Originally published in Contract Management magazine
Written by Tony Fuller and Bill Bressette
Many contractors don't understand the disclosures that form the basis for their negotiated prices, but a company's failure to keep those disclosures current may expose it to audit risk and financial liability when the Office of Inspector General (OIG) comes knocking.
GSA Audit Rights
The GSA Schedules are multiple award contracts that essentially allow a company to negotiate a price for goods and services at which all federal agencies can buy. The government's intent was to streamline the procurement process by negotiating "fair and reasonable" prices at a discount from the vendor's commercial price list. Of course, the negotiation is predicated upon a current, accurate, and complete disclosure of the contractor's commercial pricing practices (i.e., full disclosure of your pricing and discounting practices to all customers or customer groups). These disclosures need to be maintained throughout the life of the contract to help the government ensure that its pricing remains fair and reasonable.
The government's audit rights generally flow from two clauses from the Federal Acquisition Regulation (FAR) and the General Services Administration Regulation (GSAR), respectively-FAR 52.215-20, Requirements for Cost and Pricing Data or Information Other than Cost and Pricing Data; and GSAR552.215-71, 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...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 post-award audit. The primary objective of a pre-award audit is to ensure that the option pricing disclosures are current, accurate, and complete so the GSA CO can effectively negotiate fair and reasonable pricing for the option extension period. A post-award audit focuses on historical contract performance, including Price Reductions Clause (PRC) compliance, Industrial Funding Fee (IFF) payment, over-billings, and compliance with other contract terms and conditions. Unfortunately, the lines of demarcation between pre-award and post-award audits can be blurred. Contractors should be aware that compliance risk associated with past performance often surfaces during pre-award audits, even though the stated purpose of the pre-award audit is to review disclosures for the future contract period.
Two key GSAR clauses carry the greatest financial risk. The first clause is GSAR 552.238-75, Price Reductions, which establishes a relationship between the GSA price and the pricing offered to the identified customer-often referred to as the basis of award (BOA) customer. The government will often begin negotiations by attempting to identify your best or most favored customer (i.e., the customer to which you offered the deepest discount from your list price). The contracting officer's goal is to negotiate the same or better price for the federal government. Obviously, since it is a negotiation, companies will often identify a customer or customer group that is most similar to the GSA ordering agencies. There are a number of strategies that one can use here, but some of the more common arguments center around dollar volume of sales for similar products and services. Once identified, this customer or customer group becomes the basis of award for your GSA Schedule contract.
In essence, the government defines its negotiated discount (or price) relative to what is being offered to the BOA customer. If a contractor offers a better price, discount, or concession to the BOA 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. In short, the dollars can add up quickly for high-volume contractors.
The second important clause is GSAR 552.215-72, Price Adjustment, Failure to Provide Accurate Information. This clause allows the government to reduce prices if it finds that a contractor failed to provide current, accurate, and complete information that the government relied upon to negotiate prices before contract award. Adverse audit findings may result in false claims allegations and a variety of undesirable outcomes, not the least of which are large financial settlements or a referral to the Department of Justice.
Critical Compliance Considerations
Given the financial risk associated with noncompliance, government contractors should look at the option extension as an opportunity to conduct a thorough compliance review and update their pricing disclosures. Such a review is often beyond the capabilities of in-house resources, and retaining outside experts helps ensure that a thorough and objective review is performed that will minimize future compliance risk.
Perform a Broad GSA Schedule Compliance Assessment
This is an ideal time for contractors to revisit all key areas of GSA Schedule compliance, particularly in the areas of PRC and quarterly sales/IFF administration. Contractors should take the time to test the preventive and detective controls established within their systems to ensure that they are working as planned. Preventive controls are typically system controls designed to ensure a company follows an established policy or procedure.
One such control might consist of a required field in the order entry system that ensures sales personnel include GSA Schedule contract information at the time of order placement. This helps to identify a GSA sale up front, and gives the contractor some level of confidence in the GSA sales numbers (and consequently, the IFF remittance) that are reported on a quarterly basis. Detective controls may, for example, include a periodic review of sales data to identify PRC triggering deals that may not have been reported. Detective controls are designed to ensure that the preventive controls-including policies, procedures, and training-are functioning as intended.
Policies and processes also should be reviewed to make certain that they adequately address the compliance concerns within the context of a contractor's current organizational structure and previous contract disclosures. Changes in business unit structure/operations, sales, or marketing practices-and certainly changes driven by mergers and acquisition-can often render an existing policy or process ineffective. For example, a contractor may have an adequate process in place for tracking all GSA contract sales in its current system. However, through acquisition, the company acquires a business unit with different systems that will not be integrated or migrated for some period of time. If this unit will make use of your GSA Schedule, it's likely that your current process for identifying sales in your system may not be capturing GSA sales made through the newly acquired unit.
Finally, contractors should review the efficacy of their training programs and periodic internal reviews. An annual compliance review is a good way to test your policies, procedures, and training. Personnel subject to periodic training on document retention, for example, should be expected to have maintained the appropriate sales files required by your GSA Schedule contract. During an annual compliance review, validating that the policies surrounding document retention are actually achieving the desired results will do two things: (1) It will identify the gaps between policy and practice; and (2) In so doing, it will identify any weaknesses in your training program.
Conduct a Historical Pricing Review and Update GSA Pricing Disclosures
A detailed review of a company's pricing practices during the preceding 12 months will frequently reveal that discounting policies and practices have changed, particularly if they have not been closely monitored during the contract term. It is therefore recommended that contractors not only update their commercial sales practice format (CSP-1), but that they also draft a detailed narrative carefully describing all of their standard practices as defined in written policies/procedures, and the nonstandard practices as revealed by the historical pricing analysis.
The CSP-1 format is a standard form in every GSA solicitation. While it requires you to explain all deviations from your "standard" practices, contractors often provide just enough text to answer the question. We often recommend that a comprehensive narrative be developed and attached to the CSP-1 as a material part of the pricing disclosures. This is the place to eliminate all ambiguity surrounding what you do and don't do when it comes to your commercial customers.
The pricing narrative can also be used to eliminate any potential misinterpretation surrounding what the contractor understands the price/discount relationship to be and how the PRC compliance will be handled. This allows the contractor to disclose all pertinent information to the GSA CO and removes ambiguities that might otherwise be interpreted in a disadvantageous way in the future.
Although the compliance review and historical pricing analysis can be time-consuming, the effort pales in comparison to management's distraction and the potential financial impact of an adverse audit report from the GSA OIG. For large contractors who are more likely to be subjected to pre-award audits, the data and analysis produced during such an internal review will help expedite the performance of the on-site portion of the audit.
Current Trends in Pre-Award Audits
Although no two audits are alike, we have observed several key trends which GSA Schedule contractors should be aware of if chosen for a pre-award audit. The following are just a few of the challenges we have observed during recent GSA OIG pre-award audits.
The lead time for OIG's pre-award audit notification can vary significantly based on many factors, which is why it is important- especially for large, high-volume contractors- to start preparing well in advance of the expiration of the current contract term (e.g., performing the compliance and historical pricing review). In the past 12 months, we have seen notification lead times that generally range from three to four months prior to option exercise. In these cases, the OIG has expected the contractor to respond very quickly to the initial information request, and the field work has begun within a month of the letter notification.
The OIG has become increasingly inflexible with regard to the format and content of the system data it requests before beginning field work. While most companies keep the various data elements required by the OIG, they are typically not maintained in a format that is GSA "OIG-friendly." Many contractors find themselves creating custom queries and developing reports in a format which they do not routinely maintain in order to satisfy the initial information request. OIG rarely understands the difficulties associated with these types of demands, and related delays may translate into qualifications in the audit report.
We suggest contractors spend the time up front to review the data closely before providing it to the auditors. Many elements of the initial data request letter are common to each and contractors may consider obtaining a copy of an example letter to help them prepare ahead of time.
For services contractors, OIG is particularly focused on issues related to the proper assignment of personnel to GSA Schedule labor categories. Unfortunately, many contractors overlook the importance of mapping personnel from their standard internal labor categories into the GSA Schedule labor categories. OIG looks at both the qualifications of personnel assigned as well as the pricing of those personnel to other customers.
For example, OIG might not be pleased to find that the consultant you regularly sold to the government at the GSA price of $120 per hour was frequently sold to your commercial clients (for services similar in scope) at a discounted rate of $100. This is an extremely challenging compliance issue that we see causing services contractors more problems than any other audit area. A best practice is to perform the labor category mapping analysis internally before the audit field work begins.
All contractors should expect more scrutiny from the auditors regarding their BOA customers. Just because a contractor was successful in negotiating a specific set of BOA customers with the CO does not mean it will pass the OIG's review. The auditors will look closely at the BOA to assess whether it provides the foundation for ensuring that prices remain fair and reasonable during the contract term. Contractors should consider alternative, and potentially broader, BOA customer groups as a fallback position in case adverse findings surface in the auditor's report.
In general, you can expect OIG to be looking for a very broad BOA with which you do at least the same volume of sales as you push through your GSA Schedule on an annual basis. If the BOA is limited to a few customers, or if it is limited to a small category or class of customers, you can expect OIG to be looking for a suitable replacement from the sales data you provide.
PRC compliance has always been the biggest challenge for GSA Schedule contractors. Some contractors, particularly larger contractors, have often attempted to tailor the PRC by disclosing certain exceptions that would be excluded from triggering the clause or by proposing a specific approach that may be different than the literal interpretation of the clause.
Our recent experiences indicate that the OIG auditors are looking more closely at contractors' PRC disclosures, particularly the frequency of transactions representing "nonstandard" discounts. We recommend contractors take advantage of the option extension to beef up their disclosures so that exclusions, if any, are clearly articulated.
Finally, OIG has the tendency to communicate potential adverse findings to the GSA CO before the pre-award review is complete and the draft audit report has been generated. In some instances, OIG has gone so far as to recommend contract actions prior to the completion of its review and receipt of all requested information from the contractor. The risks here speak for themselves, and ultimately, it is incumbent upon the contractor to press for an exit conference, the opportunity to provide a management response to any findings, and to maintain good communications with their GSA CO at all times.
Conclusion
As seen in several recent high profile matters brought on by the GSA OIG and Department of Justice, the cost of noncompliance with GSA Schedule contract terms and conditions can be severe. Among the more highly publicized of these is the one in which Oracle Corporation settled False Claims Act allegations by agreeing to a $98.5 million settlement.
All contractors, regardless of size, should be prepared for the eventuality of an audit. When the time comes to exercise the option to extend a contractor's GSA Schedule contract, they should take the opportunity to confirm that their practices are properly disclosed and that they have an effective compliance program in place. Although the additional disclosures that result may raise questions and complicate things in the near term, it will go a long way in ensuring long-term GSA Schedule contracting success.
About the Authors
Tony Fuller is a partner with Beers + Cutler, leading its government contract consulting practice. Mr. Fuller is a member of the Tysons Corner Chapter of NCMA, a co-chair of the American Bar Association's commercial products and services committee, and a member of the Project Management Institute. He can be contacted at tfuller@beersandcutler.com.
Bill Bressette is a senior manager with Beers + Cutler, focusing on GSA Schedule contracting. Mr. Bressette is a member of the Tysons Corner Chapter of NCMA, where he serves as the vice president of communications on the board of directors. He is also a member of the American Bar Association, Section of Public Contract Law. He can be contacted at wbressette@beersandcutler.com.
Beers + Cutler provides a wide range of government contract consulting services, including GSA Schedule proposal preparation, contract administration, compliance, and audit support.