Defense inspector general OKs use of GSA contracting offices

Despite an ongoing interagency contracting fight, the Pentagon's inspector general has decided against restricting the Defense Department's business with the General Services Administration's Federal Technology Service regional contracting shops, sources at both agencies said.

In a possibly related development, GSA will acquiesce to the Pentagon's disputed interpretation of fiscal law for all future Defense acquisitions, agency and industry sources said.

Still apparently unresolved is whether GSA will agree to apply Defense's legal interpretation retroactively, as the Pentagon would like. If GSA were to do that, the cash-strapped agency would be forced to refund money to the Pentagon, perhaps hundreds of millions of dollars, sources said. The Defense Department, in turn, probably would have to return those funds to the U.S. Treasury. Pentagon and GSA acquisition officials met in person at least once last week to discuss the matter, an industry source said.

Earlier this year, the Defense inspector general was about to declare four regional FTS contracting shops off-limits for departmental purchases worth more than $100,000. Such a move would have been a huge blow to GSA, which already is reeling from sharply declining business.

Fiscal practices at the four regional FTS centers weren't in keeping with the Pentagon comptroller's interpretation of applicable law, Defense IG officials found. GSA maintained that the practices were legal.

The law in question governs when the clock starts counting the time remaining on contracts for services purchased on an annual basis -- so-called "severable services" contracts. Severable services form about 70 percent of the 11 regional FTS centers' business, said Gene Waszily, GSA's assistant inspector general for auditing.

GSA has maintained that the countdown on the one-year limit for severable services contracts starts when a contract is awarded. But Defense has argued it begins at an earlier point--when it transfers money to GSA. Defense Comptroller Tina Jonas outlined the department's position in a March 27 memorandum.

The two agencies continue to fundamentally disagree, but sources from both said the Defense IG recently decided not to issue a negative finding against the four regional centers. A GSA source said the IG backed off only after receiving assurances that GSA would accept the Pentagon's reading of fiscal law for all future Defense acquisitions.

A Defense acquisition source disagreed, however, saying there was no explicit quid pro quo between the Defense IG and GSA.

M.J. Pizzella, GSA's chief spokeswoman, also said there was no such agreement. "There isn't any deal," she said.

The Defense IG's office did not offer comment when reached Friday. The Pentagon comptroller's office did not respond to questions sent earlier, and GSA's Waszily would not comment on audit-related matters. Also, the Office of Management and Budget, which often acts as a referee on interagency arguments, had no comment.

GSA offered a statement that the Defense and GSA inspector generals have briefed the Senate Armed Services Committee and that "issues remain under active discussion between GSA and Defense."

One unresolved issue is whether GSA would have to refund money for contracts that Defense says were made after the funds had passed their fiscal year expiration date set by Congress. Because the Pentagon is citing expiration of appropriated funds as the reason the money should be refunded, in all likelihood, the department would have to return the money to the Treasury.

The prospect of canceled contracts because of such refunds does not sit well with industry representatives.

"We're concerned about the impact it would have on supporting ongoing critical [Defense Department] missions," said Alan Chvotkin, senior vice president of the Professional Services Council, an Arlington, Va.-based group that represents contractors.

Defense contracting officers "would tend to blame GSA more for the action, which would further harm [the agency's] relationship with customers that it wants to continue to do business with," said Larry Allen, executive vice president of the Washington-based Coalition for Government Procurement, a contractor trade association. Contractors who are performing the work might be left unpaid and GSA could lose the revenue it had gained by facilitating the transactions, he added.

The GSA reading of the law ensures that the time needed to award a new contract doesn't detract from the time period of services rendered. It can take from weeks to months to issue a contract, but if the clock is counting down during that time, there's pressure to act hurriedly, said a GSA official speaking on condition of anonymity.

"You don't want to artificially force people to do stupid things to get money on the contract quickly," the official added. A change in interpretation could also make Defense less likely to use interagency contracting even though the Pentagon itself suffers from a dearth of contracting officials, the official said.

The potential change would put the onus on GSA to do more planning and preparation in advance of a money transfer from the Defense Department, said Stan Soloway, president of the Professional Services Council. But within the contracting community, it's a common perception that "the commitment isn't real until the money is on the table," he added.

The Defense Department lately has been cracking down on its use of interagency contracting and monitoring its acquisition practices more closely. It became especially upset following GSA's 2005 decision to limit the related practice of allowing agencies to use the FTS revolving fund as an ersatz savings account.

The Pentagon had made particular use of the now-closed appropriations law loophole by parking between $1 billion and $2 billion in the fund over a period of five years-most of which Defense was forced to send back to the Treasury Department following GSA's decision to clear out funds from previous fiscal years.

Although it could work to the Defense Department's advantage to postpone the start of the ticking clock on severable service contracts for as long as possible in order to define its requirements and find the best contractor possible without squeezing the time period of the agreement itself, Defense is determined not get burned again by the vagaries of fiscal law, the GSA official said. "It's cutting off their nose to spite their face," the official added.

In a March 27 letter to Linda Combs, Office of Management and Budget controller, Defense comptroller Tina Jones wrote that GSA's interpretation of the severable services law "impressibly extends the life of DoD's annual appropriation" and violates several sections of U.S. code.

But Defense could have other incentives for its strict interpretation -- interagency money transfers are notoriously hard to keep track of, so placing firm limits on their time to use will bring the department one step closer to its still-elusive goal of attaining a clean financial audit.