Written by Tony Fuller and Bill Bressette
Planning to extend your GSA Schedule contract for another five year term any time soon? The option extension is a relatively routine administrative process, right? Not necessarily! GSA often chooses to audit contractors in connection with their contract option extensions. Because your business practices inevitably change during the course of a five year GSA contract term, the contract option presents an excellent opportunity to review compliance and update pricing disclosures to mitigate audit and compliance risks. If you do not receive pre-award audit notifications you might think little of this milestone, but you may regret the lack of consideration when you are chosen for audit by GSA.
GSA Audit Rights and Remedies
Let's begin with a quick review of the fundamentals. Each GSA Schedule contract contains the "Evergreen" clause (I-FSS-163). This provides the Government with the option to extend the term of GSA contracts for five years. The contract option may be exercised up to three times, resulting in a total GSA contract term of 20 years.
The Government's audit rights generally flow from two clauses - FAR 52.215-20 and GSAR 552.215-71 Examination of Records by GSA. The former "grants the Contracting Officer (CO) or an authorized representative the right to examine...books, records, documents, papers, and other directly pertinent records to verify the pricing, sales and other data related to the supplies or services proposed in order to determine the reasonableness of price(s)." The latter provides the Government with the right to access all records related to the GSA Schedule contract during contract performance and up to three years after final payment on the contract.
The Government's audit rights are generally exercised in the form of a pre-award or a post-award audit. The main purpose of a pre-award audit is to ensure that the option pricing disclosures are current, accurate and complete. This audit occurs before the contract base period or option term is awarded. A post-award audit has a broader scope which covers Price Reductions Clause (PRC) compliance, Industrial Funding Fee (IFF) payment, over-billings and compliance with other contract terms and conditions, including the Trade Agreements Act (TAA), scope of contract and the proper use of labor categories. If warranted, a GSA post-award audit may also include a review of the information submitted before the contract was awarded to determine whether all disclosures were current, accurate and complete.
Two key clauses carry the greatest financial risk. The first clause is GSAR 552.238-75 Price Reductions, which establishes a relationship between your GSA price and the pricing offered to the identified customer(s) - often referred to as the "Basis of Award" customer(s). If you offer a better price, discount or concession to the identified customer(s) that disturbs the defined discount relationship, the same deal must be offered to GSA with the same terms and conditions and for the same period of time. If price reductions are identified by GSA during an audit, they may be applied retroactively to all GSA transactions from the time of the initial incident. The dollars can add up quickly.
The second important clause is GSAR 552.215-72 Price Adjustment - Failure to Provide Accurate Information. This clause allows the Government to reduce your prices if it finds you failed to provide current, accurate and complete information which the government relied upon to negotiate prices before contract award. Adverse audit findings resulting in defective pricing and false claims may result in a variety of costly outcomes, not the least of which is a large financial settlement with GSA.
The GSA Option Process and Pre-Award Audits
As the contract option period approaches, you will typically receive a letter from the GSA CO providing a timeline and instructions for preparation of the option package. The timing of this letter may vary, so you should conduct your own review and prepare the option package well in advance of contract expiration. Either before or after the option package disclosures are submitted, you may also be notified by the GSA Office of Inspector General (OIG) of an intent to conduct a pre-award audit. Although the primary purpose of the audit is to examine pricing disclosures, the scope may broaden to include pricing practices and contract compliance for the entire contract period.
The GSA OIG will typically ask for 12 months of sales data in electronic format which it reviews for prices and discounts relative to commercial list prices. Auditors will review samples of source documents to validate the accuracy of the system data and also to understand any relevant concessions or other terms/conditions. For service contractors without a commercial price list, GSA will typically look at pricing extended to comparable commercial customers and/or assess the adequacy of your cost build-up approach. In any event, your option will not be awarded until the pre-award audit has been completed.
While the stated purpose of the pre-award audit may seem relatively innocuous, the lines of demarcation between pre-award and post-award audits are often blurred. You may find that your pre-award review broadens far beyond what is necessary to determine that the Commercial Sales Practices disclosures submitted for the option period are accurate. Furthermore, findings uncovered in a pre-award audit may trigger a formal post-award audit review. A post-award audit typically requires you to submit electronic sales data that covers the period beginning 12 months prior to award. For many schedule contractors, the challenges associated with responding to the auditor's initial data request alone may seem insurmountable.
As we have seen in several recent high profile settlements, the cost resulting from false claims and defective pricing allegations can be severe. Depending on the nature and severity of problems discovered during an audit, the matter may also be referred by GSA to the Department of Justice, bringing the possibility of other civil and criminal penalties, including treble damages and suspension and debarment. You should not underestimate the seriousness of the obligations you assume when entering into any contract with the Government. There are several steps, however, you can take to minimize risk at the time of option exercise.
GSA Option Extension Best Practices
Given the audit and compliance risks, you should look at the option extension as an opportunity to keep your pricing disclosures current and make other necessary modifications to your GSA contract. Below are a few ideas you should consider taking to minimize compliance risks at the time of the GSA option extension.
Conduct an Internal GSA Compliance Review
You should review your practices annually, but at the very least conduct a comprehensive review of your pricing practices and GSA compliance no later than six months prior to the expiration of the current contract period. Sales data for all customers should be analyzed to determine whether or not there have been any changes to the commercial sales practices previously disclosed on the Commercial Sales Practice Format (CSP-1). Remember, the CSP-1 is used by GSA to negotiate pricing and it generally serves as the foundation for the negotiation of the Basis of Award customer(s). The CSP disclosures and any accompanying narrative should be carefully written and, as always, be current, accurate and complete. In addition to reviewing the pricing and discounting data, the following areas should be assessed for compliance:
These are several of the critical areas you should examine at the time of option extension. Starting this process early will allow you to understand any potential audit risks prior to the window in which a pre-award audit might occur.
Update GSA Pricing Disclosures
A thorough review of your pricing practices may reveal that they have changed, particularly if they have not been closely monitored during the contract term. Now is the time to update your CSP-1 and the narrative provided with your original pricing submission. Yes, the "narrative provided with your pricing submission!" Many contractors fail to take advantage of the opportunity to expand upon the information required by the CSP-1. Although you don't need to create an exhaustive narrative, you should carefully describe all of your pricing and discounting practices - your standard practices as defined in your written policies/procedures and your actual practices as reflected in the historical pricing analysis. This allows you to disclose all pertinent information to your CO and removes ambiguities that might otherwise be interpreted in a disadvantageous way in the future.
Assess Compliance Program Effectiveness
This is also an excellent time to revisit your GSA Schedule compliance practices. Take the time to test the preventive and detective controls you have established within your systems. Review your policies and processes to ensure that they adequately address the compliance concerns within the context of your current organizational structure. Take a look at your training program, your audit program and your resources to validate the efficacy of all three. And ask yourself these questions:
These are only a few of the compliance questions that should be considered by GSA Schedule holders large and small.
Conclusion
All contractors, regardless of size, should be prepared for the eventuality of an audit. While you may consider the likelihood to be relatively low, the consequences for non-compliance are high. When the time comes to exercise the option to extend your GSA Schedule contract, take the opportunity to confirm that your practices are properly disclosed and that you have an effective compliance program in place. Remember that your sales practices have likely evolved as your business has grown - take the time to conduct a self-audit. Understand the risks associated with holding a GSA Schedule and control them to the maximum practical extent. A few proactive steps on your part can go a long way toward ensuring a successful long term relationship with the GSA.
Beers + Cutler provides a wide range of government contract consulting services, including GSA Schedule proposal preparation, contract administration, compliance and audit support. For additional information contact:
Tony Fuller at 703 923 8688 or tfuller@beersandcutler.com or
Bill Bressette at 703 923 8624 or wbressette@beersandcutler.com