Friday Flash, 12.12.14

FAR and Beyond Blog

On December 4, 2014, Anne Rung, Administrator of Federal Procurement Policy, Office of Federal Procurement Policy (OFPP) at the Office of Management and Budget (OMB) issued a memorandum for all Chief Acquisition Officers and Senior Procurement Executives entitled “Transforming the Marketplace: Simplifying Federal Procurement to Improve Performance, Drive Innovation and Increase Savings.” The memorandum sets forth the Administrator’s vision for improving performance outcomes of the procurement system. Although there are concerns across the procurement community regarding the viability of government-wide adoption of “Category Management,” there is much in the memorandum that has the potential to foster improvement in the procurement system. In particular, the focus on the acquisition workforce and building stronger vendor relationships is welcomed.

It is a timely and encouraging memorandum. Timely, as across the procurement community there is a growing consensus that the procurement system must be modified or “reformed” to increase efficiency and effectiveness in delivering best value outcomes to support customer agency missions. Encouraging, as the approach reflects much of what the Coalition for Common Sense in Government Procurement (the Coalition) has called for over the last three years:

Embrace simplification in processes and procedures
Put “commercial” back in commercial item contracting
Conduct a retrospective review of procurement regulations
Embrace robust dialogue between government and industry
Reduce contract duplication
Address barriers to entry and promote innovation
Incorporate “materials” (i.e. ODCs) capability in Multiple Award Schedule (MAS) contracts
Improve the negotiation software licensing in MAS contracts
Reform MAS pricing policy

These themes are reflected throughout the “FAR & Beyond” Blogs and in our white papers and policy statements addressing key procurement trends, issues and challenges. Here is a list of links to some relevant FAR & Beyond blogs and/or Coalition policy documents:

The December 4^th memorandum includes common sense procurement themes that Coalition members support. Here is a sampling:

“Simplifying the Federal Contracting space is critical to driving greater innovation and creatively and improved performance.” See Page 1 of the Memorandum.
… [U}nnecessary duplication imposes significant costs on contractors and agencies.” See Page 2 of the Memorandum.
“Early, frequent, and constructive engagement with industry leads to better outcomes.” See Page 4 of the Memorandum.
“[G]reater attention must be paid to regulations relating to procurements of commercial products and services, as the Government is typically not a market driver in these cases and the burden of Government-unique practices and reporting requirements can be particularly problematic, especially for small business . . .” See Page 5 of the Memorandum.

The December 4^th memorandum highlights the results of the Open Dialogue stating in part that “[t]he Open Dialogue, which drew nearly 500 participants, was an important first step in helping agency managers to better understand both industry concerns and the processes and practices that will better enable companies to consistently do their best work and delivery optimal value to the taxpayer.” See Page 6 of the Memorandum. The memorandum instructs GSA to identify steps to reduce burdens and barriers to entry for contractors and to improve the efficiency and effectiveness of the MAS program, including steps to improve the acquisition of materials (i.e. ODCs) and negotiation of end-user licensing agreements.

As you recall, the Coalition submitted a set of recommendations to the Open Dialogue. Seven Coalition recommendations made the top ten in votes from the public. We look forward to working with OFPP, GSA, the FAR Council and the entire procurement community on making these recommendations a reality!

Roger Waldron

President

Government Operating Under 2 Day CR- Full Year Funding Pending

On the evening of December 11th, the House of Representatives passed a $1.1 trillion appropriations bill by a vote of 219-206. The bill will fund the government with an omnibus appropriations package through the end of the current fiscal year. However, the omnibus does not include funding for the Department of Homeland Security, which has separate appropriations secured until February 27th of 2015.

Because the Senate did not have time to pass the $1.1 trillion omnibus measure, the House was also forced to pass a two-day continuing resolution (CR) that funds the government at current levels. Less than two hours from the government shutdown deadline, the Senate passed the two-day CR. The Senate is expected to vote on the longer-term funding bill after a vote on the National Defense Authorization Act (NDAA) for FY15, another bill that has been plagued with political gridlock.

DoD Aims for more Consistent Decisions on ‘Commercial’ Items

Federal News Radio reported this week that the Defense Contract Management Agency (DCMA) wants to make determinations of whether an item is “commercial” or not more predictable and consistent by employing a team of experts for contracting officers to reference. Currently, the decision to designate the “commercial” label on a product falls entirely on the individual Department of Defense (DoD) Contracting Officer (CO). Under DCMA’s new initiative, that authority will not change, but a cadre of around fifty commercial pricing experts based in St. Petersburg, Florida, will serve as a central resource for COs. Lt. Gen. Wendy Masiello, DCMA’s director, said at a recent Air Force IT day, “In the end, the goal for standing up this capability is to help facilitate a consistent thought process about what commercial pricing really is, where it fits, and how we handle the one-offs like commercial-of-a-type.”

More information about DCMA’s new initiative can be found in the Federal News Radio report.

Alliant 2 Interact Updates

The GSA Alliant 2 Team has released an update on its Interact page concerning the Alliant 2 timeline for the upcoming year. Readers can view some of the highlights below:

March 2015: Post the first draft Request for Proposal (RFP) to FEDBIZOPPS (FBO)

May – August 2015: Post the second draft RFP to FBO, if Alliant 2 & Alliant 2 Small Business PCOs deem in best interest of Government.

July – September 2015: Pre-Solicitation Conference in D.C. will be considered if beneficial to industry and feasible for GSA.

October – November 2015: Post Final RFP to FBO.

This week the Coalition held a meeting of its Alliant 2 Working Group. The group is in the process of releasing a draft document containing a set of principles for GSA to consider prior to the Alliant 2 RFP is issued. If you would still like to get involved, please contact Roy Dicharry at rdicharry@thecgp.org.

DoD Plans Review of LPTA

According to a new report from Federal News Radio, the Department of Defense (DoD) appears to be planning an initiative to explore how widespread the use of lowest-price technically acceptable (LPTA) is. In a recent address, Randall Culpepper, the Program Executive Officer for Combat and Mission Support, Office of the Assistant Secretary of the Air Force for Acquisition, mentioned that he will lead a new team that will examine the use of LPTA throughout the department. Mr. Culpepper expects the results to inform the final version of Better Buying Power 3.0.

The Air Force official gave two reasons for the planned study. “One is we’ve had great success with doing LPTA, but we’ve also had a few bumps along the way that we believe we’ve learned from, and we’ll bring that experience to bear,” he said. The DoD has faced some difficulty in defining the “technically acceptable” especially with regard to services.

Air Force Looks at Innovative Acquisition Processes

On Tuesday the Air Force Office of Acquisitions announced its “Bending the Cost Curve” (BTCC) initiative, designed to help contain cost growth and escalation over time. The 11 projects and initiatives being launched this year center on finding more efficient ways of spending money, and harnessing the best capabilities for the lowest costs. Some of the programs include conducting experiments to evaluate time and price outcomes of variations in the Truth in Negotiations Act requirements; identifying and capitalizing on acquisition successes with the Matchmaker project; cost-capabilities analysis and launching small business engagements. More details on BTCC can be found here.

Subcontractors and Prime Contracts Not Linked in Current Systems

According to a Government Accountability Office (GAO) report published this week, it is not currently feasible to link small business subcontractors with prime contracts using current Federal IT systems. The systems reviewed were the Federal Procurement Data System (FPDS), USASpending.gov, the Electronic Subcontract Reporting System and the Federal Funding Accountability and Transparency Act Subaward Reporting System. The GAO found that none of these systems were designed to link small business subcontractors to prime contracts. They said that attempts to find this information using multiple systems were especially difficult when subcontracting plans pertained to multiple contracts. The following chart shows what subcontract data the GAO was able to identify in the four systems.

GAO noted current efforts in the government that could result in a single system that could link small business contractors to prime contracts. GSA and the Department of Treasury both have projects underway that may make this information more readily available. GSA is consolidating a number of contract reporting systems through the Integrated Acquisition Environment while Treasury is upgrading search capabilities in USASpending.gov. In addition, agencies are now required to disclose additional data relevant to subcontracting; improve the consistency and reporting of these data; and periodically review their completeness, timeliness and accuracy per the Digital Accountability and Transparency (DATA) Act.

To view the report, visit www.gao.gov/assets/670/667410.pdf.

DoD CIO Role on Cybersecurity

A new directive from the Department of Defense (DoD) has clarified the roles of the Pentagon’s Chief Information Officer (CIO), principal cyber advisor and other officials in setting the department’s cybersecurity policy. The recent directive tasks the CIO with advising the National Security Agency director on cybersecurity policy, and with prescribing cyber-related standards, but gives the CIO no operational authority on offensive or defensive cyber maneuvers. That authority lies with U.S. Cyber Commander Adm. Michael Rogers, who is also NSA director.

The directive also makes the acting DoD CIO Terry Halvorsen, along with acting Deputy Chief Mangement Officer (DCMO) David Tillotson, co-chair of the Defense Business Council. Readers should note that the introduced fiscal 2015 defense authorization bill would combine the DCMO and CIO jobs into a new position — undersecretary for business management and information — effective February 2017.

DoE IG Report on Strategic Sourcing

This week, the Department of Energy (DoE) Inspector General released a report noting that DoE has taken a number of positive steps to implement its own Energy Wide Strategic Sourcing (EWSS) program, in response to OMB directives.

The report states that DoE has also established cost savings reporting guidance and management commitment memos by senior officials. However, the report explains that the department had overstated savings by nearly $9 million of the approximate $40 million claimed in fiscal 2013 for six DoE buying facilities that were evaluated. One example from the report sites that $4.1 million saved from reutilizing equipment was misreported as strategic sourcing savings. A data entry error in another example led to an exaggeration of $2.4 million in strategic sourcing savings.

In summary, overstatements were largely due to calculation errors and incorrect categorization of savings. The report notes that while sites had various controls in place to prevent or detect errors, these controls were inadequate and management lacked a consistent process to ensure the accuracy of reported savings.

Healthcare Spotlight

Veterans Access Choice and Accountability Act – Implications of the New Supplemental Veterans Health Care Program for Drug and Device Manufacturers

By: Donna Lee Yesner, Partner, Morgan Lewis & Bockius LLP and Stephen E. Ruscus, Partner, Morgan Lewis & Bockius LLP

In the wake of the scandal over veteran wait time for health care at certain Department of Veterans Affairs (“VA”) medical facilities, Congress acted quickly to improve the care available to veterans, including access to providers outside the VA system. On August 7, 2014, President Obama signed into law the Veterans Access, Choice, and Accountability Act of 2014 (“Veterans Choice Act”), which authorized veterans to obtain hospital care and medical services from non-VA providers and $10 billion to pay for such care. Prior to the enactment of the Veterans Choice Act, the VA had voluntarily adopted a policy of paying for veterans’ medical care outside the VA system under certain circumstances; however, VA approval was required for these referrals. By contrast, the new law gives veterans greater access to the hospital care and medical services to which they are entitled under section 17 of title 38 of the United States Code.

The Veterans Access, Choice and Accountability Act – Key Provisions

The new law applies to veterans who are:

enrolled in a patient enrollment system at the VA established under 38 U.S.C. 1705 and have contacted the VA seeking an initial appointment for the receipt of hospital care or medical services; and
eligible for hospital care or medical services under 38 U.S.C. 1710(e)(1)(D) and have either
1. unsuccessfully attempted to schedule an appointment at a VA medical facility within the Veterans Health Administration wait-time goals (posted on the internet),
2. live more than 40 miles from the closest VA medical facility,
3. reside in a state lacking a VA hospital, emergency care and surgical care or live more than 20 miles from such a medical facility, or
4. live 40 miles or less from a medical facility but must travel by boat, air or ferry to reach it or travel is otherwise burdensome due to geographic challenges.

A veteran who meets any of these conditions is referred to as an “eligible veteran.”

Section 101(a) of the Veterans Choice Act requires the VA to either place an eligible veteran on an electronic waiting list for hospital care or medical services at a VA facility or, at the veteran’s election, authorize care outside the VA through agreements authorized by the statute, or any other laws, from one of four categories of care providers. Further, the VA must inform eligible veterans of the available care and ensure the electronic waiting list is accessible in order for veterans to determine the wait time and make an informed choice. If an eligible veteran elects to receive medical care outside the VA, he or she may obtain care from any of the following entities that have entered into agreements with the VA as described in the statute: 1) any health care provider in the private sector, including any physician, that is participating in the Medicare program; 2) any federally-qualified health center as defined in 42 U.S.C. 1396d(1)(2)(B); 3) the Department of Defense, and 4) the Indian Health Service. To avoid affirmative action program compliance issues, the law expressly prohibits the Department of Labor, Office of Federal Contract Compliance Programs from treating an entity that signs an agreement to furnish health care to veterans as a federal contractor or subcontractor.

When entering into participation agreements under section 101(d) of the Veterans Choice Act, the VA must negotiate rates for furnishing hospital care and medical services and reimburse the entities at the negotiated rates. In general, negotiated rates may not exceed the rates paid by the Medicare program to providers of services and suppliers as defined in sections 1861(u) and (d) of the Social Security Act for the same care or services. However, the VA may negotiate higher rates for care or services furnished to veterans in highly rural areas. The law prohibits providers from collecting more than the negotiated rate and from collecting a co-payment in excess of any amount that could be collected under chapter 17 of title 38 if the veteran received care from a VA provider.

Veterans must disclose whether they are covered under a health care plan other than Medicare, Medicaid, or Tricare. If they are covered by another plan, that plan will be primarily responsible. , for hospital care and medical services for a non-service related disability, to the extent the plan covers the care furnished. The VA will be secondarily responsible. The provider will be responsible for seeking reimbursement first from the primary payer. Authority to pay for hospital care and medical services through non-VA providers – as either the primary or secondary payer – has been transferred from the Veterans Integrated Service Networks and VA medical centers to the Chief Business Office of the Veterans Health Administration. Within 90 days after the August 7, 2014 enactment date, the VA must prescribe regulations for the implementation of a system for processing claims and paying bills for authorized care and services.

Impact of Expanded Care on Drug and Device Suppliers

Furnishing medical care to veterans through non-VA providers is a positive development for suppliers of drugs and medical devices as it should increase the utilization of their products. For example, the VA may pay for products that are manufactured in countries that are not designated countries under the Trade Agreements Act (“TAA”) without a non-availability determination, because the TAA only applies to products acquired under a federal procurement contract, not products purchased by private sector health care providers through commercial channels. At the same time, the law authorizing access to care outside the VA system raises questions regarding reimbursement of supplies, particularly pharmaceutical and biological products, which need to be resolved, perhaps through the claim processing system regulation. For example, the law specifies that veterans may elect to receive medical services including supplies furnished incident to a medical service from Medicare providers. It also contemplates that VA provider agreements will cover drugs and devices covered by Medicare Part B, cap the negotiated rate paid for such supplies at the Medicare rate, and follow procedures applicable to participation agreements under the Medicare program. What is unclear is whether the VA will pay for any drug administered by a non-VA physician and covered by Medicare, or impose its own restrictive formulary on contract providers.

Prior to the Veterans Choice Act, any drugs paid for by the VA were subject to VA formulary requirements. Not only would it be burdensome for non-VA providers to adhere to the VA formulary as a condition of reimbursement, physicians participating in the Medicare program may be unwilling to sign agreements to treat veterans if they cannot use the same products covered by Medicare and receive the same payment. Similarly, military treatment facilities and federally-qualified health centers will want to be reimbursed for whatever supplies they use in treating all their patients, not just veterans. If the VA formulary restrictions do not apply to drugs administered by non-VA physicians, manufacturers of non-formulary drugs may increase utilization of their drugs in the VA market.

Another area requiring clarification concerns prescriptions written by non-VA physicians. Although the Veterans Choice Act authorizes VA payment for supplies furnished as medical services under the Medicare program, it does not provide a pharmacy benefit outside the VA system, and does not cover drugs dispensed by private sector pharmacies. If veterans want the VA to pay for their prescriptions, the prescriptions must be dispensed by a VA pharmacy or the agency’s mail order pharmacy. Before enactment of the new law, prescriptions written by non-VA physicians often could not be dispensed by VA pharmacies without a VA physician first seeing the patient and approving the prescription. In those situations, a veteran still had to wait to schedule an appointment at a VA facility to get the medication. Hopefully, the VA will not continue that practice under the new law.

It is unclear, however, whether the VA will still require veterans to make appointments with VA doctors in order to obtain certain prescriptions. Requiring a veteran to wait weeks for a VA appointment or drive many miles to see a VA doctor in order to receive medication, which could be prescribed outside the VA and dispensed by the VA’s mail order pharmacy, is clearly contrary to the spirit of the law. If the VA is concerned with the expense of a drug prescribed by a non-VA doctor, a requirement for electronic or telephonic consultation between the prescribing doctor and a VA doctor should suffice. In addition, veterans will be issued Veterans Choice cards in order to process payment claims. Thus, it would be relatively easy for a Pharmacy Benefit Manager to manage prescriptions written by authorized non-VA doctors and dispensed by the VA’s mail order pharmacy to Veterans Choice beneficiaries, including any prior authorization requirements.

Finally, it is worth noting that if veterans elect to be treated by DoD physicians, any drugs or devices furnished to veterans at a military treatment facility will be procured by DoD at contract prices available to DoD, including prices under Blanket Purchase Agreements. Similarly, if veterans elect to be treated at federally-qualified health centers, as defined in section 1905(1)(2)(B) of the Social Security Act, drugs used to treat the veterans will be acquired at deeply discounted prices under pricing agreements authorized by section 340B of the Public Health Service Act. Thus, the acquisition cost for these providers is well below the Medicare rate, which, for drugs, is generally based on the weighted average sales price for the drug, exclusive of federal sales. The Veterans Choice Act caps the negotiated reimbursement rate paid non-VA providers for medical supplies at the Medicare rate; however, the statute does not, prohibit the VA from negotiating prices below this amount with providers that are beneficiaries of other federal contracts or pricing agreements and have much lower acquisition costs. Accordingly, the VA could negotiate payment terms with DoD facilities or federally-qualified health centers consisting of a service fee plus the acquisition cost of the drug.

Legal Corner

“Incomplete, Inaccurate, and Unverifiable”: An Evening with the OIG’s Recent Audit Report on GSA’s Administration of Contractor Team Agreements

By: Jonathan Aronie, Partner, Sheppard Mullin Richter & Hampton

I acknowledge it runs counter to the traditional, universally-accepted, ultra-cool image of DC Government Contracts lawyers, but I must admit I like reading GSA OIG Audit Reports. So it was with great anticipation that I poured myself a generous glass of milk the other night and curled up in front of a warm desk lamp to devour the pages of the OIG’s latest commentary, engagingly titled “Audit of Contractor Team Arrangement Use.”

As its title foreshadows, the Report, dated September 8, 2014, recounts the exhilarating tale of the OIG’s exploration of GSA Contractor Team Arrangements (“CTAs”). The noble objectives of the audit team, established in the Report’s opening pages, were to “(1) determine the extent to which contracting officers follow existing guidance and regulation in the administration of contractor team arrangements and (2) assess contracting officer awareness of risk in improperly administering team arrangements.” They had me at “objectives.” Snuggling up closer to my desk lamp, I read on.

Because GSA’s CTA records were “incomplete, inaccurate, and unverifiable” (a finding, incidentally, that would spell disaster for a contractor), the OIG’s audit was performed on a limited sample of GSA task orders – 7 orders, to be exact. The auditors, however, did interview numerous contracting officers and supervisors, and the conclusions they were able to draw from their review are nothing short of hair-raising. According to the auditors – wait for it – GSA’s contracting officers “have been provided minimal instruction and have received no formal training relating to the award and administration of team arrangements.” The auditors also concluded GSA has provided inadequate guidance regarding the use and administration of CTAs. I was pulled deeper and deeper into the story with each new paragraph. As I flipped the pages with zest, hungering for the surprise around the next corner, I . . . .

Okay, I give up. The truth is, there is absolutely nothing surprising, engaging, hair-raising, or even particularly interesting about the OIG’s audit findings. We all have known for years that GSA contracting officers don’t understand Contractor Team Arrangements – and, frankly, most contractors don’t either.

For the last 15 years or so, I’ve taught an Advanced Issues in MAS Contracting Course – previously with Carolyn Alston (currently with the Coalition) and currently with Larry Allen (previously with the Coalition) – and the issue of CTAs comes up in every class. The pervasiveness of the confusion among Government COs and contractors never ceased to amaze me – at least until I attended a CTA course at GSA Expo a few years back taught by a now-retired CO. With due respect (and apologies) to the many good COs and Government teachers out there, the course was awful. The information was vague, not useful, and, in many ways, just plain wrong. Thus, it came as no surprise to me, as it probably didn’t to you, that the GSA OIG auditors concluded COs are not being well educated on this topic.

I was more interested in the OIG’s view of the consequences of the lack of training and guidance. The consequences identified by the auditors, however, were presented through the lens of a Government actor – not a contractor. While I don’t quibble with the correctness of the auditors’ findings, I do regret they ignored most of the risks to the contractor of misunderstanding CTAs. And there are several. But before getting to that, let’s get some basics out of the way.

A CTA is an agreement between two (or more) GSA Schedule contractors to provide a solution to an authorized Schedule purchaser that neither could provide on its own. In GSA’s words, a CTA allows Schedule contractors “to meet the government agency needs by providing a total solution that combines the supplies and/or services from the team members’ separate GSA Schedule contracts. It permits contractors to complement each other’s capabilities to compete for orders for which they may not independently qualify.” Here are a few other important elements of CTAs:

All participants in a CTA must have their own Schedule contract, and must contribute something to the CTA.
The products or services offered through the CTA must be “on Schedule” just as they would have to be if offered by a sole Schedule holder. (Open market items may be offered only as provided in FAR Part 8.)
Notwithstanding the penchant of Schedule contractors to characterize one member of the CTA as the prime and the other member as the sub, in fact, all CTA participants are primes. The leader commonly is known as the “Team Lead,” while the others commonly are known as “Team Members.” But, legally speaking, they all are primes. As the OIG pointedly reminded GSA in its Audit Report, “each team member is a prime contractor and should be treated as such.” The point is critical for reasons discussed further below.
As prime contractors, all CTA participants have “privity of contract” with the Government. In other words, all participants assume the rights of, take on the obligations of, and subject themselves to the risks of being a prime contractor.
All CTA participants are responsible for complying with the terms and conditions of their respective Schedule contracts, including pricing terms, TAA requirements, Price Reductions Clause obligations, labor qualification requirements, etc.
Each CTA participant is responsible for reporting its own revenue and paying its own IFF.

And importantly, each CTA participant – whether it views itself as the lead or as a member – is at risk for any non-compliance, including breach risk for its or its teammates’ non-compliance, past performance risk for its or its teammates’ performance failures, False Claims Act risk at least for its own recklessness (and possibly for its teammates’ recklessness if it was known), and, as a practical matter, reputational risk for most anything that goes wrong regardless of fault.

With that as background, let’s now take a look at the aspects of a CTA that create some of these risks from the perspective of the contractor.

Billing Errors Risk

In the context of a Subcontract, the prime contractor must have all products/services on its Schedule and must bill the Government at or less than its Schedule price – even if the products/services are provided by a subcontractor. This means that, unless a unique solicitation provision directs otherwise, the prime contractor can “mark up” the subcontractor’s price to the prime’s Schedule price. In the context of a CTA, however, each participant is beholden to its own price list. Thus, the team lead cannot “mark up” a team member’s products/services beyond that team member’s Schedule price. Failure to appreciate the difference between a Subcontract and a CTA can create the risk of pricing errors and, at the very least, the risk of confusion among COs and auditors.

IFF Reporting Risk

Each team member is responsible for paying its own IFF on sales made through a CTA. Where CTAs are structured so the Team Lead handles all interactions with the customer, however, the Team Lead sometimes pays the entire IFF obligation and, consequently, the Team Members may lack visibility into the timing or even the amount of Schedule revenue. While GSA typically receives its due tribute in any case (since, as noted, the Team Lead sometimes pays the full IFF amount), the absence of a specific, traceable payment by the Team Member can create all sorts of problems when it comes time for IOA reviews and/or OIG audits.

Labor Qualification Risks

A prime contractor must ensure all personnel working on the project meet the labor qualification requirements set out in the prime contractor’s GSA Schedule contract – whether or not the individual performing the work is employed by the prime contractor or a subcontractor. In contrast, each participant in a CTA must ensure its personnel meet the labor qualifications set forth in its own Schedule contract. Here again, a clearly written CTA is essential. Lack of clarity regarding the nature of the contracting relationship can increase the risk of an inadvertent contract breach in an area (i.e., labor qualification issues) that increasingly is a favorite among auditors.

Ability-to-Offer Risk

As GAO has made clear again and again over the years, except in very limited situations, Schedule procurements require the proposal of Schedule items. The failure to offer products or services on the offer’s valid Schedule contract can result in rejection of the proposal, or, if it does not, will provide fodder for an easy bid protest. While a contractor bidding under a CTA can pull from any/all of its teammates Schedule contracts to prepare a compliant 100%-Schedule solution, a prime contractor cannot pull from its subcontractor’s Schedule if the prime does not have the product/service on its own Schedule. The prime contractor must have 100% of the items on its own Schedule. One unlucky contractor found this out the hard way back in 2007 when it submitted a quotation in response to a management operations RFQ, but didn’t make clear it was proposing as a Contractor Team. Consequently, GSA rejected the quotation, finding it not to be a CTA and finding the offeror did not independently hold all of the necessary Schedule items required by the RFQ.^{^[1]}

Price Reductions Clause Risk

This one is best described through the ancient and time-honored art of a war story. I had a client years ago that entered into what it thought was a prime/sub relationship with another Schedule holder. It was a service contract for the military and the “prime” didn’t have all the necessary labor categories on its Schedule so it “subbed” to my client. As many companies do, the companies structured their relationship as a prime/sub arrangement, with the “sub” providing personnel at a discount to the “prime,” and then the “prime” marking up the personnel to its Schedule price; the markup serving as the “prime’s” fee.

A year or so after the project came to an end, the “sub” was hit with an OIG audit. The auditor saw the “discounts” to the “prime” and accused it (the “sub”) of violating its Price Reductions Clause. (The company’s Basis of Award included prime contractors.) The auditor did not particularly care that the Government was the ultimate customer. He saw only a discount to a BOA customer and, to him, that spelled PRC violation.

Nor was the auditor taken by the company’s argument that the relationship actually was a CTA and, therefore, the sales to the “prime” actually were sales to the Government because (as you know if you’ve read this far) each CTA member is a prime contractor. The company’s argument was not made any easier when the auditor reviewed the order (which only referenced the “prime”), reviewed the agreement between the “prime” and the “sub” (which was titled a “Subcontract” and referenced only a “prime” and a “sub”), and recognized that the “prime” had paid the totality of the IFF (an action consistent with a prime/sub relationship, not a CTA). Had the parties clearly identified the agreement as a CTA, employed the correct terminology, and acted consistent with GSA’s CTA guidelines, there would have been no PRC violation allegation.

The moral of this little tale is this: Words matters. Contractors should use prime/sub when dealing with a subcontract, and use lead/member when dealing with a CTA.^{^[2]}

Risk Mitigation Techniques

Add to the foregoing risks the additional, mostly-Government-facing risks identified in the OIG’s Audit Report and you have yourself one very confusing, very misunderstood, and very risky contract vehicle. This is not to say, of course, you should avoid entering into CTAs. But you should look before you leap, understand the rules and the risks, and take compliance seriously. And, oh yes, don’t read the OIG Audit Report as though it sets forth all the risks!

In its Audit Report, the OIG identified a number of measures GSA can/should take to help reduce some of the confusion around CTAs. These involved better training for COs, better internal record keeping systems within GSA, and better policies. While industry awaits these enhancements, there are things contractors can do to protect themselves. Here are a few:

Understand the difference between a Subcontract and a CTA, and clearly identify which vehicle you are employing. Be clear internally, be clear to your teammates/ subcontractors, and be clear to the Government.
Do not rely on oral CTAs (or oral subcontracts for that matter). Prepare properly crafted CTAs in writing. While, as confirmed by the OIG, GSA historically has paid little attention to the content of CTAs, the agency’s website does offer a pretty good list of what contractors should include in their CTAs. See www.gsa.gov/portal/content/202253. While GSA identifies these elements as requirements of a CTA (i.e., “The CTA document must address” X or Y), they are not. They are, however, quite good recommendations.
Share the CTA with the contracting officer. GSA “strongly encourages” contractors to do so, and so do I.
Use correct terminology. If you are establishing a CTA, call it a CTA and identify one company as the Lead and the other as the Member. If you are establishing a subcontract, call it a subcontract and identify one company as the prime and one as the sub. Do not use the terms interchangeably.^{^[3]}
Try to have the award issued in the name of the CTA rather than in the name of one member of the CTA. If this is not possible (e.g., because the agency, for whatever reason, resists), then try to have the CTA identified on the face of the award document. As the OIG recognized in its Audit Report, contracting officers often do not remember to do this on their own.
Identify clearly in the CTA (and in the proposal and/or contract) which team member will submit invoices and how payment is expected to be made. Remember, while the Government should pay each team member independently, agencies rarely want to take that approach, and GSA does not force them to. Failure to deal with invoicing and billing issues early can create great confusion down the road as auditors struggle with reconciling reported revenue to internal records. The OIG correctly recognized this issue in its Audit Report as well.

* * *

In hindsight, perhaps I was too hard on the OIG in my introduction. While GSA’s CTA files may be incomplete, inaccurate, and unverifiable, the Audit Report nonetheless got it right. CTAs are misunderstood by the contracting community – industry-wise, CO-wise, and otherwise. So maybe the Audit Report was not as exciting as I had hoped, but it did provide a good opportunity to reflect upon a risky area of GSA Schedule contracting. Perhaps the sequel will be more riveting. GSA estimates it will publish updated CTA regulations by April 2016. I plan to be the first in line to get a copy so I once again can curl up in front of my warm desk lamp with a nice glass of milk and get lost in the world of GSA Schedule contracting. Oh, what a life!

Jonathan is the co-managing partner of Sheppard Mullin’s Washington, DC office, and has been practicing government contracts law since 1994. He is the co-author of the GSA Schedule Handbook (West Publishing), teaches on a variety of Government Contracts topics across the country, and is a frequent speaker at Coalition events. When not reading or writing about Government Contracting, he can be found trying to get control over his two young girls, one of whom became a teenager this month.

^{^[1]} The Computer Cite protest (B-299858) is an interesting one and a good read for contractors participating in CTAs. In the bid protest that followed GSA’s rejection of the offer, the offeror contended its teaming agreement satisfied “the essential requirements for a CTA. . . .” GAO disagreed.

^{^[2]} For those interested, the audit actually came to a very interesting and successful conclusion. Since the “prime” did not have the necessary labor categories on its Schedule and the “sub” did, we explained to the auditor that either (1) the prime and the Government agency violated the procurement rules by providing/procuring non-Schedule services under a Schedule procurement or (2) the parties actually had intended to establish a CTA, but simply failed to use the proper language. Ultimately, the auditor went with door number two, which, legally, was the correct result. The parties’ poor terminology and documentation, however, caused what should have been a simple audit to turn into a very expensive one.

^{^[3]} To add to the confusion, in the context of a CTA, either team member also may have subcontractors of its own. But that’s an article for another time.

FISMA Reform Bill Heads to President’s Desk

On December 10th, 2014, the House of Representatives passed the Federal Information Security Management Act (FISMA) of 2014. The Senate passed the same version of the bill on December 8th. FISMA now goes to the White House for President Obama’s signature. This is the first significant cybersecurity legislation to be enacted by Congress since 2002, when FISMA was passed in its first iteration. Per Gov Info Security,

“…the FISMA reform bill would replace the requirement that federal agencies must file annual checklists that show the steps they’ve taken to secure their IT systems. Agencies, under the new law, instead would automatically continuously monitor their systems to assure their security. FISMA reform also would codify the Obama administration action that elevated the Department of Homeland Security’s role in getting other civilian federal agencies to comply with cybersecurity standards. The measure would retain the White House Office of Management and Budget’s overall jurisdiction over federal government IT security.”

The House also approved the Homeland Security Cybersecurity Workforce Assessment Act, which will help the Department of Homeland Security recruit and retain qualified IT security personnel. The President is expected to sign both bills into law. The full text of the FISMA reform bill can be found here.

GSA SmartPay Program Announces RFI

On December 9th, 2014, GSA issued a Request for Information (RFI) seeking industry feedback and comments on the development of SmartPay 3, the next-generation of the government-wide payment and charge card program. GSA is seeking recommendations about the future of the payments industry, solutions to reducing waste, fraud and abuse, payment tool security, how to maximize data, and innovative payments solutions in the commercial space.

Quick Facts on SmartPay:

There are four types of cards available through the GSA SmartPay program: Purchase, Travel, Fleet and Integrated charge cards.
The GSA SmartPay Program is available to more than 350 federal agencies and organizations.
GSA SmartPay 2 customer agencies and organizations processed nearly 90 million purchase, travel, and fleet transactions with an approximate value of $26 billion in FY 2014.
GSA SmartPay 2 customer agencies and organizations received over $272 million in sales refunds in FY 2014.
There are currently about 265,000 active purchase cards government-wide.

The RFI can be viewed here on FedBizOpps.Gov. Responses to the RFI are due January 22, 2015.

2015 Sponsorship Opportunities Now Available!

We are pleased to announce our 2015 sponsorship opportunities and benefits! Please review the list of options and consider supporting the Coalition in 2015. Your sponsorships are crucial to the success of our events and we offer a wide variety of options to meet all budgets. Be the first to commit your sponsorship for our Annual Spring and Fall Training Conference, EIP Awards Dinner, Charity Golf Tournament, Breakfast Forums and more! To commit to specific sponsorships or talk through options, please contact Matt Cahill at 202-315-1054 or mcahill@thecgp.org.

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