Panel cannot agree on how to set prices for services

A panel of procurement specialists, after recommending last week the General Services Administration no longer use a best-customer pricing policy for services on the Multiple Award Schedules contracts, could not agree on Monday on what metrics the agency should use to set prices for services.

Comment on this article in The Forum.At a meeting of GSA's advisory panel on Multiple Award Schedule contracts, the specialists debated changes to the pricing policies used for purchasing professional services for the government. The panel, which meets periodically to develop recommendations for the GSA on pricing policies, argued that because it is more difficult to compare prices for services than products, the same policies used to set prices for products should not be applied to services.

But the panel could not agree on what metrics GSA should use to set prices for services.

GSA negotiates prices with contractors for commercial products and services sold on its schedules, which are indefinite-delivery, indefinite-quantity contracts. The agency awards the contracts for a base period of five years, plus three five-year options. The government and other authorized users issue task and delivery orders against the contracts. State and local governments also can buy off many of the contracts.

On Friday, the panel approved a motion recommending GSA eliminate a clause for services that require vendors to charge the government with at least as good a price as the company's "most favored" commercial customers. This price reduction clause has been controversial. In 2004, GSA's inspector general investigated Sun Microsystems for failing to honor the clause. Sun later withdrew from the schedules, preferring to sell its products and services on other governmentwide contracts rather than open its books to prove it was providing its best deal to government.

Setting prices on services, which vary from company to company, is difficult, said panel chairman Elliott Branch, executive director of contracts for the Naval Sea Systems Command. "You don't get an apples-to-apples comparison of vendors [with services]," he said.

Branch said pricing for services is largely dependent on the unique needs of each agency and each task order. As a result, he said the rates written into the contract are largely used for research.

Because comparing prices for services is difficult, panel members debated how to ensure contracting officers are getting the best deal possible for the government. The standard currently in use requires contract officers to secure "fair and reasonable pricing" for the government. Members debated what constitutes fair and reasonable, however.

Branch said the regulation does not define the terms, but directs contracting officers to prove they have applied several different tools and techniques to reach the lowest possible price. Even if the government price is higher than that available to the company's most favored customers, the pricing regulation provides ways contracting officers can exercise their judgment as to whether the contract is in the government's best interest.

"The policy lays out a goal, and then in implementation essentially eviscerates it," Branch said. "I would be interested to see how often the contracting officer documents getting the most favored customer price. I'm guessing it's a minority.

"Let's face it, in most cases [the government] is not the most favored customer."

Other panel members offered takes on what constitutes fair and reasonable and which prices should be compared when evaluating a company's proposal for services contracts.

"Without putting it in a succinct form, it's a commercial customer who buys most like the federal government," said Judith Nelson, an industry specialist in GSA's Office of Acquisition Management. "Clearly, that would be a large customer with strong buying power."

Nelson said part of the approach to defining what is fair and reasonable would be acknowledging that the government is not always the most favored customer, and therefore, would not always get the best price.

Alan Chvotkin, executive vice president and counsel for the Professional Services Council, said the definition of fair and reasonable should equate to the lowest cost alternative available to the government. "I think there are about nine standards out there that are inconsistently applied," he said. "I picked one [lowest cost alternative], the congressional clause. It's not my preferred test, but it should be [something] that is applied uniformly and consistently. Right now we have contracting officers applying different standards in different regions for what constitutes fair and reasonable."

All panel members interviewed agreed that, ultimately, the decision of what makes a price fair and reasonable must reside with contracting officers.

"It's a judgment call in every single case," said Branch. "Decisions will vary based on the individual."

Branch said that because of various concerns such as national security, trade agreements and contracting policies favoring U.S. companies, it's not always possible to get the lowest price.

"They want us to be the Wal-Mart of the world, but we realize that's not always possible," he said. "The whole confusion seems to be generally from a lack of reading that section [of the schedules pricing regulation] as a whole. We want to simplify it so [contracting officers] can read it as a whole. We don't necessarily want Chinese computers sitting in government offices."