I I I 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, B 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. 2 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, VA'S POSITION REGARDING ECONOMIC ADVANTAGE POLICY 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. 4 PRICE CQMPARISQNS 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. b 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 6 Goverment”s 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 contractors. 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. FOEUbib-W OF STAT CONCEWWINGT'G90FSS COFiTWGTOwS 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 jW3tifi,do 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. 10
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)