that waivers to purchase products from a vendor other than FPI are not normally authorized simply because the vendor offers a lower price. If the FPI product division rejects the contracting officer’s request for a waiver, FPI procedures allow an appeal of the waiver denial to be made to the FPI Ombudsman in Washington, D.C. Disputes regarding price or other matters that cannot be resolved within FPI are subject to binding arbitration by a board consisting of the Attorney General, the Administrator of General Services, and the President or their representatives. FPI officials said that they did not believe the Board of Arbitration had met very often and that they were unaware of any disputes that had been appealed to the board since the 1960s. We were unable to identify any disputes that had been appealed to the board since the 1930s. We did not assess FPI’s waiver process or complete a comprehensive review of the circumstances under which waivers are requested and granted or denied because this was beyond the scope of our work. We did discuss waivers with FPI officials, including the Ombudsman who decides federal agencies’ appeals of waiver requests that were denied by FPI’s product divisions. The Ombudsman said that in fiscal year 1997, FPI received 11,895 waiver requests for an unknown number of products valued at approximately $302 million. FPI approved waiver requests for products valued at about $251 million, or 83 percent of the dollar value of the products for which waivers had been requested. The Ombudsman explained that a single waiver request may include multiple products that federal agencies wish to buy from sources other than FPI. She also said that price disputes do not normally result in a significant number of waiver requests. We queried an FPI database that contains information on waivers and determined that FPI granted or denied waivers on 29,387 products in fiscal year 1997. Waivers for 982, or 3 percent of these products, cited FPI’s price as the reason for the waiver request. Our analysis also showed that FPI approved waivers on 24,304, or about 83 percent, of the products, and 907 of these resulted because FPI could not meet the customers’ price requirements.