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Two large information technology vendors recently chose not to renew schedule contracts with the General Services Administration because of increased questioning by the agency's inspector general into their pricing of services and products, with more defections possible, according to federal IT industry sources.

EMC Corp., which develops software and systems for information management and storage, and Canon USA, which manufactures printers, copiers, scanners and other office equipment, have chosen not to renew their multiple award GSA schedule contracts, which the majority of federal agencies use to buy IT equipment and other supplies. EMC officials chose not to renew their contract when it expired on June 30, and Canon officials did not renew their contract after it expired on Oct. 31, following a one-month extension.

EMC and Canon join Sun Microsystems Inc., maker of computer components and software, in dropping GSA schedule contracts. Sun canceled its contract in September amid an ongoing investigation into the company's pricing for information technology products and services.

The amount of sales EMC and Canon have had on the canceled contracts is not insubstantial. EMC had $46.8 million in fiscal 2006 and $28.2 million in fiscal 2007, according to Eagle Eye Publishing, a federal procurement research company in Fairfax, Va. (EMC's contract terminated at the end of the fiscal third quarter, missing the typically high sales in the federal government's fiscal fourth quarter.) On the contract Canon declined to renew, sales topped $66.3 million in fiscal 2006 and $62.5 million fiscal 2007, according to Eagle Eye.

EMC officials would not comment on why they did not renew. Canon spokesperson Michael DeMeo confirmed that an audit from the GSA's inspector general resulted in "unreasonable demands" that drove the vendor's decision to not renew. Canon is now looking into alternative procurement vehicles, the spokesperson said, and hopes to revisit a Multiple Award Schedule contract with GSA down the road. Officials with the GSA's inspector general's office did not return phone calls asking for a comment.

GSA spokesman Brian Filpot said, "EMC and GSA reached a mutual decision not to exercise the option to extend the contract." He declined to say why. He said either EMC or Canon can submit a new proposal at any time.

But a procurement expert familiar with the specifics of both contracts who asked not to identified said audits from GSA's inspector general, much like those conducted with Sun Microsystems, drove the vendors away. The IG had not audited the contracts in as much detail as the Sun contract, the expert said.

The IG often chooses to audit at the time of option extensions, asking for sales data and statements indicating that no price reductions have occurred under the contract. Each GSA schedule contract contains a clause that provides the government the option to extend the term after the first five years for five more years, up to three times. That would result in a total term of 20 years.

According to rules for multiple award schedules, contractors have to offer government their lowest prices. "For Sun, it wasn't worth the time and expense to defend themselves," the procurement expert said. "This wasn't a matter of serious compliance issues, but rather how the issues they did have were being portrayed by the IG. The same is true with EMC, and there are others that are leaving as we speak."

Multiple Award Schedule 70, which agencies use for the procurement of IT products, services and solutions, maintains 5,500 contracts, GSA's Filpot said. between January and September 2007, 188 contractors opted not to extend contracts for various reasons, although it's unclear how many were up for renewal and therefore subject to audit. Regardless, industry sources say that increased oversight by the IG's office has many contractors -- including some of the largest IT manufacturers -- worried about compliance.

"These requirements were always there, but no one took them seriously because the IG never enforced anything," said Steve Charles, executive vice president of the Immix Group, a government business consulting firm in McLean, Va. "Now the IG is back in the game enforcing requirements for companies ... analyzing all commercial sales data and making disclosures that fully represent what's in that data. Everyone is being faced with this."

"Many people in industry recognize that the GSA IG is very much more actively auditing than they typically were in the past," said Ray Bjorklund, chief knowledge officer at McLean, Va.-based market research firm Federal Sources. "Consequently, some companies are being proactive by seeking counsel on how to modify their schedules so the terms and conditions are in line with the present government rationale for scrutinizing the schedules program. A company seeking a schedule and a government contracting officer negotiating that schedule both have to engage in due diligence. We should not forget that the [schedules] program is built, in principle, on commercial offerings and practices."

For vendors who choose to drop out of the schedules, some can offer part of their product portfolio through partners who remain on the GSA schedules. They also can offer their products on other governmentwide acquisition contracts managed by other agencies.

The decisions to drop off the schedules have ramifications for agencies. Those using products offered by vendors dropping off could find it more difficult to obtain maintenance, leasing, service and parts replacement. Agencies that want to purchase new products not covered by another indefinite delivery, indefinite quantity contract will have to pay more to buy on the open market.

COMMENTS

• Jim, In theory, you're correct. But in practice, GSA is requiring the lowest price given to any customer as the basis for negotiation. And I don't know if you're a lawyer, consultant, or whatever, but the fact that you "have successfully represented a great many schedule holders in such negotiations"... I don't know if I should laugh or cry. Why would a firm need 3rd party representation in a negotiation that's based on a disclosure of commercial sales practices? (Don't worry, it's a rhetorical question :-)) Former GSA CO Posted November 14, 2007 8:57 AM
• It would be helpful if we could stop disseminated the false statement or suggestion that Schedule contractors “must” offer GSA their lowest prices. That simply is not true as is made clear by GSA’s own Commercial Sales Practices (CSP) Disclosure form. Question 3 on that form specifically asks offeror’s to state “yes” or “no” whether they are offering GSA their lowest price. If they say yes, then they must offer GSA their lowest price. But if they respond “no”, then they have no such obligation. In that case, they must make a complete disclosure of their commercial sales practices to enable GSA to determine a “reasonable” price. In the case of Sun and the others, they have apparently declined to offer GSA their lowest price because they are rational business people. They recognize that the minimum sales order under many schedule contracts is as low as $100. The key to successful schedule negotiations is being able to work with GSA to establish a “reasonable” price point that reflects the uncertainties of the Government market. I have successfully represented a great many schedule holders in such negotiations. Apparently in the high profile case of Sun and the others, the IG’s intervention precluded such a negotiation. This problem is only going to expand unless we return to the basic premise the CSP Disclosure is what it states – a disclosure statement. While vendors must disclose their lowest prices and explain the circumstances that resulted in those prices, they are not obligated to extend such prices to GSA and, in many if not most cases, compelling grounds exist for GSA to agree that the GSA price should not be the lowest price recognized by that vendor. Jim Phillips Posted November 13, 2007 2:48 PM
• After reading Former GSA IG Auditor's comments, I had to go make sure the Price Reductions clause had not changed. It hasn't. It states: (d) There shall be no price reduction for sales— (1) To commercial customers under firm, fixed-price definite quantity contracts with specified delivery in excess of the maximum order threshold specified in this contract; (2) To Federal agencies; (3) Made to State and local government entities when the order is placed under this contract (and the State and local government entity is the agreed upon customer or category of customer that is the basis of award); or (4) Caused by an error in quotation or billing, provided adequate documentation is furnished by the Contractor to the Contracting Officer. I was at GSA when it became Industrially-funded (i.e., self-sustaining), and worked on some of the original service MAS contracts including MOBIS (which the FSS administrator referred to as "Mo' Biz"). The Price Reductions clause benefits not only the contractor but also GSA. The thought was that agencies would spend more money (and thus, GSA would get more IFF) if the agencies could get better discounts on a large order (widgets or services) on schedule versus going open market, so GSA would not make those orders subject to teh price reductions clause. But now, with firms dropping out and other firms not willing to give agencies like mine a deeper discount on a large order because GSA is mis-interpreting the Price Reduction clause by requiring the lowest price ever charged to any customer for any reason, GSA is losing out, not just other agencies and contractors. Former GSA CO Posted November 13, 2007 11:28 AM