By Jack Horan, Partner, McKenna Long & Aldridge LLP
Sales to the Department of Defense under its Distribution and Pricing Agreement program are very important to many VA FSS contractors. The VA, itself, views DAPA sales as integral to the success of VA Schedule contracts, telling contractors that “success of your VA FSS contract requires the development of a strong federal customer base and active promotion of your business to these customers” and “[p]articipation in the Defense Logistics Agency’s (DLA) Troop Support Distribution and Pricing Agreements (DAPA) program is a surefire way to penetrate the federal healthcare marketplace.” See VA FSS eNewsletter, No. 55 (March 2014) at 1
Despite the importance of these sales to VA FSS contractors, DOD and the VA are in the midst of a disagreement over whether VA FSS contractors are required to pay the industrial funding fee on sales of items through the DAPA when those items are also listed on the contractor’s VA Schedule Contract. The VA’s position is explicitly set forth in a somewhat unusual appendage to the standard Industrial Funding Fee and Sales Reporting Clause, GSAR 552.238-74, included in VA Schedule contracts:
NOTICE REGARDING DISTRIBUTION AND PRICING AGREEMENTS (DAPA)
If your firm has a DAPA with the Department of Defense, items available therein that are also awarded under FSS contract must, during the course of the FSS contract, be reported as FSS sales and included in quarterly FSS Sales Reports and Industrial Funding Fee (IFF) remittance.
See, e.g. RFP 797-FSS-99-0025-R9, Solicitation Document at 38.
The VA recently confirmed (and justified) its position that FSS Contractors must pay the IFF on DAPA sales in its FSS eNewsletter:
One of the questions we most often receive is “I have a DAPA, do I need to report those sales on my quarterly sales report?” In 1999, DoD and the VA signed a memorandum of understanding indicating that FSS pricing is the preferred method of pricing for products identified on DAPAs and as such sales for items awarded under a VA FSS contract that are also available under a DAPA must be reported as FSS sales.
Any delivery/task order placed against a VA Schedule contract – whether for a base contract item, blanket purchase agreement, or DAPA, is a reportable sale and must be included in the quarterly sales report & IFF payment. Additionally, all sales made to agencies other than the VA, state & local governments, and through prime vendor programs & direct-to-patient distribution must be reported. Direct all FSS sales reporting & IFF remittance questions to the VA Sales Desk.
See VA FSS eNewsletter, No. 55 (March 2014) at 5 (emphasis in original).
So the VA’s answer is a firm “yes” – VA Schedule contractors must pay the IFF on DAPA sales. Based on the VA’s eNewsletter, the VA appears to believe it has two justifications for the requirement: (1) a 1999 memorandum of understanding with DOD; and (2) its apparent view that items purchased under a DAPA is “placed against a VA Schedule contract.” Id.
A major problem with the VA’s position is that DOD apparently does not agree. The Defense Logistics Agency, the DOD Executive Agent for Medical Material. responsible for administration of DAPAs, is instructing its DAPA holders not to pay the IFF for sales to prime vendors under a DAPA:
The following is specific DAPA guidance:
• There is no direct relationship between a Federal Supply Schedule (FSS) and DAPA.
• A DAPA does not require a vendor to establish or have a FSS.
• Prime Vendor contracts are separate acquisitions and sales thereunder using the DAPA catalogue do not require reporting or payment through the Department of Veterans Affairs (DVA) Industrial Funding Fee (IFF) process.
Any DAPA holder given contrary guidance should immediately contact DLA.
See DLA Memorandum to Prime Vendor DAPA Program, found at https://www.medical.dla.mil/Portal/.
DLA views DAPAs as “DLA pricing vehicles used to establish and manage pricing with manufacturers and/or distributors for medical materialpurchased under DLA’s Prime Vendor contracts” rather than orders “placed against a VA Schedule contract,” Compare, id and VA FSS eNewsletter at 5. DLA also sees its Prime Vendor contracts – “FAR Par 12 acquisitions that use pricing vehicles such as DAPA under FAR Part 16 as single source awards within a region” — as separate from VA’s FSS contracts. Id. Thus, these opposite views on the IFF grow out of a fundamentally different view of the role of VA Schedule contracts in DAPA orders. VA views the DAPA orders as “placed against” Schedule contracts while DLA views them as placed under DLA’s Prime Vendor contracts independent of the VA’s Schedule contracts. In its instruction to DAPA holders, DLA does not address the 1999 memorandum referenced in the VA’s eNewsletter.
So, FSS contractors with a DAPA, at least for now, are caught between the conflicting views of the VA and DLA – one telling them that they have to pay the IFF and the other telling them that they should not. Each relying on a fundamentally different view of the status of orders placed through DLA Prime Vendors based on DAPA pricing.
Moreover, a contractor faces risk in following either position. By excluding DAPA sales from the IFF, as instructed by DLA, the contractor risks a claim by the VA that it is not complying with its FSS contract, or worse, a potential claim under the False Claims Act. By paying the IFF, the contractor faces at least the financial risk of paying a fee that it is not obligated to pay. To the extent the fee is included in the cost in its DAPA, the DAPA holder also faces a potential request for a price reduction under the DAPA to eliminate the IFF. Given these risks, the VA and DLA have an obligation to their contractors to resolve this issue.
VA and DLA are involved in a discussion of these issues and we hope to report a resolution soon.