For this week’s comment I wanted to share with you a blog post first published on the Federal Times’ Acquisition Blog (www.federaltimes.com). The post highlights the government’s challenge to employ sound data management policies specifically, with regard to price.
Driving the federal government towards a Low Price Regardless (LPR) contracting model
As part of the Federal Strategic Sourcing Initiative (FSSI), the Office of Management and Budget and the General Services Administration have created a Prices Paid Portal. The goal of the Prices Paid tool is to reduce total cost of ownership for goods and services by providing greater visibility on the prices agencies have paid for them.
The Prices Paid Portal is part of an ongoing effort to collect transactional data across the government. The challenge in managing pricing data is to ensure it is used to identify contracting strategies and/or terms (like volume commitments) that increase competition and deliver greater value to the American people. Unfortunately, current data management practices will likely reduce competition and value over the long term.
Sound management of pricing and procurement data requires discipline, sophistication, and, most significantly, an understanding of markets and how companies respond to competitive dynamics. Moreover, price alone is incomplete data. In order to effectively understand pricing, one must have access to and understand the underlying terms and conditions, contract commitments, market and economic forces that drive pricing. Price is only one data point in determining “total cost of ownership.” An accurate measure of “total cost of ownership” includes much more than just price. It also includes acquisition cost (i.e. how much did it cost to conduct the procurement), operational costs, maintenance costs, and disposal costs. The emphasis solely on prices paid data ignores these fundamental cost elements.
To date, the experiences with FSSI and GSA regarding the prices paid data is that of an agency seeking to drive down prices “at all costs.” It is the implementation of a new Low Price Regardless (LPR) model—(i.e. give us the lowest reported price regardless of the associated terms and conditions, volume commitments, market and economic conditions). For example, GSA is using historical, horizontal price comparisons to drive down pricing in the Multiple Award Schedules (MAS). Price comparisons that too often ignore differing terms and conditions, commitment and market conditions—even ignoring such basic price drivers as unit of issue!! It is LPR on steroids.
This LPR model is fundamentally inconsistent with the Federal Acquisition Regulation (FAR). FAR guidance on fair and reasonable price determinations looks first to adequate price competition—and direct competition takes place at the order level under the MAS program as it does under contracts like NASA SEWP, NIH CIO-SP3, OASIS, Alliant, and any other multiple award IDIQ contract. Significantly, FAR guidance regarding comparison of proposed prices to historical prices paid directly contradicts the LPR model. The FAR provides that any prior price must be adjusted to account for materially differing terms and conditions, quantities and market and economic factors!
Will the prices paid portal include sufficient information for contracting officers to comply with the above guidance? Are contracting officers sufficiently trained to identify, understand and reasonably consider and adjust prior prices based on materially different terms, quantities, and market and economic factors?
The LPR model has grave implications for the federal government. Traditional commercial firms, already burdened by the voluminous and costly government-unique requirements, are reexamining their commitment to the federal market. These firms are already dealing with LPR. It is a recipe for long term contraction of the supply chain. Supplier suppression will drive innovative commercial firms out of the federal market. It will reduce opportunities for small businesses. It will reduce access to best value products, services and solutions to support agency missions on behalf of the American people.
LPR and supplier suppression are driving the federal market towards a limited subset of firms that are willing to do business with the federal government. It reminds me of the late 1980’s and early 1990’s when I entered government service. At that time GSA more often than not dealt with a limited number of contractors whose only focus was the federal market. In terms of quality, performance and value—the products and services these firms provided were not comparable to similar products and services available in the commercial market. It took the Federal Acquisition Streamlining Act to bring the quality and best value of the commercial marketplace to the federal government. Unless the federal government rethinks its current approach to price and value, we will continue to move towards a procurement system with limited commercial competition, value, performance and innovation.