By: Paul Emanuelli
This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its April 2020 report entitled FAS is Forfeiting Savings Identified in Preaward Audits of Multiple Award Schedule Contracts, the US Inspector General found that the government’s failure to leverage pricing data from prior audits when negotiating contract awards costs taxpayers billions of dollars. As the report stated, “the Federal Acquisition Service (FAS) is not fully leveraging cost savings opportunities identified in preaward audits conducted by the Office of Inspector General (OIG)” and that “FAS’s failure to capitalize on opportunities for cost savings presented in preaward audit reports wastes critical audit resources and taxpayer dollars.”
As the report noted, “FAS establishes long‐term, government‐wide contracts from which millions of commercial products and services are made available to customer agencies” and that the “intent of the Schedules Program is to leverage the government’s buying power in an effort to provide customer agencies with competitive, market‐based pricing.” However, in what was referred to as a “troubling downward trend”, the report found that the government was failing to properly leverage that intelligence since it was continually accepting above-market pricing in its contract awards:
The recommended cost savings in our audit reports are based on significant sales data analyses that otherwise would not be available to contracting officers for negotiations, such as detailed reviews of the contractor’s sales and customer agreements. These analyses are provided to aid contracting officers in their decisions and to improve negotiation results in order to maximize cost savings for the government and taxpayers.
During the 3‐year period April 1, 2016, through March 31, 2019, we issued 130 preaward audits with estimated sales of over $27 billion for their pending contract periods. Of these audits, 84 included recommended price and discount adjustments that, if realized, would allow for $1.1 billion in cost savings for the government and, ultimately, the taxpayer. As of February 2020, FAS has only sustained approximately 10 percent ($113.6 million of the potential $1.1 billion) of the potential cost savings identified in these 84 preaward audits, as presented in Appendix A.
This is a decline from the 21.5 percent in sustained cost savings observed during the prior 3‐year period ended March 31, 2016, which is indicative of a troubling downward trend.
The Inspector General found that the government relied on faulty pricing tools or unverified information. In fact, when looking only at the period under review for the specific institution, the Inspector General found that the government left hundreds of millions in potential savings on the table by failing to negotiate better pricing:
We reviewed documents for contracts awarded during the review period to determine what contracting officers were using for the basis of their negotiations. We identified numerous instances where contracting officers relied on faulty pricing tools or unverified information, rather than preaward audit results, to make pricing determinations. For example, on a projected $2.3 billion contract, we found the proposed contract rates were overstated by an average of 31 percent, but the contracting officer negotiated a mere 1 percent discount improvement from the proposed rates based on an unsupported price analysis, which negated potential cost savings of $124.7 million. Moreover, we found that FAS accepted the contractor’s proposed pricing on 15 contracts, resulting in $262 million in forfeited savings.
By not effectively using all of the negotiation tools available, contracting officers are failing to leverage the government’s purchasing power. While we recognize that negotiations may not always yield the full amount of cost savings identified in our preaward audit reports, FAS’s general disregard of preaward audit results wasted our audit resources and forfeited opportunities to save over $900 million in taxpayer dollars.
As public institutions face increasing cost constraints, this failure to negotiate cost savings represents a glaring lost opportunity in the proper stewardship of public resources. Public institutions across all jurisdictions should take note of these findings and develop procurement strategies that effectively leverage opportunities for greater cost savings.
