Veterans Administration's Method of Awarding Federal Supply Schedule Contracts for Chemical Reagents

Published by the Government Accountability Office on 1971-06-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

0weYi-Jthe prices o%feredto istIler custotierBa. We            brought       these matters
to idle attention of VA o%ficials who i-i-xformedus          that VA bad increaeed
ita sea%% spectiicalSy      %OP the p-lmpofBe 0% monitoring        contracts       to deteT-
migm whether        the Government      actxm~ly wan obtaining        the economic         ad-
vantagee   o%%ered by- contractor       i3 o

        The. ~amdts    of OUT examination        ale        discussed    in more detail   in this
report.     VA and Sigma      ChemicaP     Company            o%%icials were not provided
with copies    0% this report    for their   review           and comment,

       Similar    ~acp.e~ts     ah0 were      areceived from   other    members         of Con-
         arid the 5ame      idormation      is being %urnished      to them.

                                                    Sincerely        yan=6,
source for filling          the supply requirements     of all Federal
agencies   except the         Department  of Defense.    The Department
of Defense has its          own procurement    system but may use the
FSS contracts     if it       deems it advantageous   to do so.

         The FSS contracts             awarded by VA are effective            for spec-
ified      periods      of time and provide             for the purchases of in-
definite        quantities        at definite       prices.    FSS contracts       for
similar       products       are awa&  --ded    to  numerous   contractors       because
there are no product                standards      and because specifications
cannot be prepared              for the products,           Such numerous con-
tract      awards also enable the Government to choose from sim-
ilar     items,       FSS contracts          are awarded to contractors           offer-
ing the Government an economic advantage,                       in regard to price
and/or service           offered,        over other customers for the same
items or groups of items.                    These contracts      are for l-year
periods       and, by mutual agreement of the Government and the
contractor,        may be renewed, in wlzole or in part,                   for addi-
tional      periods      not to exceed 2 years.

     Si      was las% awarded an PSS cmn%rac% by VA in waken-
dar yea     968 0             anee with GSAPs policy,     VA, in
              bega            ng  %ha% a con%-ra@%or  p-e-ovide the
         nt with an faxmOrni@ advantage     over prices offered     %Q
         stomers in ordes to be awarded an FSS contract,
Sigma refused    to offer- the Gover     nt such an e@onomic: ad-
van%age and thea-efore    was not awarded an FSS contract,
        lYh2 presiden% of Sigma advised us %ha% the reasons for
not offering       an eeonlomic adva.n%age to e-he Government were
                    *s net prices   were sufficiently       low and
                    not offer   o%her customers,      except dealers,   any
lc%2duc%ion in its established       prices 0 He also stated that
giving     an economic advmtage      to tlae Governmen% would. resu$%
in extra work for and added ess%s to Si                    He cantended
tha% %he purchasing        agents sf VA. hospft       s cou$d no% buy
Sigmams produets       because it did not have an FSS contract;
therefore)           a was lassing amkua'P sales of approximateiy
$1 million,

         The Director    of VA's Supply Service          informed us that
Sigma was correct        in stating    that,   unless it offered          the
Government an economic advantage             over *other customers,          it
could not obtain        an FSS contract,       He stated that VA's
pharmaceutical        and chemical reagent       FSS contracts        were
agreements       to purchase indefinite       quantities        of items at
definite      prices   and were not awarded on a competitive-bid
basis,       He stated also that this policy           had been estab-
lished     by GSA and that VA was administering               its FSS con-
tracts     in accordance with this policy.

       We discussed    the FSS contracting     policy    with GSA offi-
cials who informed       us that VA was administering        its FSS
contracts    in accordance     with GSAPs policy      of requiring  an
economic advantage       over other customers.

        Both GSA and VA officials        expressed          the view Chat, be-
cause of its Government-wide          distribution,            FSS was a type
of advertising      media for FSS contractors               and that the sales
potential     of the contractors      thereby       was increased.          The VA
Supply Service Director        stated that the policy               of not award-
ing a contract      to a company that did not offer                 the Govern-
ment an economic advantage          over the prices offered              to other
customers had been established           to offset          certain    cost in-
curred by the Government in awarding                FSS contracts        and to
reduce the large number of suppliers                utilizing       the FSS as
a free medium of advertisement.

        We noted that,       in a letter     dated July 9, 1968, the
Administrator       of General Services         advised the Subcommittee
on Government Procurement,             Select Committee on Small Busi-
ness, that the Government would save an estimated                   $40 mil-
lion to $60 million          annually     as a result    of this discount
policy,       On May 5, 1971, the Commissioner             of the Federal
Supply Service,        GSA, informed       us that the Government was
obtaining      substantial      savings as a result        of the discount
policy    and that the aforementioned            $40 million     to $60 mil-
lion was probably          a conservative     estimate,      We did not at-
tempt to verify        the reasonableness        of the estimated     savings
made by GSA.


        VA Marketing      Center records showed that the FSS con-
tractors9    prices     for comparable       items varied      considerably.
In comparison       with SigmaIs prices,          some FSS contractors9
prices were higher         and some were equivalent           or lower,        The
quality    of a product has a bearing             on price;    however,      there
is no standard       grading    or classification         system for chemical
reagents.      Therefore     we  were  unable      to equate    the quality
of SigmaOs products         with those provided          by FSS contractors.

        The following table includes   a price    comparison   for
the same four items that Sigma included        in its open letter.
Because the open letter     showed a comparison     of Sigma's 1971
prices with an FSS contractorEs      1970 prices,    we have in-
cluded in the table selected      1971 prices offered      by FSS con-
tractors    for the same four items.
     Comparison     of Prices       for Items Listed             in Sigma's           Open Letter

                                   Schedule     as shown in
                                    Sigma's     open    letter
                                       FSS                                            Sample of 1971
                                 contractor's              Sigma's               prices       available
                                      1970                       1971          from  FSS contractors
     Item          Unit
                   ---              prices                   prices              (notes a and b)
L-Glutamine          1 kg*              $600'              $ 71.50                $100        $ 67.50
L-Proline            1 kg.               395                219.00                 240         200.00
L-Tryptophan      100 g.                  70                 29.50                  70          30.15
Pyridoxal         250 rnged                55                                                    9.93
  Phosphate         1 ?t.                                         5.00                 32         5.25

a-sh ese prices     do not    include      applicable     discounts            which        would   lower
  the prices    per unit.
  The scheduled      prices      are not necessarily   the highest   or lowest prices
  available.     We chose        a high and a low price specifically       for the pur-
  pose of illustrating           price differences   among the contractors.

CThe contractor      advised       the VA Central        Office         that     it did not sell
 this package     size     to any of its        customers.

d250 mg. equals      l/4    g.

     Although   there            is a wide variance of prices available
from FSS contractors,              as shown by the above table, the

Goverment‚ÄĚs policy          is td3 purchase from the FSS contractor
offering the lowest         dePFTEred price Rrsr an item of aeeept-
able quahity.     Any deviation     from       this     epHicy must     be fulry
justified   by the sardering    Qffi@et,

        VA recaPrds indicated         that)   as of March E2, 1971, there
were 55 FSS contractors            for chemical     reagents.      As previsusly
discussed,     the GovemmentP s polfcy            is to seek fnxn a con-
tractcpr   an economic      advantage       over the prices     c3ffered tlCB
other customers       before     it awards a.12FSS ccmtract.           Qur QIC-
aminaticm     of cmtract      files      showed, however,     that two ebf
the 55 contractors        were not providing          the Gtcavernment with
any apparent      economic    advantage       over other customers.

       VA does not have any means fsr  detemining    whether a
price offered  to the CIhxwrnmen~t is Bower- than prices    charged
to other customers o Also VA has nlse established      a defini-
tilon of economic         advantage    or criteria       for measurin
constitutes        a reasonable     econsmic      advmtage     0 VA cited
price     discaunts,      time discounts,       free transportation         costs
tea the 1Qcation        of the ordering       offif2e    f2Lo.b.   destination),
and acceptance         of small orders      as some of the types of eco-
nomic acbmntages          that it had aeeepted         from potential       FSS

       Qur review     showed that FSS contractors             offered      varying
degrees of eccmmnie advantages.                  We found that one contu-ae-
tar offered      f.0.b.     destination        as an economic      advantage
whereas another         cmtraetar       offelred    a price    and time discount,
f.o.b,    destination,       and the acceptanee          of small larders as
eeormftie   advantages       to the Government.            Both contra@tsrs
were awamzkxl FSS csntraerts            because of their         comgli
with the Government3 s eeonsmic                advantage    gdicy.

        We discussed    these findin   s with VA offiefal.s      whc3 in-
formed us that VA had increase          its Marketing      Center staff
specifically      for the purpose of monitaaring       contracts   to
determine     whethea- the Goverme~cnt actua&ly      was obtaining      tl3e
economic     advanta es included     in the contracts,
       The Director      of VA's Supply Services       by letter      dated
April    23, 1971, informedusthat          VA was attempting       to obtain
from the two aforementioned          FSS contractors      an economic ad-
vantage over the prices offered            to other customers and that,
if acceptable     price agreements were not obtained,              the con-
tracts    would be canceled,        The  Director    agreed   that    VA
needed criteria       for determining      whether the economic advan-
tage offered     by a contractor      was reasonable,       He stated
that VA was developing         such criteria      and that future      FSS
contracts    would be negotiated        on the basis of the criteria.


         In a letter      dated April     3.3, 1970, the president         of
Sigma informed VA officials             that a ZO-percent        discount     of-
fered to the Government by one FSS contractor                   was not,:ap-
plicable     unless there was a purchase of five.times                  the
Largest unit quantity           of an item.       Our examination       of VAls
file    for this FSS contractor           showed that the statement           was
correct B Other data in the file,                however,  indicated       that
the contractor         also had offered       the Government free trans-
portation       to the location       of the ordering     office,     a benefit
not offered       to the contractor8s         other customers,       and that
f.o,b,     destination       was the economic advantage         upon which
the contract        had been awarded.

        The president       of Sigma also stated that another FSS
contractor      had been overcharging           the Government by selling
certain     items to both the Government and retailers                   at the
same prices.        Our examination        of V.A"s file      for this FSS
contractor      showed that in 1970 the contractor                had not given
the Government the agreed-upon               discounted     price on certain
catalog     items.     After    receiving     the letter      from the presi-
dent of Sigma, VA, on the basis of the contractorPs                       esti-
mate of the overcharges,           recovered      about $5,700 from the
contractor.        Because it was too difficult             to reconstruct      the
sales data necessary          to calculate        the actual     overcharges,
VA considered       the contractor's         estimate    to be reasonable.
             The presidmt of Sigmawas         correct   in his    statement
that Sigma had been denied an FSS contract                      because it bad
refused      to provide      the Govermerat       with a discount       on prices
that it affered         to other cznstomers.          This denial      was based
Qn GSA'S po%icy of obtaining              an economic advmtage           to
 cl.3 offset     tie costs incurred        in awarding        these ccmtracts
and (2) prec%de           the contractors       from using the FSS as a
free medium of advertisement              without     providing      an economic
advaatage      to the Govermat.

          With regard    to the    stataemt      that the Govermmt    is        pay-
ing      significantly    higher    prices    because it has not given
Sigma an FSS        contract,     QuF examination      has shorn that some
FSS fxmtraet        prices    are higher        d ccsthers are l.ower thapl
those dfere                       for similar     items.    Further,   it is
the Goverme                      y to purchase frQm the FSS contractor
offering    the     lowest    del~ivere     price for an item 0% accept-
able quality        unless deviation      from this policy        is adequately

      VA has not established     a definition    of ecomQmi@ advan-
tage or criteria    for measurf     what constitutes    a reasomabkt
ecommic   a&vantage    when cons   ering a pro osab for an FSS
contract m we mted that,              as a result,    FS cQntra@tQrs OS-
fered the Goveriment           v-a       degrees of economi@ advatages,
For instate,          a supplier         be awarded an FSS contract         by
offering        the Goverment      free tsamportation         to the ordering
point whereas another contractor              may be awarded an FSS ccm-
tract        by sf%ezLng the Goverment        a p-rice,   time, or other
diSCOl..lT-&   .% Mso VA does not have any me               for detemining
whether a cOntTaCtQPm s rice offered                to the Govenmeekt is
        We brought   these findings   to the attention     of VA of-
ficials    who informed us that contracts     would be monitored      to
determine     whether economic advantages    actually    were being
obtained     by the Government and that criteria       were being de-
veloped    for determining    whether the economic advantage      of-
fered by a contractor      was reasonable.

     We plan   to keep abreast     of VA's   progress   in implementing
the proposed   actions.

                                                          U.S GAO. Wash.. D.C.