On October 19th the Government Accountability Office (GAO) issued its decision denying the protest of Herman Miller against the Air Force’s solicitation for commercial office furniture.  Unfortunately, the GAO failed to clearly address the solicitation’s consistency with commercial practice as required by FAR Part 12 and essentially punted on significant issues regarding the overall structure of the two-tier approach and its impact on small business dealers and manufacturers. A copy of the decision can be found here.

The Air Force’s two-tier acquisition strategy and solicitation terms are not only inconsistent with commercial practice; the Air Force strategy is “contract duplication gone wild.”  All the commercial office furniture sought under the Air Force solicitation is currently available via the GSA Multiple Award Schedules (MAS) program.  The Air Force could have saved time and money, and likely avoided a protest, if it had used Blanket Purchase Agreements (BPA) to leverage its requirements under the MAS program.

I will be writing more on the Air Force procurement in the coming weeks but the focus this week is on the implications of a GSA waiver of the Price Reduction Clause (PRC) on MAS contractors and the overall market.   The waiver, which can be viewed here, was central to the GAO’s decision denying the protest.

The Air Force’s two-tier acquisition strategy implicates the PRC and, as a result, its application became an issue in the bid protest. Under the Air Force’s solicitation, awards will be made to at least four furniture manufacturers.  However, no office furniture will ever be ordered under these contracts.  Rather, the pricing and products identified under these manufacturer contracts will form the basis for future limited competition, small business set-aside procurements/solicitations for separate contracts with small business dealers.  Under the Air Force plan, all furniture sales must be made through the designated dealers rather than directly to the agency.  Think of it this way, the Air Force is essentially seeking to award at least four “subcontracts” that will be used by small business dealers for future competitions for independent prime contracts at various Air Force installations around the country.  The Air Force’s two-tier approach is inconsistent with the traditional manner in which the furniture manufacturers and their dealer networks compete in the marketplace.  As a result, questions arose throughout the MAS furniture manufacturer community as to whether a price reduction to a dealer pursuant to a “subcontract” under an Air Force small business prime contract would trigger the pricing disclosure requirements and corresponding price reduction on a manufacturer’s MAS contract.

After the filing of the protest, GSA issued a September 7th memorandum to all GSA contractors on Schedule 71 waiving the PRC.  The memorandum states in part:

GSA recognizes that under the [Air Force] Enterprise Sourcing Group, there is the potential for some GSA contractors to trigger the Price Reduction Clause 552.238-75 of their Schedule 71 Multiple Award Schedule (MAS) contract.

Therefore, solely for the purposes of the Enterprise Sourcing Group’s solicitation, FA8057-12-R-0001, GSA will forbear enforcement of the Price Reduction Clause at 552.238-75, if the affected MAS vendor has requested and been granted a contract modification concerning its participation in an Air Force contract resulting from this solicitation.

This waiver is both troubling and illuminating.

First, on a fundamental level, the waiver supports contract duplication and further fragmentation of the furniture market. MAS contractors who have invested in their MAS contracts are seeing market share leaving the MAS program. It also sets a significant precedent.  GSA has essentially waived a contract requirement to enable a single customer agency to conduct a series of two-tier open market procurements: How will GSA deal with the next customer agency open market procurement that implicates the PRC?  The federal furniture market has been one where GSA’s MAS program has been the leader.  As such, the GSA furniture schedules provide an array of furniture products and solutions at reasonable prices using streamlined ordering procedures.  It is important that GSA’s actions on an individual acquisition support the underlying integrity of its program.  In that regard, it also sets a precedent for other MAS contracts and markets beyond furniture.

At bottom, fragmentation of the market is not good for customer agencies, taxpayers, GSA and the furniture contractors.  Dividing the market increases procurements costs to everyone; costs that are ultimately borne by the taxpayer.  For example, a growing market leads to lower pricing while a shrinking market will ultimately lead to higher pricing.  Here, hundreds of millions of dollars in work will leave the MAS furniture market as a result of the Air Force procurement, likely leading to higher pricing on the MAS program—which will lead to agencies setting up their own contract vehicles—it is a vicious cycle.

Second, at the same time the waiver facilitates contract duplication, it also illuminates one of several flaws in the PRC.  Here, the Air Force’s acquisition forces the furniture manufacturers to enter into private “transactions” or “subcontracts” with dealers that are inconsistent with standard industry practice. In response to these circumstances, GSA waived the PRC in an effort to ensure the fulsome benefits of competition.  As illustrated through the waiver, the PRC restricts the ability of contractors to offer prices to commercial entities where the ultimate customer is the federal government.

The PRC impacts the MAS contractor’s ability to enter into commercial agreements and can impact the ability of an agency to get a more favorable price.  Here, the waiver was granted for purposes of a single agency’s separate open market procurement. The current situation raises fundamental policy questions:  Why should the PRC be waived to provide a contractor the ability to compete for federal work but not waived for commercial work, or for certain subcontracts under government contracts but not others?  Is one more valued than another?  Being able to fully compete for federal or commercial work means JOBS for manufacturers.   The waiver validated the PRC as an anti-competition, anti-growth provision.   It also raises significant questions regarding the MAS audit process and the fairness for MAS contractors who have previously had to manage their contracts based on the limitations of the PRC.

Third, it is not clear that the waiver actually does what it is intended to do.   The GSA memorandum states that the waiver is “solely for purposes of the Enterprise Sourcing Group’s solicitation FA8057-12-R-001.”  It further refers to “GSA vendors participating in this particular Air Force solicitation.”  The memorandum goes on to state that “This one-time PRC forbearance is available for this unique procurement circumstance and will not affect any other sales to the category of customer that formed the basis of award the MAS contract.”  In the case of the Air Force two-tier acquisition strategy, separate independent contracts will be awarded to small business dealers at at least 70 separate Air Force installations.  These subsequent contracts will be awarded pursuant to new solicitations issued by the Air Force at each installation—which will likely lead to further price reductions to the dealers in response to a specific requirement.  It is a fundamental principle that each procurement/solicitation stands on its own.  As such, the waiver does not specifically reference or refer to those subsequent solicitations and resulting contracts.