Doing Business With Federal, State And Local Governments Through Multiple Award Schedules

Saturday, May 1, 2004 - 01:00

With the passage of the Federal Acquisition and Streamlining Act of 1994 and the Clinger-Cohen Act of 1996, Congress sought to encourage federal government agencies to purchase goods and services from private companies through the use of uncomplicated procedures; that is, procedures without all of the costly legal trappings and red tape that are commonly associated with government procurements.

These legislative initiatives require agency procurement officials, among other things, to acquire commercial items, as opposed to goods and supplies that are uniquely tailored to government specifications, in order to meet the agency's needs; to require prime contractors and subcontractors under existing agency contracts to incorporate commercial items as components of items supplied to the agency; to modify requirements in appropriate cases to ensure that agency requirements can be met by the use of commercial items; and to craft solicitation specifications in terms that enable and encourage bidders and offerors to supply commercial items, all to the maximum extent practical. Federal Acquisition Regulation (FAR) Part 12 sets forth the government's procurement policies and procedures designed to accomplish these objectives.

The Multiple Award Schedule program (MAS or Schedule) is by far the most common and widely-used procurement vehicle through which the federal government, and to some extent state and local governments, purchase commercial items through streamlined procedures. According to published reports, government's use of Schedules during Fiscal Year 2003 accounted for more than 50 percent of transactions over $5 million and in excess of $15 billion in government purchases of Information Technology (IT) products and services alone

Because of the relative ease with which government purchases can be made, Schedules have gained acceptance and popularity with both private companies that sell, and the numerous government agencies that purchase from them. Despite their popularity, however, Schedules can create significant problems for the unwary, especially if scrupulous attention is not paid to the manner in which prices are determined at the outset and price adjustments are made (or not made) under the MAS during contract performance.

MAS Agencies And Products

The MAS administered by the Federal Supply Service of the General Services Administration (GSA) provides for the sale of all qualifying commercial products and related services, except pharmaceuticals, medical, surgical, and dental equipment and supplies, related IT equipment and services, nonperishable food items, consulting services, and other health-related items, all of which are handled by the Department of Veterans Affairs (VA) under similar Schedules.

The most significant feature of the MAS is that contractors can sell their commercial products and related services to the VA or through the GSA directly to other federal government agencies without the need of submitting individual proposals. Qualified contractors may sell commercial IT products, such as software, and related services to participating states and local governments from these schedules, as well.

Definition Of Commercial Item

Determination of whether a product or supply qualifies as a "Commercial Item" within the meaning of federal procurement laws is the most important initial inquiry companies must resolve in deciding whether to sell products or supplies on a Schedule. Commercial Item is defined in 41 U.S.C. § 403(12) and FAR 2.101, both of which provide, in relevant part, the following meaning of this term:

(a) Any item, other than real property, that is of a type customarily used for nongovernmental purposes and that -

(i) Has been sold, leased, or licensed to the general public; or

(ii) Has been offered for sale, lease, or license to the general public.

(b) Any item that evolved from an item described in paragraph (a) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation.

(c) Any item that would satisfy a criterion expressed in paragraphs (a) or (b) of this definition, but for -

(i)Modifications of a type customarily available in the commercial marketplace; or

(ii)Minor modifications of a type not customarily in the marketplace made to meet Federal Government requirements.

The Commercial Item definition also covers services so long as such services are procured to support the items referred to in paragraphs (a) through (c), above, and are similar in kind to those provided to the general public under comparable terms and conditions.

Getting On The Schedules

In order to get on a MAS, a contractor must submit a proposal to either GSA or the VA. Solicitations are routinely announced in the Commerce Business Daily or can be obtained directly from the GSA's or the VA's websites. Software companies and telecommunications providers, for example, can download the pertinent GSA Schedule and Checklist for their products and services by going to GSA's Technology Center from GSA's main portal, http://www.gsa.gov, and clicking on "Schedule 70" and then "Solicitation: Schedule 70."

Once a MAS proposal is submitted to GSA or VA, a contracting officer from the agency will be assigned to review the proposal for compliance and to negotiate a price discount from the contractor's commercial price. This price discount is based upon the identification and selection of a category of customer, referred to as the "basis for award entity," in order to establish a discount relationship, which must be maintained by the contractor in relation to the price paid by the basis of award entity throughout the term of the MAS contract with some exceptions.

Changes In Price

The price reduction clause of the MAS contract makes clear that any change in the contractor's commercial pricing or discount arrangement applicable to the identified customer (or category of customers) that disturbs the discount relationship shall constitute a "price reduction." Price reductions must be reported to the GSA and the VA within 15 days of their effective dates, and the report must include an explanation of the circumstances under which the reductions were made. Depending upon such circumstances, the contractor will be required to apply the price reduction to sales made under the MAS contract with the same effective date. Failure to apply such price reductions may result in the termination of the MAS contract and at a minimum will permit the government to seek a retroactive refund. MAS contracts also have an "Economic Price Adjustment" clause that permits the contractor to increase prices within certain 12 month periods, so long as certain enumerated conditions are met to justify the increase.

Other Noteworthy Terms And Conditions

The term of MAS contracts commonly is for five years and may be extended by the government for three additional five-year terms, so long as the extensions are deemed "advantageous to the government" while taking into consideration price, whether the contractor's electronic catalog/pricelist has been kept current, whether the contractor's performance has been acceptable, and whether subcontracting goals, if any, have been reviewed and approved. Either party may cancel MAS contracts in whole or in part by giving 30 days' notice.

MAS contracts also contain a clause that permits GSA and the VA to charge a fee, referred to as an "Industrial Funding Fee." E.g., GSAR 552.238-76. This fee equals one percent of the total quarterly sales reported by the contractor under GSA schedules and one-half of one percent for VA schedule sales. The fee is included in the award price and reflected in the total amount charged to government agencies.

The contractor must report total sales under the MAS contract upon a quarterly basis. The dollar value of such sales is the price paid by the MAS user for products and services on a schedule contract task or delivery order as recorded by the contractor, and the value must include the Industrial Funding Fee.

Both GSA and the VA have extensive audit rights under their MAS contracts. The "Examination of Records" clause grants the government "or any duly authorized representative" the right to examine any books, documents, papers, and records involving MAS contract transactions for over-billings, billing errors, compliance with the Price Reduction clause, and compliance with the Industrial Funding Fee clause. These audit rights remain in effect for three years after final payment under the MAS contracts.

Practical Tips: Getting on the GSA or VA Schedules is a tedious and at times complicated process for those without much, if any, government contracting background. Some companies submit their schedule proposals with the help of GSA and VA personnel and related services, while other companies retain consultants for a fee to assist them in the process of submitting their proposals. Either way, contractors seeking to do business with the government through MAS contracts should consult with legal counsel prior to the final submission of their proposals in order to avoid unexpected or unwanted complications from cropping up during the performance phase.

Once contractors are on GSA or VA schedules, it is imperative for them to maintain adequate books and records to comply with the Price Reduction and Industrial Funding Fee provisions of the Schedules. At a minimum, contractors should designate one person within the company who will be responsible for granting and tracking discounts to the company's basis of award entity and ensuring that any applicable and corresponding reductions are made to Schedule prices. Remember, the government has extensive audit rights, and the government will enforce these rights if there is any chance either one of these clauses has been violated.

Joseph T. Casey, Jr. is a Partner in the Tysons Corner office of Kelley Drye & Warren LLP, where his practice focuses on government contracts, commercial litigation and defective-software disputes.

Please email the author at jcasey@kelleydrye.com with questions about this article. Joseph T. Casey, Jr.