Reduce Exposure Through Disclosure: Minimizing Risk in GSA Option Extensions
By Jeff Clayton, Julia Smith & Leo Alvarez | Baker Tilly, Deltek Partner
The time of option extension is a prime opportunity for General Service Administration (GSA) Schedule contractors to revisit all key areas of compliance. With the check of a box, contractors make the choice to put themselves at risk.
A high risk area that contractors should pay particularly close attention to are the commercial sales practices that form the basis for the negotiated prices for GSA Schedule contracts. In fact, according to the GSA Office of Inspector General’s (OIG) most recent semi-annual report to Congress, 52% of contractors who received pre-award or post-award audits during the April through September 2018 timeframe were alleged to have provided their contracting officers with inaccurate commercial sales practice disclosures. A company’s failure to keep those disclosures current, accurate and complete expose it to audit risk (and the potential for increased scrutiny during audits), financial liability and even false claims act litigation.
This can be of critical importance at the time of option extension, when a contractor may be more likely to receive a pre-award audit of its Schedule contract. This post will review recommendations for preventative controls to ensure commercial sales practice disclosures are current, accurate and complete.
GSA Option Extensions: How to Survive & Thrive
Option Extension Process
In September of 2011, the GSA introduced Option Process Ensuring iNtegrity (OPEN) for Federal Supply Schedule (FSS) contracts with the hope of streamlining the process and meeting former Commissioner Steven Kempf’s goal of exercising options 60 days prior to contract expiration. In a nutshell, it refocuses the extension process, shifting it closer to what it was originally intended to be—a unilateral modification that extends the contract with the same terms and conditions for another five years. It also translates into a much earlier notification letter for contractors, with notification approximately 210 days prior to option expiration and often with a 45-day turnaround on the option package.
Two things of critical importance: 1) A responsible GSA Schedule contractor needs to thoroughly review their historical pricing practices to ensure that their pricing disclosures are current, accurate and complete; and 2) If a contractor needs to make contract modifications they will need to accomplish those changes outside of the option exercise modification itself. For example, if a contractor wishes to add or delete products or services, request an economic price adjustment, or offer lower prices, the contractor will likely be required to do this independent of the option exercise. Meaning, what was previously a best practice recommendation is now a pragmatic and necessary step—contractors must start the review of their Schedules at least nine months prior to option expiration, and they should attempt to make any bilateral contract modifications prior to when they receive their notification letter.
The first question asked in the standard OPEN option exercise notification is whether a contractor wants their contract to be considered for the option to extend. If they do want their contract to be extended, the government requests that they submit the following within 45 days.
- Affirmation that there are no changes to their current CSPs, and that they are current accurate and complete; or
- Revised CSPs.
Price Reduction Clause (PRC)
- Affirmation that the PRC price/discount relationship has not changed; or
- A change in disclosed Basis of Award customer discounts utilizing the CSP disclosures noted above.
- Affirm that the terms and conditions of the contract have not changed; or
- Submit revised terms and conditions; and
- Address additional administrative requirements.
Commercial Sales Practice Disclosures
It may be tempting for a contractor to affirm that their commercial sales practices have not changed, but the only way to ensure that CSP disclosures are current, accurate and complete is to perform a historical pricing analysis that includes a review of all commercial sales during the preceding 12 months. Start with a data-driven analysis that captures and analyzes commercial sales data, and conclude with a review of policy and process, as well as discussions with the business stakeholders to further refine the findings.
Frequently this type of review reveals that discounting policies and practices have changed, particularly if they have not been closely monitored during the contract term. Updating the Commercial Sales Practice Format (CSP-1) is an important step to reducing compliance pitfalls, as is drafting a detailed narrative carefully describing all standard practices, as defined in written policies/procedures, and non-standard practices, as revealed by the historical pricing analysis. While the CSP-1 requires a contractor to explain all deviations from their “standard” practices, contractors often provide just enough text to answer the question. This is the place to eliminate all ambiguity surrounding what an organization does and does not do when it comes to commercial customers. It also allows the contractor to disclose all pertinent information to the GSA CO in writing and removes ambiguities that might otherwise be interpreted in a disadvantageous way in the future.
Our firm, Baker Tilly, has worked with contractors after they have provided disclosures that were accurate, but not complete, or that were both inaccurate and incomplete. The outcomes can be just as bad under either of these scenarios, particularly if the contractor has been audited and has had difficulty responding to auditor requests accurately and timely fashion. In fact, many multi-million dollar GSA Schedule settlements have resulted from some combination of disclosures that were not current, accurate, complete, or displayed an inability to respond to auditors’ requests.
Although performing a historical pricing analysis can be time consuming, the effort pales in comparison to the potential financial impact resulting from an adverse audit report, or the time spent responding to audit requests. For large contractors who may be more likely to be subjected to pre-award audits, the data and analysis produced during an internal pricing review will prepare the company to respond promptly and accurately to the auditors’ requests and expedite an audit.
Price Reduction Clause
While CSP disclosures provide information that allows the government to make a fair and reasonable pricing determination, the PRC is GSA’s mechanism for ensuring it continues to receive fair and reasonable pricing throughout the life of the contract. The Basis of Award (BOA) customer, or customer group, and the price/discount relationship between the BOA customer and GSA are agreed upon by the government and the contractor for purposes of monitoring the PRC. The price/discount relationship is the discount differential between the BOA and GSA customers, and it must be maintained per the PRC. The OPEN option extension process provides a contractor with the opportunity to update its disclosures for purposes of the PRC.
At the time of option extension, a contractor should take the opportunity to assess its BOA customer, or customer group, for relevancy and determine if it continues to be a good fit. A contractor should ask itself whether its BOA customer group provides its government customers with adequate price protection while avoiding unnecessarily inhibiting its flexibility to do business in the commercial marketplace. If this is not the case, the contractor should consider proposing a new BOA customer, based on intelligence gained from its historical pricing analysis rather than supposition. Clearly explaining the price/discount relationship in the pricing narrative can also help eliminate potential misinterpretations surrounding how PRC compliance will be handled.
OPEN Administrative Requirements
In addition to affirming or updating pricing disclosures, a contractor must also complete the following administrative tasks.
Redetermination of business size
- Must submit current business size in accordance with the most current North American Industry Classification System (NAICS) code awarded under their contract.
- If a contractor qualifies as “other than small business” they must submit a proposed SubK Plan for evaluation and approval prior to the option being extended.
Required actions that do not require submission of information.
- The contractor must ensure that their System for Award Management (SAM) registration is current and up-to-date.
- A contractor’s business size on SAM.gov must match their current status.
- The pricelist uploaded to GSA Advantage! must be the most recent version.
- All mandatory mass modifications must be reviewed and accepted.
The GSA OIG periodically conducts pre-award or post-award audits of GSA Schedule contractors. Historically, the GSA conducts approximately 50 pre-award audits and 10 post-award audits a year. Pre-award audits are most typically conducted when a contractor is undergoing an option exercise. The contractor will receive a letter from the OIG about 210 days prior to option expiration (about the same time they would receive their option extension notification letter) informing the contractor that they have been selected for an audit and requesting, among other things, transactional sales data. During an audit, the OIG will review a contractor’s disclosed sales practices and offered pricing, and compare this to its own analysis of transactional data. If a contractor has been conscientious in preparing its option package, they should be well prepared to respond to any questions or audit findings.
Post award audits occur with much less frequency and may be initiated as a result of:
- Something found during a pre-award audit
- A Contractor Assessment
- By request of the Contracting Officer
- A tip made to OIG’s hotline
- Something else that catches GSA’s eye.
These can often be more in depth than a pre-award audit and may involve a review of very specific contractual pricing requirements.
IMPORTANT GSA SCHEDULE UPDATE: Schedules Consolidation
In one of the most significant changes in recent GSA history, the agency announced in late November that the current 24 Multiple Award Schedules, excluding Veteran Administration Schedule contracts, would be consolidated down to one over the next two years. The GSA has not shared many details around the consolidation at this point, but early indications are that contractors undergoing option extension within the next two years will not experience many differences in the process. While it’s challenging to predict the exact impact the Schedules consolidation will have on GSA Schedule contractors, it is not difficult to imagine it could pose a challenge for contracting officers with items such as unfamiliar Special Item Numbers (SINs). Another area that could impact the GSA and GSA contractors is transitioning those that hold multiple GSA Schedule contracts to a consolidated contract. A review of GSA’s recent efforts to consolidate several contracts into the Professional Services Schedule (PSS) provides insight into the types of problems that could be encountered during a transition like this. As part of the PSS consolidation, contractors were instructed that the consolidation process was meant to transfer over existing terms and conditions and not re-assess Commercial Sales Practices disclosures. The GSA was criticized by the OIG because the lack of a proper review of a consolidated contract’s pricing, which could have resulted in pricing that would not have been evaluated for up to 10 years. It is likely that this experience will play a role in how the GSA approaches the consolidation of its remaining GSA Schedule contracts.
As a GSA Schedule contractor, it is always important to understand the key terms and provisions within a contract, and the affirmative actions to take to effectively manage a contract and mitigate risks. Preparing CSP disclosures that are current, accurate and complete is just one of those requirements, and despite the level of effort required, it is something that every contractor should make certain of when pursuing new contracts or completing other important contract actions. Overall, the option extension process is a time to take a step back and make sure all disclosures are right and that contract management policies and processes are working as intended. Investing here can ultimately save time and frustration, and ultimately position a contractor well for continued top-line contract performance and compliance.
Need more information and guidance on GSA option extensions? Hear our detailed overview of the process during the webinar GSA Option Extensions: How to Survive & Thrive.
About the Author
Jeff Clayton is a principal at Baker Tilly, with more than 19 years of industry and consulting experience in government contracting and commercial environments. He frequently works with clients to support their federal market goals, to include the preparation of GSA and VA Federal Supply Schedule proposals and option exercise packages.
About the Author
Julia Smith is a senior manager at Baker Tilly, with more than 11 years of experience, including audit and litigation support, FSS proposal preparation, contract modifications, option extensions, and contract compliance. Her efforts require complex historical pricing analyses, Basis of Award and pricing strategy development, preparation of commercial sales practices disclosures, contract negotiations, and compliance program development.
About the Author
Leo Alvarez, CFCM, is a manager in Baker Tilly’s Government Contractor Advisory Services practice. He has more than 11 years of experience working with federal contractors to identify, quantify and manage government contract risk. Additionally, Leo has extensive experience managing the preparation of GSA and VA Federal Supply Schedule proposals, including historical pricing analysis, BOA and CSP disclosure development, and negotiation support.
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