July Legal Corner

GSA Schedule Option Extensions – A Time of Risk and Opportunity

Guest Bloggers: Bill Bressette & Jeff Clayton, Baker Tilly

Many contractors don’t fully understand the disclosures that form the basis for the negotiated prices on their GSA Schedule contracts, but a company’s failure to keep those disclosures current may expose it to audit risk and financial liability when the Office of Inspector General (OIG) comes knocking. This is 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. Let’s begin with a quick overview of the option extension process.

In September of 2011, GSA introduced the Option Process Ensuring iNtegrity (OPEN) for Federal Supply Schedule (FSS) contracts with the hope of streamlining the process and meeting Commisssioner Kempf’s goal of exercising options 60 days prior to contract expiration. In a nutshell, it refocuses the extension process on 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 a 45 day turnaround on the option package.

Two things are of critical importance here, 1) as a responsible GSA Schedule contractor, you will need to thoroughly review your historical pricing practices and ensure that your pricing disclosures are current, accurate, and complete, and 2) if you do find that you need to make changes to the terms and conditions of your contract you 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. This means that what was previously a best practice recommendation is now a pragmatic and necessary step—contractors must start the review of their Schedules at least 12 months prior to option expiration and they should attempt to make any bilateral contract modifications prior to when they receive their notification letter.

Perform a Broad GSA Schedule Compliance Assessment

This is an ideal time for contractors to revisit all key areas of GSA Schedule compliance, particularly in the areas of PRC and Quarterly Sales/IFF administration. They should take the time to test the preventive and detective controls established within their systems to ensure they are working as planned. Preventive controls are typically system controls designed to ensure a company follows an established policy or procedure. One such control might consist of a required field in the order entry system that ensures sales personnel include GSA Schedule Contract information at the time of order placement. This helps to identify a GSA sale up front and gives the contractor some level of confidence in the GSA sales numbers (and consequently the IFF remittance) that are reported on a quarterly basis. Detective controls may, for example, include a periodic review of sales data to identify PRC triggering deals which may not have been reported. Detective controls are designed to ensure that the preventive controls, including policies, procedures and training, are functioning as intended.

Policies and processes should also be reviewed to make certain that they adequately address the compliance concerns within the context of a contractor’s current organizational structure and previous contract disclosures. Changes in business unit structure/operations, sales or marketing practices, and certainly changes driven by mergers and acquisitions can often render an existing policy or process ineffective. For example, a contractor may have an adequate process in place for tracking all GSA Contract sales in its current system; however, through acquisition, the company acquires a business unit with different systems that will not be integrated or migrated for some period of time. If this unit will make use of your GSA Schedule, it’s likely that your current process for identifying sales in your system may not be capturing GSA sales made through the newly acquired unit. Finally, contractors should review the efficacy their training programs and periodic internal reviews. An annual compliance review is a good way to test your policies, procedures, and training. Personnel subject to periodic training on document retention, for example, should be expected to have maintained the appropriate sales files required by your GSA Schedule contract. During an annual compliance review, validating that the policies surrounding document retention are actually achieving the desired result will do two things: 1) It will identify the gaps between policy and practice; and 2) In so doing, it will identify any weaknesses in your training program.

Conduct a Historical Pricing Review and Update GSA Pricing Disclosures

A detailed review of a company’s pricing practices during the preceding 12 months will frequently reveal that discounting policies and practices have changed, particularly if they have not been closely monitored during the contract term. We recommend that contractors not only update their Commercial Sales Practice Format (CSP-1), but that they also draft a detailed narrative carefully describing all of their standard practices as defined in written policies/procedures and the non-standard practices as revealed by the historical pricing analysis. The CSP-1 Format is a standard form in every GSA solicitation.

While the CSP-1 requires you to explain all deviations from your “standard” practices, contractors often provide just enough text to answer the question. We often recommend that a comprehensive narrative be developed and attached to the CSP-1 as a material part of the pricing disclosures. This is the place to eliminate all ambiguity surrounding what you do and don’t do when it comes to your commercial customers. We have also used the pricing narrative to eliminate any potential misinterpretation surrounding what the contractor understands the price/discount relationship to be and how the PRC compliance will be handled. This allows the contractor to disclose all pertinent information to the GSA CO and removes ambiguities that might otherwise be interpreted in a disadvantageous way in the future.

Although the compliance review and historical pricing analysis can be time consuming, the effort pales in comparison to management’s distraction and the potential financial impact of an adverse audit report from the GSA Office of Inspector General (OIG). For large contractors who are more likely to be subjected to pre-award audits, the data and analysis produced during such an internal review will help expedite the performance of the onsite portion of the audit.

Conclusion

As we have seen in several recent high profile matters brought on by the GSA OIG and Department of Justice, the cost of non-compliance with GSA Schedule contract terms and conditions can be severe. Among the more highly publicized of these is the one in which Oracle Corporation settled False Claims Act allegations by agreeing to a $199.5 million dollar settlement. All contractors, regardless of size, should be prepared for the eventuality of an audit. When the time comes to exercise the option to extend a contractor’s GSA Schedule contract, they should take the opportunity to confirm that their practices are properly disclosed and that they have an effective compliance program in place. Although the additional disclosures that result may raise questions and complicate things in the near term, it will go a long way to ensuring long term GSA Schedule contracting success.

Baker Tilly provides a wide range of government contract consulting services, including GSA Schedule proposal preparation, contract administration, compliance and audit support. For additional information contact: Bill Bressette at 703 923 8624 or [email protected] or Jeff Clayton at 703 923 8568 or [email protected].

Original post