GSA Checklist for Compliance: How To Survive the GSA Multiple Award Schedule Contract Systems Audit

GSA Checklist for Compliance: How To Survive the GSA Multiple Award Schedule Contract Systems Audit Government Contracts, Construction and Procurement Policy Practice Group ANCHORAGE BEIJING COEUR D ALENE HONG KONG ORANGE COUNTY PORTLAND SAN FRANCISCO SEATTLE SPOKANE TAIPEI Presented by: G. Matthew Koehl January 19, 2006 WASHINGTON DC 925 FOURTH AVENUE SUITE 2900 SEATTLE, WA 98104-1158 TEL: (206) 523-7580 FAX: (206) 623-7022 www.prestongates.com

Table of Contents Page Number Presentation: GSA Checklist for Compliance: How To Survive the GSA Multiple Award Schedule Contract Systems Audit... 1 Federal Contracts Report: Analysis & Perspective Surviving a GSA MAS Systems Audit: A Checklist for Compliance...15 Federal Computer Week: GSA cancels PC Connection contract...21 GSA Federal Supply Service: Steps to Success How to be a Successful Contractor...23 FAR 52.225-5, Trade Agreements...60 DOJ Press Release and Relator Complaint in OfficeMax FCA Matter...63 GSA Steps...80 Speaker Biography...86

How To Survive A GSA MAS Contract Systems Audit Government Contracts, Construction & Procurement Policy Practice Group Presented by: G. Matthew Koehl, Esq. January 19, 2006 Presentation Outline Overview of General Services Administration (GSA) Multiple Award Schedule (MAS) Program Expanding scope of routine MAS contract audits Top audit issues, rules and common problems Preparing for and Responding to GSA audits Compliance Checklist (Page 15 in Course Materials) 2

GSA s Role in the Federal Marketplace MAS Program has seen enormous growth since procurement reform legislation in mid-1990s $33.6 billion in Government FY 2005 sales Forecast $50 billion by FY 2008 > 50% of all Federal IT purchases >17,000 GSA MAS contracts 3 GSA MAS Program Basics GSA is the lead procurement agency Long-term schedule contracts with pre-negotiated prices and terms and conditions Streamlined acquisition process for Federal agencies and many quasi-government agencies Open to State and Local Government agencies for IT hardware and services 4

Routine Contract Systems Audits GSA now conducts routine reviews of MAS contractors contract management systems Annual visit for large contractors and problem cases Performed by Federal Supply Service (FSS) Potential for referral to Office of Inspector General (OIG) and Department of Justice if serious problems discovered GovConnections (Page 21 in Course Materials) 5 Expanding Scope of MAS Audits Initially only superficial analysis of procedures for tracking GSA sales and paying Industrial Funding Fee (IFF) IFF = contract usage fee MAS contractors collect from ordering agencies and remit to GSA (0.75%) FSS receives no Congressional appropriations, IFF funds its operations Substantial incentive to audit IFF payment compliance 6

Expanding Scope of MAS Audits Scope and intensity of MAS contract audits expands Analysis of all electronic sales data for 6-12 months Is the contractor overcharging agencies? Is the contractor is selling unapproved products or services? Contractor Assessment Initiative (CAsI) Report Card assesses 27 specific contract requirements (Page 59 in Course Materials) 7 IFF Payments The Rules IFF still single largest aspect of the contract systems audit FSS takes an aggressive position on IFF applicability Federal agency orders require IFF payment unless the contractor establishes the agency did not intend to use the MAS program Unreasonable interpretation of the MAS contract clause BUT less expensive and better business decision to close out the audit by paying a 0.75% fee on challenged orders 8

IFF Payment Problems Commercial order entry systems used to identify MAS orders and pay IFF are not designed for simple and easy IFF payment compliance Systems not fully automated and depend upon accurate data entry by contractor sales staff Contractors most frequently to miss certain types or categories of orders High risk order categories and suggested internal controls in Checklist 9 MAS Order Pricing - the Rules MAS contracts contain a discounted ceiling price which GSA has determined to be fair and reasonable Approved price benchmarked against other indices: discount from a list price commercial customer price acquisition cost (resellers) Reductions to benchmark price must be granted to GSA automatically on the same date and for the same duration 10

Common Pricing Problems Sales staff are unaware of the GSA price and issue MAS quotes based on higher commercial pricing and practices Order processing staff are unaware of the GSA price ceiling and accept orders in excess of approved GSA price Benchmark price reduction not granted to GSA This category of price reduction not yet heavily audited Common GSA pricing problems and suggested internal control procedures in Checklist 11 MAS Pricing Error Consequences Denial of contract extensions, negative past performance ratings, contract termination and/or suspension/debarment Reckless failure to pass on mandatory price reductions can implicate the civil False Claims Act, with severe potential financial consequences $11,000 per invoice penalty possible July 2004, Snap-on Industrial agreed to pay $10 million to resolve allegations that it failed to pass on price reductions under MAS contracts 12

Unapproved Item Sales The Rules Federal agencies are authorized to use streamlined acquisition procedures to purchase approved products and services through MAS contract MAS orders may not include unapproved ( open market ) items in excess of $2,500, even where the items are related to the MAS products or services Federal agencies must receive accurate information from the contractor about whether items are MAS-approved to meet their competition obligations 13 Unapproved Item Sales Common Problems Sales staff don t know which items are approved Slow contract modification approval creates gaps between commercial and GSA-approved offerings Intentional misrepresentation as MAS-approved item Express misrepresentation Quote referencing MAS contract with some MAS items but not separately identifying open market items 14 Common unapproved item scenarios and suggested internal controls in the Checklist

Importance of Not Selling Unapproved Items MAS Contractors that have intentionally or recklessly misled customers about the approved status of contract items have been investigated and fined August 2004, Ashland Chemical Company paid $350,000 to resolve allegations of sales of unapproved products in connection with the MAS program Unapproved items sales common practice and largely ignored until recently 15 Get It Right Campaign Get it Right campaign is GSA s response to wellpublicized abuses of GSA contracting rules Sale of interrogation services in Iraq under the umbrella of a MAS IT contract Get it Right designed to ensure that ordering agencies and contractors respect the GSA contract scope (Page 80 in Course Materials) Auditors now apply particular scrutiny to unapproved MAS item sales 16

Trade Agreements Act CAsI Report Card recently expanded to include Trade Agreements Act (TAA) The TAA applies to all MAS contracts Except set aside Special Item Numbers (SINs) TAA implements several trade treaties granting equal treatment to products from member companies No pricing preference factors are imposed - you either comply or you can t offer the products 17 Trade Agreements Act Rules of Origin Products are eligible for purchase if last substantially transformed in a member country List of TAA-eligible countries (Page 60 in Course Materials) Substantial transformation test is not satisfied by simple manufacturing efforts that don t affect the end product s essential use End products that are substantially transformed in nonmember countries (e.g., Malaysia and Taiwan) cannot be purchased under the MAS program 18

Trade Agreements Act Rules of Origin TAA compliance problematic for industry b/c hardware production has moved to Taiwan, China, Thailand, etc. Industries tending to struggle with TAA compliance IT hardware Software Paper products Medical supplies Direct sellers and MAS resellers should review procedures and controls for ensuring TAA compliance $9.5 million OfficeMax settlement for TAA non-compliance under MAS contract (Page 63 in Course Materials) 19 Professional Services Contractors Approved MAS labor categories (LC) with specific minimum experience, education and certifications GSA has determined the LC rates fair and reasonable Contract system audit includes assessment of whether staff meet minimum requirements for the applicable LC Use of staff that fail to meet minimum LC requirements can result in a false claim December 2005, Apogen subsidiary pays $9.5 million fine for billing for under-qualified IT staff 20

Professional Services Contractors Procedures for ensuring and documenting compliance with minimum LC requirements Bid/Proposal team awareness of LC requirements Dated matrix of employees with education, experience certifications, etc. Retention of employee resumes Human Resources Periodic internal audits 21 Small Business Subcontracting Plan Requirement for all large MAS contractors Good faith effort to award percentages of subcontract dollars to various small business categories Annual or semi-annual report of plan goal achievement CAsI Report Card recently modified to include subcontracting plan goal achievement Unclear whether failure to achieve goals triggers report to SBA or other consequences 22

Preparing For A GSA Contract Systems Audit Maintain documents showing commercial pricing Maintain documents showing MAS approved products and pricing for entire contract term Maintain documents showing IFF payment calculations Maintain and periodically review compliance with other 27 CAsI Report Card categories Be prepared to demonstrate effectiveness of order quoting, receipt and entry system 23 Document Retention Challenges Many items have dynamic product and pricing changes How to show the auditor, in 2007, that an order booked at 3:00 p.m. on 2/6/05 was: (a) properly discounted, (b) approved by GSA for sale? How frequently should you store changes to GSA MAS website, given that website will change weekly, daily or even hourly? 24

Compliance Controls and Procedures Establish written procedures for: MAS pricing MAS product integrity audits IFF payment process Commercial discounting and reporting rules TAA compliance Compliance with LC minimum requirements Regular internal audits for each compliance category Identify a single person responsible for maintaining and establishing compliance with GSA MAS obligations 25 Responding to a GSA Audit Identify a single point of contact for the auditor Friendly but firm Resist requests for non-required information Never speculate, take time to get correct answers, then respond Thoroughly review data prior to providing to auditor Explain apparent problems in advance 26

Conclusion MAS contractors with material sales volumes should have one or more contract systems audits during each 5-year contract period MAS contractors often have the same compliance system flaws and compliance problems Problems are not especially complex or obscure but the consequences may be severe (GovConnection) Checklist identifies specific common problems and specific internal controls to detect and prevent each problem 27 Questions? Next Webcast Presentation: Establishing Abuse of Discretion It has become almost folklore in government contract litigation that discretionary decisions made by contracting officers are unassailable. But they aren't. Establishing abuse of discretion isn't easy, but it can be done. We'll discuss how during this webcast. G. Matthew Koehl Preston Gates & Ellis LLP (208) 338-6060 mkoehl@prestongates.com March 2, 2006 12:00 p.m. - 1:00 p.m. Eastern 9:00 a.m. - 10:00 a.m. Pacific Visit www.govcontractslitigation.com to register. Thank you! Let us know what you think Please complete a seminar evaluation.

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

Speaker Biography G. Matthew Koehl Of Counsel Practice Group(s): Government Contracts Law & Procurement Policy 1735 New York Avenue NW, Suite 500 Washington, DC 20006-5209 Tel: (202) 661-2200 Fax: (202) 331-1024 E-mail: mkoehl@prestongates.com Matt Koehl s practice focuses on representing companies that transact business with federal, state and local Government agencies, with a special emphasis on the Federal GSA multiple award schedule (MAS) program. Matt has helped numerous companies to negotiate MAS contracts with GSA. He also regularly counsels companies about how properly to administer their MAS contracts and helps companies respond to pre-award and post-award audits by GSA s Industrial Operations Analysts and Office of Inspector General. Matt also has extensive bid protest and claim litigation experience, having represented contractors in more than thirty bid protest and contract claim proceedings before the Federal courts and administrative tribunals. He has worked on numerous merger and acquisition projects involving Government contractors, representing both buyers and sellers. Matt has a strong record helping companies respond successfully to False Claims Act investigations and lawsuits. In addition, he has helped companies create and implement compliance programs and to conduct internal audits and investigations. Prior to joining Preston, Gates, Matt spent five years as the General Counsel to Micron Government Computer Systems, a leading GSA Schedule 70 contractor and a Top 3 PC supplier to the Federal Government. Before that, Matt was associated with the Government contracts group of another large, national law firm. SPECIFIC EXPERIENCE Audits and Investigations Bid Protests Contract Litigation Contracting Procedures Contractor Compliance Electronic Commerce Multiple Award Schedules Payment Issues Small Business and Small Disadvantaged Businesses Socio-Economic Issues State and Local Contracting 86

PUBLICATIONS AND SPEECHES Author, "GSA More MAS Pricing Audits in the Future?," Preston Gates & Ellis E-Alert (April 2005) Author, "Surviving a GSA MAS Contract Audit: A Checklist for Compliance," Federal Contracts Report. (January 2005) Lecturer, Commercial Item Contracting, Federal Publications, LLC, Washington, D.C. (Spring 2001- Fall 2004) Lecturer, Government Contract Law, Federal Publications, LLC, Washington, D.C. (Spring 2001-Spring 2004) Lecturer, How to Play Smart and Win Using The GSA Multiple Award Schedule Program, Federal Publications, LLC, Washington, D.C. (Winter 2003 - Fall 2004) Miscellaneous client seminars on Federal gift and gratuity requirements, Procurement Integrity Act, rules of FSS contracting and numerous other procurement and compliance related topics (1997 2004). Contributing author, The Government Contract Compliance Handbook, Federal Publications, LLC (Spring 1999) Contributing author, "Post-Award Bid Protests at the U.S. Court of Federal Claims, American Bar Association (November 1997) Co-author, "Minimum Mandatory Requirements of Solicitations", Briefing Papers, Second Series, Federal Publications, Inc. (March 1995) Co-author, Past Performance in Government Contracting: A Desk Guide for Contractors and Agencies, Holbrook & Kellogg, Inc. (July 1995) Co-author, Legal Ramifications of the Government Shutdown, The Government Contractor, Federal Publications, Inc., (November 1995) REPRESENTATIVE MATTERS MULTIPLE AWARD SCHEDULES In 2003 and 2004, represented large Multiple Award Schedule (MAS) contractors in all facets of preparing for and responding to audits of their contracts by GSA. None of the audits resulted in findings of material non-compliance with MAS contract requirements In 2003 and 2004, helped to prepare proposals and to negotiate contracts based upon various GSA MAS solicitations, including: IT hardware, software and services; business consulting services; professional engineering services; and, marketing and media services MERGERS AND ACQUISITIONS In 2001, Represented Buyer in all facets of its acquisition of a $150 million Government business subsidiary of a large publicly-traded technology company. Representation included due diligence, drafting and negotiation of purchase agreement and counseling on post-closing compliance issues. The transaction closed on-time and has exceeded sales expectations with no material compliance or performance issues. In 2003 and 2004, represented several Buyers in connection with asset acquisitions involving GSA MAS contracts. In each case the acquisition closed as scheduled and the assignment of the contract was approved by the Government. 87

BID PROTESTS In 2003, successfully represented the incumbent contractor in a bid protest at the General Accounting Office and, subsequently, the Court of Federal Claims, challenging a $250 million environmental remediation services contract awarded by the Army Corps of Engineers. Protest was eventually dismissed and settled on favorable terms. In 2004, successfully defended against a bid protest filed by a disappointed bidder for a $160 million contract for computer hardware awarded by the Commonwealth of Pennsylvania. This sole-source award is expected be the largest of its type ever awarded by the Commonwealth. Concept Automation, Inc. v. United States, 41 Fed. Cl. 361 (Fed.Cl. 1998). Filed and prosecuted complaint in the Court of Federal Claims on behalf of disappointed bidder on a U.S. Postal Service contract for computer hardware valued at several hundred million dollars. The court granted award of bid and proposal and bid protest costs following an administrative bid protest decided by the Postal Services Office of General Counsel. CONTRACT LITIGATION United States v. Pemco Aeroplex, Inc., 166 F.3d 1311 (11th Cir. 1999). Obtained summary dismissal of civil False Claims Act complaint seeking involving millions of dollars in alleged damages. Tri-Ark Industries, Inc. v. Dep t. of Treasury, GSBCA No. 13588-TD, 1996 WL 670326 (Nov. 18 1996). Prepared a claim for additional costs incurred performing a contract for janitorial services and appealed denial of the claim to the agency s administrative court. Negotiated a favorable settlement prior to trial. PROFESSIONAL MEMBERSHIPS National Contact Management Association. Former President, Boise Chapter (2002-2003) District of Columbia Bar, Public Contract Law Section EDUCATION & CREDENTIALS Bar Admissions: California, District of Columbia, Idaho, United States Court of Federal Claims J.D., Washington & Lee University School of Law, cum laude, 1993 B.A., Colgate University, with Honors in History, 1989 88