oversight

Adequacy of Regulations Governing the Negotiation of Noncompetitive Contracts over $100,000 Based on Catalog or Market Prices

Published by the Government Accountability Office on 1977-12-12.

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

                          DCCUMEN' FESUME
04405 -   B3494756]

rAdequacy of Pegulations Governing the Negotiation of
Noncompetitive Contracts over $100,000 Based on Catalog or
Market Prices]. PSAD-73-51; B-39995. December 12, 1977. 3 pp. +
enclosure (11 pp.).
Report to Joel W. Solomon, Administrator, General Services
Administration; by Richard W. Gutmann, Director, Procurement ani
Systems Acquisitions Div.
Issue Area: Federal Procurement of Goods and Services:
    Reasonableness of Prices Under Negotiated Contracts and
    Subcontracts (1904).
Contact: Procurement and Systems Accuisition Div.
Budget Function: Miscellaneous: Financial Management and
    Information Systems (1002).
Organizaticn Concerned: Department of the Interior; Department
    of CommerCe; Department of ealth, Education, and Welfare;
    Department o Transportation; Veterans Administration.

           Federal Procurement Regulations state that contracting
 officers shall, with some exceptions, obtain contractors' cost
or pricing data in support of proposed prices for noncompetitive
contracts. A review of the pricing of 204 nonccmpetitive
 fixed-price contracts and modifications with Federal agencies
 ,,,owed that there was no assurance that the pices negotiated
for 201 of the contracts were reasonable.    Findings/Conclusions:
Where cost or pricing data is required, a cost analysis or
review and evaluation of the contrac'r's data and judgmental
factors applied in estimating the cost of performing the
contract are to be performed. One exception to the requirement
is where the contracting officer determines that the proposed
price for an item is based on an established catalog or market
price for a commercial item sold by the contractor in
substantial quantities to the general public. Because of the
lack of specific criteria in the Federal Procurement
Regulations, contractors were granted exemptions from furnishing
cost or pricing date for 201 of 2C04 contracts without adequate
assurance that the exemptions were justified. In many cases
procurement ersonnel granted the exvptions ithout obtaining
contractors' price lists or other pricing documents, and, in
most cases, sales data were not obtained. An analysis of sales
data from contractors for selected items procured under 70 of
the contracts indicated that the granting of an exemption for
many items was not warranted. Recommendations: The
Administrator of General Services should approve a proposed
change in the Federal Procurement Fegulations providing specific
guidelines for determining the types of supporting data which
should be obtained and analyzed in order to determine whether
exemp tions from furnishing cost or pricing data are warranted.
(SC)
                            UNITED STATES GENERAL ACCOUNTING OFFICE
                                    WASHINGTON, D.C. 20548

P FROCUVREMNI   ANO SYTKM
   ACUISITION DIVISION


       B-39995                                                EC 121977
       The Honorable Joel W. Solomon
       Administrator of General Services

       Dear Mr. Solomcn:

            As part of our effort tc monitor civil agencies' com-
       pliance with laws, regulations, and procedures in negotiating
       noncompetitive contract prices, we evaluated the adequacy
       of regulations governing the negotiation of noncompetitive
       contracts over S100,000 based on catalog or market prices.

           In addition to the Fe O'ral Supply Service, General Ser-
      vices Administration, our review included six procurement offices
      of four civil departments and one administration.   (See enclosure,
      p. 11.) We reviewed 204 noncompetitive contracts, each valued
      at over $100,000, awarded on the basis of catalog or market
      prices during the 21-month period ending March 31, 1977. Col-
      lectively contracts reviewed were valued at about $131.7 million.
      The details of our review are included as an enclosure to this
      report.

            Federal Procurement Regulations state that contracting
       officers shall require contractors, with some exceptions, to
       submit or identify in writing the cost or pricing data support-
       ing their proposed prices for noncompetitive contracts and con-
       tract odifications valued at over $100,000. Contracting office!s
       may grant contractors exemptions from this requirement when
       they determine that proposed prices are for commercial items sold
       in substantial quantities to the general public at established
       catalog or market prices. The rationale for this exemption is
       the presumption that, if many buyers have bought an item at
       a specified price, the forces of the market place will produce
       a fair price.

           Because of the lack of secific criteria in the Federal
      Procurement Regulations, contractors were granted exemptions
      from furnishing cost or pricing data for 201 of the contracts
      without adequate assurance that the exemptions were justified.
      Although procurement personnel granted exemptions on the basis

                                                                      PSAD-76-51
                                                                      (950394)
B-39995

of contractors' claims of substantial sales to the general
public at catalog or market prices, they did not obtain
sufficient data to substantiate the claims or otherwise deter-
mine the reasonableness of the proposed prices. (See enclosure,
p. 2.)
     We found that in many cases procurement personnel
granted the exemptions without obtaining contractors' price
lists or other pricing documents. (See enclosure, p. 2.) This
data is needed to determine that proposed prices were based
on established catalog or market prices.   urther, in most
cases sales data was not otained. (See enclosure, p. 4.)
This information is needed to determine whether the contractor
sold the items in substantial quantities to the general public
at regularly established prices and for a current period.

     Although Federal Procurement Regulations set forth the
conditions which must be met before contractors can be granted
exemptions, they do not contain specific guidance for obtaining,
verifying, ann analyzing data supporting claims for exemptions.
(See enclosure, p. 8.) Such guidance is provided in the Armed
Services Procurement Reguiation and a supplementary pricing
guide used by defense agencies. (See enclosure, p. 8.)

     Because adequate sales data had not been obtained by the
agencies, we obtained sales data from contractors for selected
items valued at about $35 million procured under 70 of the
contracts reviewed. An analysis of the data, using the armed
services criteria, indicated that the granting of an exemption
for many items was not warranted.   (See enclosure, p. 5.)
CONCLUSIONS

     Contracting officers ranted contractors exemptions from
the requirement to submit cost or pricing daLa for items to
be purchased on the basis of contractors' claims that the
items were sold in substantial quantities to the general
public at published prices. However, in most cases the
contracting officers did not obtain adequate sales or market
information to support these claims. Our analysis of sales
data we obtained directly from contractors showed that, in
many instances, exemptions granted were not warranted. Accord-
ingly contracts were negotiated without adequate assurance that
the prices paid were fair and reasonable.

     We believe the above condition occurred because the Federal
Procurement Regulations do not contain specific guidelines
for determining the types of supporting data which should be
obtained and analyzed in order to determine whether exemptions
are warranted.



                              -2-
B-39995

AGENCY ACTIONS

     On September 29, 1977, the General Services Administra-
tion's Director, Federal Procurement Regulations, proposed an
amendment to the Federal regulations to make them conform
with the Armed Services Procurement Regulation regarding
contractors' claims for exemption from submission of certified
cost or pricing data. The Director, Federal Procurement Regu-
lations, told us that the change was proposed in the Lnterest
of achieving uniformity in Government regulations and in recog-
nition of the General Accounting Cffice's concern for the lack
of guidance in this area. We had discussed our review objectives
with a member of the Director's staff before we began our
examination and, subsequently, briefed procurement personnei
on the results of our examination. The proposed change provides
additional guidance, which our review shows is needed by con-
tracting officers, to obtain and analyze information to determine
whether exemptions should be granted.

RECOMMENDATION

     We recommend that you approve the proposed change to
the Federal Procurement Regulations to provide better guidance
for obtaining and analyzing information to determine whether
exemptions from submission of cost or pricing daca should
be granted.



     Copies of this report are being sent to the Veterans
Administration; Department of Health, Education and Welfare;
Department of Transportation; Department of Interior; Depart-
ment of Commerce; Ofice of Management and Budget; and the
Office of Federal Procurement Policy. We are also sending
copies of this report to the Senate and House Committees on
Appropriations; the House Committee on Government Operations
and the Senate Committee on Govcrnmental Affairs.

      As you know, section 236 of the Legislative Reorganization
Act of 1970 requires the head of a Federal agency to submit a
written statement on actions take:. on o   recommendations to
the House Committee on Government Operacions and the Senate
Committee on Governmental Affairs, not later than 60 days after
the date of the report, and to the House and Senate Committees
orn Appropriations with he agency's first request for appro-
priations made more than 60 days after the report. We would
appreciate receiving a copy of these statements.

                                Sincerely yours,



                                R. W. Gutmann
                                Director
Enclosure                     - 3 -
                                                       ENCLOSURE
              PRICING GOVERNMENT CONTRACTS ON THE

               BASIS OF CATALOG OR MARKET PRICES
BACKGROUND

     The Congress has historically required that Government
purchases of goods and services be accomplished using full

and free competition to the maximum extent practicable.

Offering all qualified contractors the opportunity to com-

pete helps to minimize favoritism and collusion and provides

greater assurance that acceptable supplies and services are

obtained at the lowest prices.

     In the absence of competition, Federal Procurement
Regulations state that contracting officers shall, with

some exceptions, obtain contractors' cost or pricing data

in support of proposed prices. Where cost or pricing data

is required, a cost analysis or review and evaluation of the

contractor's data and judgmental factors, applied in esti-

mating the cost of performing the contract, shall be performed.

These actions increase the assurance that prices, negotiated

in the absence of competition, will be fair and reasonable.

     One exception to the requirement is where the contracting

officer determines that the propose6 price for an item is based

on an established catalog or market price for a commercial item

sold by the contractor in substantial quantities to tne general

public.   The rationale for this exemption is the presumption
that, if many buyers have bought an item at a specified price,

the forces of the market place will produce a fair price.
CATALOG EXEMPTIONS GRANTED
WITHOUT ESTABLISHING VALIDITY

     We reviewed the pricing of 204 noncompetitive fixed-
price contracts and modifications valued at about $131.7 milLon.

Contracting officers granted contractors an exemption from

the requirement to submit cost or pricing data for these con-

tracts on the basis that they were for goods and services sold

by the contractor- in substantial quantities to the general

public at established catalog or market prices.       We found,
however, that contracting officers granted the exemptions

for items, procured under 201 of the contracts, at a value

of about $127.3 million, without obtaining the data needed

to determine whether the required conditions, which would

justify the exemptions, were met.       As a result, there was no
assurance that the prices negotiated for the 201 contracts

were reasonable.

Existence of catalcg or market
prices not established
    The Federal Procurement Regulations state that one of

the conditions, which must be met before granting an exemption

to the requirement for submission of cost or pricing data,

is that the proposed price must be based on an established

catalog or market price.   The regulations, however, provide
no definite guidance as to what data should be obtained to
establish that such prices exist. (See p. 8.)
    Price catalogs, lists, or similar documents, which could
be used to demonstrate that proposed prices were based on

                                 - 2-
established catalog or market prices, were not obtained from

contractors for any of the items included in 88 of the con-
tracts reviewed.   Contr:acting officers had no information
from contractors. Therefore, they made their determinations

that established prices existed on unverified contractor

statements, that propose! prices were based on such prices,

or were prices offered to their most favored customers. Fcllowing
is an example.

     A contractor was exempt from furnishing cost or pricing

data in support of proposed prices for a contract valued at

$673,538, on the basis of the contractor's certification that

the price offered was that granted its most favored customers,

and a statement that it was its best offer.     Procurement per-
sonnel did not obtain from the contractcr a price list or other

documents that would demonstrate the evidence of a catalog

or market price.

Substantial commercial
sales not verified

     Another condition, which must be met prior to granting an
exemption to the requirement for submission of cost or pricing

data, is that items being procured be sold i     substantial
quantities to the general public at regularly established

prices.   The regulations do not, however, contain definite
guidance on obtaining, verifying, and analyzing data to deter-

mine whether this condition is     et. (See p. 8.)




                                 - 3 -
     Information was not obtained by procurement personnel

on contractors' sales of items purchased under 188 contracts.

Procurement officials at agencies which obtained no sales data

told us that such data     as not requested because it was unclear
as to whether such data was required by the regulation or they

had sufficient knowledge of items being procured to determine

whether they were commercial items.    The contract files,

however, did not contain the reasons why sales data was not
obtained.

     For items procured under the 13 other contracts, data

was primarily provided by contractors on the (i) percentage

of total sales made to comnercial customers and to the Government

or (2) total dollar value of sales, with listings of customers,

but no segregation of sales by individual customers.     None of
the information obtained demonstrated the extent to which

sales were made at established catalog or market prices.

Following is an example.

     A contracting officer granted a contractor an exemption

from furnishing cost or pricing data in support of proposed

costs for a contract valued at $100,477, on the basis of

the contractcr's certification that the price offered was
based on established market prices of commercial items sold

in substantial quantities to the general public.     The con-

tractor also stated that commercial and Go-ernment sales
were 90 percent and 10 percent, respectively.    The contract
file contained no evidence that procurement personnel

                                -4-
requested the contractor to provide a price list          additional
sales data to prove substantial sales to the general public
at published prices.

MANY( ITEMS NOT SOLD IN SUBSTANTIAL
QUANTITIES TO THE GENERAL PUBLIC
AT ESTABLISHED PRICES

     Because sales data was not requested or incomplete data
was obtained for items included in the 201 contracts, we ob-

tained sales data frorm contractors for 172 selected items pro-

cured under 70 of these contracts for a 1-year period prior to

contract award.   These items were valued at about $35.2 million.
The value of al items, priced as commercial items, under the

70 contracts was about $40.7 million.

     We a alyzed the sales data using the Armed Services Pro-
curement Requlation criteria.       (See pp.   and 10.)   Our analysis
showed that 49 of the 172 items procured under the 70 contracts

were not sold by the contractors in substantial quantities

to the general public at published prices.       Sales data receive]
for an additional 22 items indicated that further review and

analysis would be needed to determine whether the exemptions

should have been granted.   Te following are the overall results
of our analysis by contract line item and value.




                                -   5 -
                             Number      Percent    Cont 'ct Percent
                            of items     of total    val~.   of total

                                                    (millions)
Items sold to the
general public in
substantial quantities        101          58.7      $24.0        68.2
Items not sold to
the general public in
substantial quantities         49          28.5        8.4        24.0
Items for which
exemption justification
was uncertain                  22          12.8        2.8         7.8
     Totals                   172        100.0       $35.2       100.0

     The following are examples of contract actions involving

items not sold in substantial quantities to the general

public.
     A procurement office awarded a contract vailed at

$222,018 without obtaining a commercial price list c     sales
data from the contractor; yet, the contract file contained

a statement that th_ contract price was based on established

catalog or market prices of commercial items sold in substan-

tial quantities to the general public.    The contracting officer
accepted the proposed contract prices as fair and reasonable

on the unverified basis that they were the same as offered

to all Government agencies and favored customers for custom-

made items.

     We requested sales data from the contractor, for selected

items valued at $215,268, for a 1-year period prior to the

award of the contract, The contractor's reply to our request

                                6
 showed that there had not been any sales of the
                                                  items during
 the 1-year period. The information, provided
                                               by the contractor
 and that contained in the contract file, did not
                                                   establish
 that the contractor had met the conditions needed
                                                    for an
 exemption from submission of cost or pricing data.

     Another contract, valued at approximately $624.184,
was awarded on the basis of established catalog
                                                 prices, of
items sold in substantial quantities to the general
                                                     public,
without the contracting officer obtaining any
                                              sales data to
support the contractors' claim. Sales data provided
                                                     to us
by the contractor showed that, while about 77
                                                ercent of its
total sales were mJe to the general public during
                                                    a 1-year
period prior to contract award, only 10 percent
                                                 of the sales
to the general public was made at published catalog
                                                     prices,
less only published discounts.   The remaining 90 percent was
made at other than published list prices, discounts,
                                                     or discount
rates. Using armed services criteria, this sales
                                                  data would
not support the exemption granted.

GUIDANCE NEEDED FOR DETERMINING
WHETHER EXEMPTIONS SHOULD BE GRANTED

     Federal Procurement Regulations allow contracting
                                                       of-
ficers to exempt contractors from sutmitting cost
                                                  or pricin9
data, in support of proposed prices for commercial
                                                   items,
when specified conditions are met. The regulations
                                                   do not,
however, contain (1) definite guidelines on what
                                                 types of
data should be obtained from contractors to assist
                                                   in estab-
lishing whether    not the required conditions for exemption

                              - 7 -
are met,    (2) criteria for analyzing the data, and (3) guide-

lines on when data should be verified. In addition, agencies

we reviewed had not established such guidelines and criteria.
     The Armed Services Procurement Rf.gulation, applicable to

defense agencies, does, however, contain guidelines on obtain-

ing price and sales data and criteria for analyzing i.       In
addition, the Armed Services Procurement Regulation Manual

for Contract Pricing, a pricing guide, contains supplementary

guidance for obtaining and analyzing data and some guidelines

on when data should be verified.

Obtaining    upporting data

     The Armed Services Procurement Regulation requires con-

tractors requesting an exemption to furnish the buying office

a copy of the price catalog, or similar document, contai.ing
list prices and discounts upon which catalog prices are based

and the source, date, or period of the me-kt quotation, in-

cluding the base amount and applicable discounts.     Contractors
are also required to provide sales and ,-arket information

to support that each catalog or market priced item proposed

at a value of over $10,000 has been sold, at an established
price, to the general public in substantial quantities.      For
a market    riced item, the nature of the market must be Gascribed.

For a catalog priced item, required information includes sales

data for a specified recent representative period indicating




                                - 8 -
the number of units sold to the (1) Government, its instru-

mentalities, and prime and subcontractors,    (2) general public
at catalcg prices less only published discounts, and (3)

general public at other than published list prices, discounts,

or discount rates.

     Additional data required to be provided by contractors
includes price and quantity information, on three of the

lowest priced sales, to the general public within the speci-

fied sales period.   This includes the lowest price sale,
at both published and unpublished prices, and discounts for

quantities comparable to those     eing procured, or the sale
most near the quantities if there were no comparable sales.

Analyzing obtained data

     The Armed Services :Procurement Regulation and Manual
contain criteria for analyzing sales data to determine

whether sales to the generai public are substantial and are

at established prices.    The need for criteria by defense
contracting officers was disclosed in our December 1969

report to te Congress on Improvements Needed in Negotiating

Prices of Noncompetitive Contracts Over $100,000 on the Basis

of Contractors' Catalog or Market Prices (B-39995).

     Subsequently, the following guidelines were included in
'he Armed Seriices Procurement Regulation ad Manual:

    -- Sales to the general public are presumed to be
       substantial if (a) they are not negligible, (b) they
       account for 55 percent or more of total sales, and
       (c) at least 75 percent of general public sales are
       made at catalog prices.



                               -   9 -
     -- Sales to the general public are generally not
        substantial if (a) they are negligible, (b) they
        acc.unt for less than 35 percent of total sales,
        or (c) less than 55 percent of general public sales
        are made at catalog prices.

     -- S. les to the general public in substantial quantities
        are questionable and require additional fact finding
        if (a) such sales are between 35 and 55 percent of
        total sales or (b) between 55 and 75 percent of gen-
        eral public sales are made at catalog prices. A key
        factor to consider in this situation is whether there
        are similar items sold in the market place in substan-
       tial quantities.

Verification-of data

     The Armed Services Procurement Manual states that data
submitted by a contractor may need verification.   The knd of
facts that may need verification are total units sold, market

price justifications, unit prices of listed sales, and sales

to the general public at either published or nonpub'-shcd
prices, and discounts when analysis of submitted data does

not clearly indicate whether exemptions are justified.   Veri-
fication should be limited to those parts of the data that

are significant and uncertain.




                                 - 10 -
                 Procu.ement Offices Reviewed

                                                Location
Supply Services Division,
National Bureau of Standards,
Department of Commerce                    Boulder, Colorado
Procurement Branch, Division of
  Administrative Services,
National Institutes of Health,
  Public Health Service,
Department of Health, Education
  and Welfare                             Bethesda, Maryland
Procurement and Contracts Branch,
United States Geological Survey,
Department of Interior                    Reston, Virginia
Contracts Division,
Logistics Service,
Federal Aviation Administration,
Department of Transportation              Washington, D.C.
Procurement Division,
Office of Comptroller,
United States Coast Guard,
Department of Transportation              Washington, D.C.
Office of Procurement and
  National Automotive Center,
Federal Supply Se. ice,
General Services Administration           Washington, D.C.
Marketing Center,
Veterans Administration                   Hines, Illinois




                                -   11-