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Testimony Before the Subcommittee on Federal Financial Management, 
Government Information, and International Security, Committee on 
Homeland Security and Governmental Affairs, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 2:30 a.m. EDT: 

Tuesday, July 26, 2005: 

Contract Management: 

Opportunities Continue for GSA to Improve Pricing of Multiple Award 
Schedules Contracts: 

Statement of David E. Cooper, Director: 
Acquisition and Sourcing Management: 

GAO-05-911T: 

GAO Highlights: 

Highlights of GAO-05-911T, a report to the Subcommittee on Federal 
Financial Management, Government Information, and International 
Security, Committee on Homeland Security and Governmental Affairs, U.S. 
Senate: 

Why GAO Did This Study: 

Each year, federal agencies spend billions of dollars to buy commercial 
products and services through the General Service Administration’s 
(GSA) Multiple Award Schedules program. The program has grown 
significantly over the past several years. Currently, federal agencies 
can directly purchase, through more than 16,000 schedule contracts, 
over 8 million products from more than 10,000 commercial vendors. In 
fiscal year 2004, purchases from these contracts totaled more than $32 
billion. 

The multiple award schedules program is designed to take advantage of 
the government’s significant buying power. To maximize savings, GSA 
negotiates discounts that are equal to or greater than those given to 
the vendor’s most favored customers. This testimony focuses on GSA’s 
historic use of two proven negotiation tools to improve the pricing of 
schedules contracts—pre-award audits and postaward audits of pre-award 
information. Pre-award audits allow GSA to avoid potential overpricing 
by verifying vendor pricing information before contracts are awarded. 
Postaward audits allow GSA to identify overpricing of awarded contracts 
and recover overcharges.

What GAO Found: 

Historically, GSA has used pre-award and postaward audits sporadically, 
thereby minimizing its ability to avoid excessive pricing and recover 
overcharges and potentially save millions of federal dollars. For more 
than 25 years, GAO has reported on GSA’s multiple award schedules 
program pricing problems. In March 1977, we reported that pre-award 
information on 6 of 15 contract proposals was not accurate, complete, 
or current. In 1979, we again reported that pricing information 
submitted by some vendors was unreliable. Moreover, only 1 pre-award 
audit and 10 postaward audits had been conducted during fiscal years 
1977 and 1978 of which 9 found inaccurate sales information had been 
reported by vendors or the availability of better discounts had not 
been disclosed. These problems continued throughout the 1980s. In the 
early 1990s, GSA made good use of pre-award and postaward audits, 
negotiating nearly $480 million in cost savings and recovering about 
$90 million in vendor overcharges over 5 years.

However, in August 1997, GSA revised its acquisition regulations and 
effectively eliminated the use of postaward audits. While GSA expected 
pre-award audits to increase, this increase never materialized. In 
August 2001, the GSA Inspector General reported that GSA was not 
consistently negotiating most favored customer pricing. For just one 
contract, the Inspector General projected that over the contract’s 
term, GSA customers would pay nearly $40 million more than they should 
have. In February 2005, we completed our most recent review of the 
multiple award schedules program and found that pricing problems 
persist and that the number of pre-award audits continued to decline. 
We concluded that GSA was continuing to miss opportunities to save 
hundreds of millions of dollars.

Pre-award Audits in Fiscal Years 1992 through 2004: 

[See PDF for image]

[End of figure]

What GAO Recommends: 

In its February 2005 report, GAO made three recommendations aimed at 
improving the multiple award schedules contracts pricing. 

www.gao.gov/cgi-bin/getrpt?GAO-05-911T.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact David E. Cooper at (202) 
512-4841 or cooperd@gao.gov.

[End of section] 

Chairman Coburn and Members of the Subcommittee: 

Thank you for inviting me here today to discuss the General Services 
Administration's (GSA) use of pre-award and postaward audits in pricing 
its multiple award schedules contracts. Each year, federal agencies 
spend billions of dollars to buy commercial products and professional 
services through GSA's multiple award schedules program. The program is 
designed to take advantage of the government's significant buying power 
when purchasing a wide range of commercially available products--such 
as office furniture and supplies, personal computers, and tools--and a 
variety of professional services. Through more than 16,000 contracts, 
federal agencies can directly purchase more than 8 million products 
from more than 10,000 commercial vendors. The multiple award schedules 
program has grown significantly over the past several years. In fiscal 
year 2004, federal agencies purchased more than $32 billion of products 
and services through the program. 

To get the most out of each taxpayer dollar, GSA seeks to leverage the 
government's immense buying power by negotiating discounts from the 
vendor's price list that are equal to or greater than the vendor's most 
favored customers.[Footnote 1] These negotiations have a direct bearing 
on how economically government agencies procure products and services. 
Today, my statement will focus on GSA's historic use of two proven 
negotiation tools to improve the pricing of schedules contracts--pre- 
award audits and postaward audits of pre-award information. Pre-award 
audits allow GSA contract negotiators to avoid potential vendor 
overpricing by verifying pricing information before contracts are 
awarded. Postaward audits allow negotiators to identify overpricing of 
awarded contracts and recover overcharges. 

In summary, GSA has used these two key price negotiation tools on a 
limited basis. When GSA has used pre-award and postaward audits, it has 
been able to avoid or recover hundreds of millions of dollars in 
overcharges. In recent years, however, the use of these pricing tools 
has declined dramatically--despite dramatic increases in program sales. 
Consequently, GSA has less assurance that vendor-supplied pricing 
information is accurate, complete, and current, and its ability to 
deter overpricing and recover overcharges has been minimized. By 
delaying action to address its contract pricing problems, GSA continues 
to miss opportunities to minimize prices paid for goods and services 
and save significant sums of federal dollars. 

Background: 

GSA established the Federal Supply Schedule (FSS) program in 1949 to 
facilitate federal agencies' purchase of common products and services 
from commercial vendors through schedule contracts. The multiple award 
schedules program, the largest FSS program, was designed to provide 
agencies with a simplified method for purchasing varying quantities of 
a wide range of commercially available products, such as office 
furniture and supplies, personal computers, scientific equipment, 
network support, and various professional services.[Footnote 2] The 
schedules program provides advantages to both federal agencies and 
vendors. By using this simplified method of procurement, agencies can 
avoid using other more time-consuming and administratively costly 
procurement methods. Vendors receive wider exposure of their commercial 
products and services and expend less effort to sell them. 

In administering the multiple award schedules program, GSA is 
responsible for ensuring that negotiated prices reflect the 
government's aggregate buying power. GSA contracting officials seek 
discounts from a vendor's price list that are equal to or greater than 
the vendor's most favored customer's discounts. GSA awards contracts to 
multiple vendors supplying comparable commercial products and services. 
Federal agencies order products and services directly from the vendors 
that best meet their needs. Prices paid by federal agencies include a 
fee for GSA to recover program costs, including contract administration 
and program support.[Footnote 3]

In the mid-1990s, GSA had about 5,200 schedules contracts. By fiscal 
year 2004, this number had increased to over 16,000 contracts. As the 
number of contracts offering products and services to federal agencies 
increased, the sales volume skyrocketed. Between fiscal years 1995 and 
2004, program sales increased more than sixfold, from $4.9 billion to 
about $32.5 billion (see fig. 1). 

Figure 1: Multiple Award Schedules Sales Volume and Contracts, Fiscal 
Years 1995 through 2004: 

[See PDF for image]

[End of figure]

Because prices that agencies pay for schedule products and services are 
the result of negotiations between GSA and individual vendors, the 
pricing of products and services being offered is key to the contract 
negotiation process. GSA contracting officials use various tools to 
analyze vendor offers and establish negotiation objectives. Tools 
commonly used include market research, sales histories, invoices and 
references, and competitor price lists. Of all the pricing tools 
available for contract negotiation, two tools--pre-award audits and 
postaward audits of pre-award information--are specifically designed to 
protect the government from overpricing. Pre-award audits enable 
contract negotiators to verify that vendor-supplied pricing information 
is accurate, complete, and current before the contract is awarded. 
Postaward audits serve as a deterrent to overpricing and a primary tool 
for recovering vendor overcharges. 

Historically, GSA Has Not Consistently Made Good Use of Pre-award and 
Postaward Audits: 

GSA's use of pre-award audits and postaward audits of pre-award 
information has been sporadic--a finding we have reported for more than 
25 years. For example, in March 1977, we reported that although sales 
from multiple award schedules contracts amounted to $840 million, 
vendor proposals were rarely independently audited and the veracity of 
the information submitted was suspect.[Footnote 4] We found that sales 
and discount information submitted on 6 of 15 contract proposals was 
not accurate, complete, and current. Further, we found that 25 pre- 
award audits done in fiscal years 1973 and 1974 had resulted in 
recommendations of $962,000 in savings. Eighteen postaward audits done 
in the same years resulted in GSA claims of more than $1.4 million. In 
1979, we again reported that price information submitted by some 
vendors was unreliable.[Footnote 5] Also, our comparison of 29 products 
available through four states' annual contracts, as well as GSA 
schedules, found that prices were on average 20 percent to 57 percent 
lower under the state contracts. We estimated that had GSA obtained the 
same discounts as did the states, $5.8 million would have been saved in 
fiscal year 1978 on purchases of calculators, dictating equipment, 
typewriters, and lamps from the same manufacturers. Moreover, of the 11 
audits (1 pre-award and 10 postaward) that had been done during fiscal 
years 1977 and 1978, all but 2 found inaccurate sales information had 
been reported by vendors or the availability of better discounts had 
not been disclosed. 

Pricing problems continued throughout the 1980s, and GSA's use of pre- 
award audits and postaward audits of pre-award information was limited. 
For example, in 1986, we again reviewed GSA's price negotiations for 
the multiple award schedules program, which at that time consisted of 
about 3,300 contracts with sales of about $2.3 billion. Our review of 
20 contracts found that while the prices GSA obtained appeared to be 
fair and reasonable, action was needed to obtain better 
prices.[Footnote 6] On one multiple award schedules contract, where the 
vendor did not offer the government discounts comparable to the most 
favored customer, a reopening of contract negotiations resulted in an 
estimated savings of $1.6 million. We also found that the number of pre-
award audits decreased between fiscal years 1984 and 1985. The decrease 
was attributed to reductions in the Inspector General's staff, a shift 
in resources to audits of higher dollar value contracts, and the change 
from single-year to multiple year contracts. In response to our concern 
about the continuing decline in the number of pre-award audits, GSA 
agreed to take actions to provide adequate audit coverage, including 
shifting resources from other GSA offices to the Inspector General's 
office, as well as within the office, and an increase in the Inspector 
General's fiscal year 1987 budget. 

In the early 1990s, schedules sales remained relatively stable, ranging 
between $4 billion and $5 billion, annually. During this period, GSA 
successfully performed a significant number of pre-award and postaward 
audits. For example, from fiscal years 1992 through 1996, the GSA 
Inspector General conducted 624 pre-award audits--an average of 125 
each year. These pre-award audits resulted in nearly $480 million in 
negotiated cost savings for GSA's customers. Additionally, from fiscal 
years 1990 through fiscal year 1994, the GSA Inspector General reported 
that it recovered an average of $18 million each year in vendor 
overcharges. Most of these postaward audit recoveries were the result 
of vendor failure to provide accurate, complete, and current 
information in the negotiation of their contracts and their failure to 
report and offer price reductions. 

Despite Skyrocketing Sales, Pricing Problems and the Overall Decline in 
the Use of Pre-award Audits Have Continued: 

In August 1997, GSA revised its acquisition regulations to expand 
access to commercial products and services and implement greater use of 
commercial buying practices. As part of this revision, GSA specifically 
removed[Footnote 7] language from the examination of records clause 
that automatically granted postaward audit rights for pre-award pricing 
information in every schedules contract.[Footnote 8] To offset the 
reduction in these postaward audits, GSA proposed to increase emphasis 
on the use of pre-award audits. According to GSA, this approach would 
provide the contracting officer a mechanism for verifying information 
submitted by vendors and avoid pricing problems instead of uncovering 
problems after contract award. However, recent GSA Inspector General 
and GAO reviews have shown that GSA's long-standing pricing problems 
have continued and the plan to increase the use of pre-award audits 
never materialized. 

GSA's Inspector General and GAO Continue to Identify Pricing Problems: 

In August 2001, the GSA Inspector General reported that while schedules 
program sales had grown dramatically, certain program fundamentals-- 
including pricing objectives and other pricing tools--had been 
marginalized.[Footnote 9] Specifically, the Inspector General found 
that contracting officers were not consistently negotiating most 
favored customer pricing or adequately performing price analyses. For 
example, the Inspector General reported that a major distributor of 
information technology products sold its top 10 GSA-selling models to 
commercial customers at an average price that was 6 percent lower than 
the price offered to federal agencies. The Inspector General projected 
that over the contract's term, GSA customers would pay nearly $40 
million more for these products than they should. 

In February 2005, we completed our most recent review of the multiple 
awards schedules program and found that contract pricing continues to 
be a problem.[Footnote 10] Table 1 summarizes the extent of the 
problems found with 62 contracts in June 2004. 

Table 1: Contract Documentation Weaknesses of Schedules Contracts by 
Acquisition Center: 

Acquisition center: Center for Facilities Maintenance & Hardware; 
Contracts reviewed: 2; 
Contracts that did not meet pricing documentation requirements[A]: 2; 
Contracts with inadequate price analysis: 0; 
Contracts that did not fully document price negotiations: 0; 
Contracts that did not identify most favored customer price: 0. 

Acquisition center: General Products Acquisition Center; 
Contracts reviewed: 10; 
Contracts that did not meet pricing documentation requirements[A]: 5; 
Contracts with inadequate price analysis: 5; 
Contracts that did not fully document price negotiations: 0; 
Contracts that did not identify most favored customer price: 0. 

Acquisition center: Information Technology Center; 
Contracts reviewed: 10; 
Contracts that did not meet pricing documentation requirements[A]: 8; 
Contracts with inadequate price analysis: 5; 
Contracts that did not fully document price negotiations: 7; 
Contracts that did not identify most favored customer price: 4. 

Acquisition center: Management Services Center; 
Contracts reviewed: 10; 
Contracts that did not meet pricing documentation requirements[A]: 10; 
Contracts with inadequate price analysis: 9; 
Contracts that did not fully document price negotiations: 9; 
Contracts that did not identify most favored customer price: 4. 

Acquisition center: National Furniture Center; 
Contracts reviewed: 10; 
Contracts that did not meet pricing documentation requirements[A]: 2; 
Contracts with inadequate price analysis: 1; 
Contracts that did not fully document price negotiations: 2; 
Contracts that did not identify most favored customer price: 1. 

Acquisition center: Office Supplies & Administrative Services 
Acquisition Center; 
Contracts reviewed: 10; 
Contracts that did not meet pricing documentation requirements[A]: 9; 
Contracts with inadequate price analysis: 6; 
Contracts that did not fully document price negotiations: 6; 
Contracts that did not identify most favored customer price: 2. 

Acquisition center: Services Acquisition Center; 
Contracts reviewed: 10; 
Contracts that did not meet pricing documentation requirements[A]: 1; 
Contracts with inadequate price analysis: 0; 
Contracts that did not fully document price negotiations: 0; 
Contracts that did not identify most favored customer price: 1. 

Total[B]; 
Contracts reviewed: 62; 
Contracts that did not meet pricing documentation requirements[A]: 37; 
Contracts with inadequate price analysis: 26; 
Contracts that did not fully document price negotiations: 24; 
Contracts that did not identify most favored customer price: 12. 

Source: GAO analysis of GSA data. 

[A] Contract file documentation is to clearly establish that the vendor-
supplied pricing information was accurate, complete, and current; that 
the vendor information was relied upon during the negotiations; 
adequate price analysis was conducted; reasonable negotiation 
objectives were established; the leverage of the total government's 
requirements was considered in negotiating prices; and the prices 
awarded were determined fair and reasonable. 

[B] Each contract could have all, some, or none of the weaknesses 
listed in each of the columns. 

[End of table]

We found that a GSA review of 62 contract files identified 37 
contracts--nearly 60 percent--that lacked sufficient documentation to 
clearly establish that the contracts were effectively negotiated. 
Twenty-six of the 62 contracts--roughly 40 percent--lacked adequate 
price analyses or price negotiation documentation. 

Decline of Pre-award Audits Continued: 

Between fiscal years 1997 and 2004, GSA completed only 155 pre-award 
audits--an average of about 19 each year, compared to the average of 
125 pre-award audits annually for the prior 5 years (see fig. 2). 
During this same 8-year period, schedules sales increased nearly five- 
fold from about $6.6 billion in fiscal year 1997 to $32.5 billion in 
fiscal year 2004. 

Figure 2: Pre-award Audits Conducted in Fiscal Years 1992 through 2004: 

[See PDF for image]

[End of figure]

As the number of pre-award audits performed continued to decline, so 
too did the amount of negotiated cost savings. Between fiscal years 
1992 and 1997, the GSA Inspector General reported a total of nearly 
$496 million in savings--an average of nearly $83 million per year. 
Between fiscal years 1998 and 2004, the total savings reported had 
dropped to about $126 million--an average of only $18 million per year 
(see fig. 3). 

Figure 3: Negotiated Cost Savings from Pre-award Audits Conducted in 
Fiscal Years 1992 through 2004: 

[See PDF for image]

[End of figure]

According to GSA Inspector General and contracting officials, the 
decline in pre-award audits was largely due an organizational culture 
that stresses making award decisions quickly and because pre-award 
audits were not emphasized institutionally in GSA. Also, GSA management 
officials told us that they believe increasing the contract length from 
1 year in the mid-1990s to the 5 years of today has also limited pre- 
award audits because the number of opportunities for pre-award audits 
has been reduced. We believe, however, that the potential for pre-award 
audits is substantial. Since the mid-1990s, the number of schedules 
contracts awarded increased from about 5,200 in fiscal year 1995 to 
over 16,000 in fiscal year 2004, significantly increasing the potential 
for pre-award audits. 

While conducting our review, we tested GSA's assertion that longer-term 
contracts reduced the opportunity for pre-award audits, applying GSA's 
guidance[Footnote 11] to contract negotiators on when to request audit 
assistance. As we reported in February 2005, we found that 71 contracts 
awarded or extended in fiscal year 2003 met the pre-award audit 
threshold, but GSA only completed 14 pre-award audits--57 fewer than we 
identified as potential audits. In fiscal year 2004, GSA selected 55 
contract offers for pre-award audits. The GSA Inspector General 
completed 40 of these audits. 

In our most recent review, we also found that GSA has not conducted 
postaward audits of pre-award information since 1997--when GSA revised 
its policy on the use of such audits. The revised policy had the effect 
of eliminating the use of postaward audits. With the dramatic increase 
in sales and the continuing decline in pre-award audits, the potential 
for significant recoveries of vendor overcharges could be substantial. 

Recent GSA Actions to Improve Price Negotiations: 

In our February 2005 report, we made three recommendations aimed at 
helping GSA ensure that prices are effectively negotiated for schedules 
contracts. We recommended that the GSA Administrator (1) ensure that 
pre-award audits are conducted when the threshold is met for both new 
contract offers and contract extensions, (2) develop guidance to help 
contracting officers determine when postaward audits are needed, and 
(3) direct GSA program management to revise its quality control program 
to (a) determine the underlying causes for contract pricing 
deficiencies and (b) develop appropriate plans to implement corrective 
actions. 

GSA management officials agreed with our recommendations, and stated 
that GSA would: 

* continue to work with the Inspector General to increase and improve 
the number of pre-award audits,

* publish an advance notice of proposed rulemaking in the Federal 
Register to request comments on the role of postaward audit reviews in 
the acquisition process,[Footnote 12] and: 

* evaluate the results of the fiscal year 2004 contract file review and 
that this evaluation would involve a discussion and identification of 
the underlying reasons for any weaknesses. 

We believe that GSA's actions are a good first step toward addressing 
its long-standing pricing problems with multiple award schedules 
contracts. However, unless these actions are effectively implemented 
the risk of pricing problems will continue. 

In conclusion, while GSA's schedules program has provided the 
government with a more flexible and cost-effective approach to buying 
commercial items, our work has shown that the program has long been 
fraught with problems of contract overpricing--resulting in millions of 
taxpayer dollars being wasted. Historically, pre-award and postaward 
audits have proven their value in deterring overpricing and recovering 
vendor overcharges. Until GSA takes steps to ensure the appropriate use 
of available pricing and negotiation tools, it will continue to miss 
opportunities to save the government hundreds of millions of dollars in 
the procurement of goods and services. 

Mr. Chairman and Members of the Subcommittee, this concludes my 
prepared statement. I will be happy to address any questions you may 
have at this time. 

Contact and Acknowledgments: 

For further information, please contact David E. Cooper at (202) 512- 
4841 or by e-mail at cooperd@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this testimony. Individuals making key contributions to this 
testimony include James Fuquay, Sanford Reigle, Victoria Klepacz, Karen 
Sloan, and Sylvia Schatz. 

FOOTNOTES

[1] The most favored customer is a customer or category of customers 
that receives the best discounts from the vendor's commercial price 
list. 48 C.F.R. 538.270(a). 

[2] In 1960, GSA delegated authority to the Veterans Administration to 
manage and award schedules contracts for all medical products and 
services needed throughout the federal healthcare system. 

[3] The GSA schedule fee in fiscal year 2005 is 0.75 percent of 
negotiated item or service price. 68 Fed. Reg. 41286 (July 11, 2003). 

[4] GAO, Federal Supply Service Not Buying Goods at Lowest Possible 
Price, PSAD-77-69 (Washington, D.C.: Mar. 4, 1977). 

[5] GAO, Ineffective Management of GSA's Multiple Award Schedule 
Program--A Costly, Serious, And Longstanding Problem, PSAD-79-71 
(Washington, D.C.: May 2, 1979). 

[6] GAO, GSA Procurement: Are Prices Negotiated for Multiple Award 
Schedules Reasonable?, GAO/GGD-86-99BR (Washington, D.C.: July. 8, 
1986). 

[7] The revised regulations allow the contracting officers to modify 
contract language to provide for postaward access to vendor-supplied 
information if they determine there was a likelihood of significant 
harm to the government without such access, and obtain the senior 
procurement executive's approval. 

[8] GSA, however, retained the right to conduct postaward audits for 
overbilling, billing errors, and compliance with the Price Reduction 
and Industrial Funding Fee clauses. GSAR 552.215-71. 

[9] General Services Administration, Office of Inspector General, MAS 
Pricing Practices: Is FSS Observing Regulatory Provisions Regarding 
Pricing? (Washington, D.C.: Aug. 24, 2001). 

[10] GAO, Contract Management: Opportunities to Improve Pricing of GSA 
Multiple Award Schedules Contracts, GAO-05-229 (Washington, D.C.: Feb. 
11, 2005). 

[11] Procurement Information Bulletin (PIB) 03-4: Audit Assistance- 
Multiple Award Schedule (MAS) Contracts; General Services 
Administration, June 20, 2003. This guidance instructs contract 
negotiators to request audit assistance when the dollar value for 
estimated sales of a contract offer or extension exceeds $25 million 
for the 5-year contract period. 

[12] GSA published advance notice of proposed rulemaking in the Federal 
Register on March 11, 2005, requesting comments on whether postaward 
audit provisions should be included in its FSS contracts and 
governmentwide acquisition contracts. The Federal Register notice was 
amended on March 17, 2005 (70 FR 13005) and again on April 12, 2005 (70 
FR 19051) to extend the comment period until May 10, 2005, and to add 
further comments concerning the Examination of Records clause at GSAR 
552.215-71.