Federal Supply Service Multiple Award Program Contracting Procedures

Published by the Government Accountability Office on 1977-03-11.

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

                           DOCONEIT RBSRBE
01129 - [A10516701
Federal Supply Servtce multiple    award Prograa Contracting
Procedures.   PSAD-77-87; B-114807. match 11, 1977. 5 pp.
Report to Robert T. Griffin, Acting Adsinistrator, General
Services Administration; by Richard g. Gutmann, Director,
Procurement and Systems Acquisition Dev.
Issue Area: Federal Procuremant of Goods and Services (1900),
    Federal Procurement of Goods and Services: Reasonableness of
     .PricesUnder Negotiated Contracts and Subcoutracts (1904).
Contact: Procurement and 3ystess acluisition Div.
Budget Function: General Government: General Property and
    Records   eanageuent (S0).
Organization Concerned: Federal Supply Service.
          The Federal Supply Service needs to improve its
evaluations of contractors' proposal prices in the aartd of
multiple award schedule contracts. There are doutts concerning
the appropriateness of benchmarks established and whether the
Service negotiates the best possible prices.
Findings/Conclusions: A review of eight multiple award schedules
showed 'that the contractor with the best offer often was not
chosen as the benchmark contractor, and there was not adequate
support to justify any other selection. Proctreaent files for
the eight schedules did not include a mesorandum of price
negotiations reqaired by Federal Procurement Regulations, so
that the criteria need in negotiating contracts could not be
ascertained. githout a formal record of negotiations, there is
no assurance that all significant factors were considered or
that the negotiated prices were fair and reasonable.
Becommendations: The Federal Supfpl Service should: (1) docunent
the procurement files with the factors that were considered in
evaluating the reasonableness of contractors' proposed prices,
including selection of the benchsark contractor; (2) prepare a
statement of justification when other than the contractor
offering the best price discount is selected as benchmark
contractor; and (3) prepare a record of negotiations. This
documentation should be reviewed by zuperviscry personnel. (RaS)
                                     WASHINGTON. D.C.   20548

                     ==~"'U~='"""i          oavmao~MWAR 1 1             177

      The Honorable Robert T. Griffin
      Acting Administrator of General
      Dear Hr. Griffin:
           We completed a review of the Federal Supply Service
      practices in awarding multiple award schedule contracts
      with the objectives of ascertaining whether the Service
      negotiated fair and .easonable prices and identifying any
      weaknesses in the Lervice's contracting procedures and
           In March 1977, our office issued a congressional report
      on the need for the Service to negotiate prices commensurate
      with the volume of Government purchases and to ensure con-
      tractors' submissions of accurate, current, and complete
      sales an& discount information. This letter addresses some
      additional administrative and procedural weaknesses we noted
      during our review.
           In summary, we found that the Service needs to improve
      its evaluations ef contractors' proposed prices. Our review
      centered on the Service's evaluations of eight multiple award
      schedules which had been performed in conjunction with the
      selection of a benchmark contractor as a target for use in
      negotiating catalog price discounts with other contractors.
      The procurement files showed that the contractor with the
      best offer often was not chosen as the benchmark contractor,
      nor was there adequate support to justify any other selection.
      Thus, there is doubt as to the appropriateness of the bench-
      mark established and that the Service negotiated the best
      possible price.
           The procurement files for the eight schedules did not
      include a memorandum of price negotiations required by the
      Federal Procurement Regulations. Thus, we were unable to
      ascertain what criteria Service officials used in negotiating
      contracts. Without a formal record of negotiations there
      is no assurance all significant factors were considered,
      or that the negotiated prices were fair and reasonable.


       As a first step toward improving the Service's
 in these areas, we recommend that the Federal         performance
  (1) document the procurement files with the   Supply  Service
                                              factors that were
 considezrd in evaluating the reasonableness
 posed prices, including selection of the     of contractors' pro-
 (2) prepare a statement of justification  benchmark  contractor;
                                           when other than the
 contractor offering the best price discount
 benchmark contractor; and, (3) prepare a     is selected as
 tions, or a statement why negotiations were      of negotia-
                                              not considered

      Secondly, we recommend that this documentation
 by supervisory personnel with a view toward         be reviewed
                                             scheduling appro-
 priate training for those needing it.

     The following are further details with respect
discussed above.                                    to points

     The Federal Procurement Regulations state
Government's policy is to buy from responsible that the
fait                                           sources with
     and reasonable prices and at the lowest overall
To ensure fair and reasonable prices the Regulations cost.
some form of cost or price analysis in connection    require
                                                  with every
negotiated Procurement.
      The Federal Supply Service satisfies the requirement
cost or price analysis through its benchmark
                                               discount negotia-
tion technique. The benchmark guidelines provide
contracting officer to identify the contractor       for the
the most acceptable offer for a product or a     who  submits
The contracting officer compares discounts off group  of products.
commercial catalog price offered by the various  the  established
contractors, selects the beuchinark contractor
the benchmark discount. Whetn negotiating the   and  negotiates
particular attention is devoted to discounts    discount,
to the contractor's most favored customer.     and terms extended
is to negotiate discounts that are commensurate ultimate goal
.overnment's volume of purchases.                 with the

     We examined the Service's procurement files
                                                 for eight
multiple award schedules, under which 547 suppliers
tracts, to ascertain how the benchmark contractors had con-
         and if the selectnnos were adequately justified.


     Procurement files for three of the eight schedules
contained sufficient information to identify the process
followed in comparing contractors' offers, but did not
contain the basis fo£ selecting the benchmark contractor.
We traced the discount comparison process and used the same
information available to the contracting officers at the time
they selected the benchmark contractor. We noted contracting
officers selected other than the contractor with the best
offer as benchmark without documenting the justification
for the selection. Furthermore, we noted instances of con-
tractors, submitting more acceptable offers under the criteria
contained in the Service's benchmark guidelines, who were
not selected as benchmark contractors. The Service's con-
tracting staff was unable to explain why contractors offering
better discounts were not selected as benchmark.
     For one schedule, a contractor other than the one submit-
ting the apparent best offer was often chosen as benchmark con-
tractor. This occurred in four of the schedule's six commodity
groupings reviewed, as demonstrated by the following chart.
Product    No. of                         Percent
group      suppliers   Discount                        Apparent
                       range a/            Benchmark   best offer
  A          33        5-1/2   to 7-1/2       5-1/2       6
  B          17        5-1/2   to 6-1/2       5-1/2       6
  C          34        5       to    17       5           7
  D           7        5-1/4   to 7-1/1       5-1/4       7-1/4
a/ Discount values arrived at by contrasting officer after
consideration of cash discount, prompt payment discount,
shipping arrangements and quantity discounts on individual
orders for a combination of items.
      We could not determine what the actual overall fffect on
prices would have been if contractors offering better discounts
had been selected as benchmark. But sales to Government over
a 3-year period in the four product groups referred to above
totaled an estimated $86.4 million. If the four contractors
with a better assigned discount value had been selected as
benchmark, and comparable discount terms had been negotiated
with the other contractors with offers below the resulting
benchmark discount, the price of Government purchases of these
products over the 3-year period would have been considerably


     For the remaining five schedules, we had to rely on
contracting officers' memories Has to the basis for bench-
mark selections. We were told :ty Service officials that
under four of these five schedules, the dominant contractor
with the greatest volume of sale!s was normally selected as
the benchmark.


     The Federal Procurement Regulations provide that at the
conclusion of negotiations the contracting officer should
prepare a memorandum setting forth the principal price negoti-
ation elements. This memorandum is to be included in the
contract file for the use of reviewing authorities. The
memorandum should contain (1) the name and position of con-
ferees representing the contractor and the Government,
(2) the purpose of the negotiations, (3) the basis for any
determination that cost or pricing data was not required for
contracts with a negotiated prict exceeding $100,000, (4) a
summary of the contractor's proposal and recommendations of
advisory audit performed, (5) the most significant facts or
considerations supporting the reasonableness of the negotiated
prices, and (6) an adequate explanation in those instances
where the prices negotiated differed significantly from the
price negotiation objective.

     Tne Service's benchmark guidelines recognize the need
for meaningful negotiation of prices between the Service and
its contractors. These guidelines specify that the bench-
mark discount represents a minimum goal and state that a
"vigorous attempt should be made to achieve even higher
discounts and more favorable terms and conditions."

     Our review of ..e cor._ac ftiles and discussions with
the Service's contracting staff disclosed that no record
of negotiation was prepared for the contracts negotiated
under any of the eight schedules reviewed. Furthermore,
the files did not contain any documentation as to the
extent of negotiations with a specific contractor. Other
than an occasional reference to negotiations on the "Request
for Approval of Award," which is prepared for each contract,
the procurement files contained no information concerning
the price negotiations held.


     Thne Service's contracting staff stated that they normally
conducted negotiations with specific contractors, but that
this is often accomplished over the telephone.   They further
stated a formal record of negotiations would be very tine
consuming and is not prepared, but that comments concerning
the negotiations are often recorded on the aforementioned
"Request for Approval of Award."

    In our opinion, the Service's contract files should include
basic information and documentation concerning negotiations.
Without this information, there is no assurance that adequate
negotiations were held, nor that fair and reasonable prices
were obtained.

    This report contains recommendations to you., As you know,
section 236 of the Legislative Reorganization Act of 1970
requires tne head of a Federal agency to submit a written
statement on actions taken on our recommendations to the
House and Senate Committees on Government Operations not
later than 60 days after the date of the report and to the
House and Senate Committees on Appropriations with the agency's
first request for appropriations made more than 60 days after
the date of the report.

    No further reporting of these matters is planned by us,
however, we believe the implementation of stated procedures
is needed. We would appreciate receiving copies of your
statements on actions taken which will be submitted to the
congressional committees.

    We are sending copies of the report to the Director, Office
of Management and Budget, and the Chairmen, Senate and House
Committees on Government Operations and Appropriations.
     We will be glad to discuss any questions you have on
matters discussed in this letter.
                                  Sincerely yours,

                                  R. W. Gutmann