GSA Schedule Services Contracting and the Cost-build Approach to Pricing

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2 GSA Schedule Services Contracting and the Cost-build Approach to Pricing Breakout Session #: D09 Presented by: Bill Bressette, Principal, Baker Tilly Rob Austin, Director, Baker Tilly Date: 7/23/2013 Time: 11:15am 12:30pm 1

3 Session Objectives Explain the current challenges and related risks faced by services contractors under the GSA Schedule program Understand the cost-build approach to pricing as it relates to the GSA Schedule program Provide best practices for effectively mitigating pre-award disclosure risk and post-award compliance risk under FSS services contracts 2

4 Agenda Introduction Disconnect Between Services and the GSA Contracting Model Understanding the Cost-build Approach Common Challenges Best Practices Related Updates Questions 3

5 Introduction 4

6 Introduction GSA s Multiple Award Schedule (MAS) program is the preferred means by which federal government agencies purchase commercial goods and services Currently, 19,000+ contractors offer more than 11 million products and services across 40+ GSA Schedules Although the MAS program was originally intended to streamline the procurement process for commercial products; sales of services through the program have grown substantially over the past decade 5

7 Introduction In FY2012, GSA reported schedule sales of approximately $37.5 billion, more than half of which were attributable to services Four of the five top Schedules are largely services oriented: GSA Schedule Total FY12 Sales Approx. FY12 Services Sales % of Total FY12 Sales 70 - Information Technology $ 15.3 billion $ 8.8 billion 58% Mission Oriented Business Integrated Solutions $ 4.8 billion $ 4.7 billion 98% Professional Engineering Services $ 2.8 billion $ 2.8 billion 100% Financial and Business Solutions $ 1.4 billion $ 1.4 billion 100% 6

8 Disconnect Between Services and the GSA Contracting Model 7

9 Disconnect Between Services and the GSA Contracting Model The unique nature of professional services sales practices do not align with the disclosure requirements, pricing terms and compliance obligations set forth under the existing GSA contracting model. For example: Services contractors frequently do not utilize a published commercial pricelist Services contractors utilize a variety of contract types (e.g., time & materials, fixed price, cost plus) with unique characteristics relative to the sale of products Pricing decisions are often decentralized and vary dramatically by project / client High turnover of commercial customers and inconsistent / undefined customer groups present challenges in negotiating a manageable Basis of Award Monitoring for compliance with the PRC can be challenging given the ambiguity surrounding its application / mechanics to services contracts and related system and data limitations 8

10 Disconnect Between Services and the GSA Contracting Model GSA has not issued clear or consistent guidance to address industry concerns and confusion related to services: Current program framework and related guidance is antiquated and in some cases vague, subjective Contracting Officers and OIG auditors often have opposing viewpoints, which when coupled with a lack of clear guidance from GSA, results in confusion and frustration among contractors BOA, PRC and pricing negotiations can vary widely between similarly situated contractors on the same Schedules, and between Schedules Consequently, this has resulted in pre-award disclosure risk and postaward compliance risk for many GSA Schedule services contractors These risks / challenges are further compounded for those contractors that utilize a cost-build approach to pricing 9

11 Understanding the Cost Build Approach 10

12 Understanding the Cost Build Approach Current disclosure model provides for two common commercial methods for pricing hourly rate-based services: - Commercial Price List - Market Based Prices However, many services contractors do not use either pricing approach to establish labor rates in the commercial marketplace The cost-build approach is another method by which services contractors establish commercial T&M rates The cost-build approach to pricing takes into account various direct and indirect costs in establishing hourly rates, and is more common in the engineering, IT, business and environmental fields 11

13 Understanding the Cost Build Approach Cost Build-up Model Burden Direct Labor Cost $ Fringe Rate (25%) Overhead Rate (55%) G&A Rate (15%) Target Profit (8%) Industrial Funding Fee (0.75%) 1.80 Hourly Labor Rate $

14 Understanding the Cost Build Approach Variations of the cost-build approach: - Blended cost-build: Resources are grouped into labor categories and costs are blended to establish a single rate for each labor category - Unique rate for each employee: A single rate is established for each employee based on his/her direct labor cost of service 13

15 Understanding the Cost Build Approach Benefits of the cost-build approach: - Closest approximation of a cost-based contractor s standard pricing practices - May facilitate the development of tiered rate structures including: Onsite / Offsite Domestic / International Regional - If managed properly, may allow for increased pricing / staffing flexibility 14

16 Understanding the Cost Build Approach Challenges of the cost-build approach: - May be met with some resistance from the Contracting Officer - May be required to submit cost data to support proposed prices - GSA is not accustomed to evaluating cost data for the purpose of determining fairness / reasonableness of prices - How to disclose the MFC information (profits v. rates) on the CSP? - How to identify an appropriate BOA and establish an effective tracking ratio for PRC purposes? Should the PRC even apply? - Under what circumstances must a contractor update its CSP disclosures once the GSA contract is awarded? 15

17 Common Challenges Faced by GSA Services Contractors 16

18 Common Challenges Ensuring that CSP disclosures adequately describe standard pricing practices as well as the circumstances, magnitude and frequency with which they deviate from standard How to define standard practices, and what constitutes a deviation from standard? As standard pricing / discounting practices, customer groups or service offerings evolve, contractors must update their disclosures to ensure that they remain current, accurate and complete What constitutes a change in standard commercial pricing practices? Effectively negotiating GSA pricing that is fair and reasonable without offering the MFC pricing to GSA How to demonstrate that offered pricing is fair and reasonable? 17

19 Common Challenges Contractors must monitor sales to BOA customers for PRC purposes, notify the contracting officer of any price reductions within 15 days, and extend the price reduction to GSA eligible buyers What constitutes a price reduction? How to account for the maximum order threshold during PRC compliance reviews? How long must reduced prices be offered to GSA? Under what terms and conditions? If a federal customer (or customers) serve as the BOA, can the PRC be triggered during contract performance? GSA sales must be reported on a quarterly basis by Schedule and SIN Service contract task orders often span multiple Schedules and/or SINs which may present challenges depending upon a contractor s ability to track this information Whose responsibility is it to make sure that a project is performed under the correct schedule? (e.g., overlap between IT, FABS and MOBIS type projects) 18

20 Common Challenges Contractors must ensure that resources staffed to GSA task orders meet or exceed the minimum requirements set forth in the labor category descriptions to avoid the risk of overcharges or False Claims Act (FCA) violations Prime contractors are also responsible for ensuring that subcontracted resources meet these requirements Without adequate internal controls, maintaining and documenting compliance with regards to labor mapping can be extremely difficult Firm fixed-price contracts present additional challenges for services contractors: Effective project / resource management to ensure profitability Maintain adequate documentation of the basis of estimate to support rates and mappings in the event of an audit Realized rates versus contract rates Use of different labor categories or resources than those originally proposed Resources mapped to Service Contract Act (SCA) eligible labor categories must be compensated in accordance with appropriate wage determinations and benefit levels Based on the location in which the work is performed 19

21 Best Practices for GSA Services Contractors 20

22 Best Practices: Establishing Labor Categories GSA labor categories should reflect a contractor s business practices and people: Contractors should be prepared to demonstrate commercial sales of all labor categories proposed Labor categories should reflect commercial or internal labor categories; or a clear mapping / crosswalk should be provided to explain this relationship Contractors should ensure consistency in mapping resources to requirements Labor category descriptions should contain clear and quantifiable requirements including: Minimum years of experience Minimum education Functional roles and responsibilities of the position Any applicable training, licenses or certifications A substitution methodology (if applicable) to allow staffing flexibility 21

23 Review published policies and procedures for pricing / discounting guidance Standard versus non-standard practices Best Practices: CSP Disclosures Analyze and disclose at least 12 months of commercial sales data Map commercial or internal labor categories to proposed GSA categories Ensure consistency between the mapping of resources to GSA labor categories and the sales of these resources to commercial customers Disclose the circumstances, frequency and magnitude of deviations from standard practices Develop a pricing and Basis of Award strategy that will help to limit future compliance risk (e.g., narrow the BOA customer group) Maintain supporting documentation of the underlying analysis that was performed to arrive at the proposed labor categories and prices Provide a detailed narrative to accompany the CSP which elaborates on the companies pricing practices, addresses the frequency / magnitude of deviations from standard practices, and outlines key pricing and compliance terms Ensure BOA and PRC terms are clearly outlined in the Final Proposal Revision 22

24 Ensure that each employee is assigned an internal category If the system has the functionality to do so, GSA or commercial labor categories may also be specified in the system for each employee Centralize resume / qualification data and establish a mandatory update cycle At least annually Best Practices: Staffing / Mapping Resources Consider aligning with the promotion cycle Develop written policies and procedures to ensure consistent mapping of resources on all contract opportunities Each resource s qualifications should be verified prior to being staffed to a project or included in a bid / proposal May be accomplished with a centralized pricing function or opportunity approval process Always maintain documentation supporting resource / internal labor category mappings to project-specific or GSA labor categories 23

25 Best Practices: Cost-build Considerations Disclose lowest rates offered (i.e., MFC pricing) in CSP disclosures, but explain why the government is not entitled to these rates Utilize government-approved / audited indirect rates (where possible) in establishing GSA rates If unable to take exception to the PRC, attempt to narrow the BOA customer(s) to the maximum extent possible Ensure that direct-bill resources included in administrative labor categories on Schedule are not also included in indirect cost pool 24

26 Ensure you have a clear understanding of your labor-related contract requirements (SCA, etc.) and centralize the related compliance function Perform periodic internal compliance reviews (at least annually) Conduct periodic training for targeted groups of employees on relevant policies, procedures, systems and regulatory changes Consider establishing system controls Track applicable contracts Track resource qualifications and assignments Assign resources to multiple labor categories / rates for reporting purposes Monitor for compliance with the PRC Automate the IFF reporting process Best Practices: Other Considerations Consider teaming arrangements with other schedule holders offering complementary services as part of your overall strategy 25

27 Related Updates for Services Contractors 26

28 Related Updates for Services Contractors One Acquisition Solution for Integrated Services (OASIS) RFP for a new contract vehicle, OASIS, is being readied for summer 2013 rollout with anticipated awards in fall 2013 OASIS is a Multiple Award, Indefinite Delivery, Indefinite Quantity task order contract Designed for complex professional services contracts which overlap many disciplines (excluding IT) already covered by the GSA Schedules including: Program Management Management Consulting Scientific Engineering Logistics Financial Will allow for Cost Reimbursement, Fixed Price, Time and Materials, and Labor Hour contracts and the ability to combine more than one contract type at the task order level 27

29 Related Updates for Services Contractors GSAR Updates Proposed rewrite to GSAR Part 538, published in the Federal Register Vol. 74, No. 15, 1/26/2009, which includes the addition of an updated CSP form for services / solutions without an established catalog price (among other changes), has been withdrawn as of December 28, GSA is now opening a series of new GSAR cases to modernize the Federal Supply Schedules (FSS) program. The new GSAR cases will focus on the areas that require immediate modernization to maintain currency in the FSS program as well as strategically position the FSS program to meet the current and future needs of ordering activities: GSAR 2012-G501, Electronic Contracting Initiative (in Final Rule) GSAR 2012-G502, Enterprise Acquisition Solutions (currently being reviewed by OIRA) GSAR 2012-G503, Industrial Funding Fee and Sales (in Final Rule) GSAR 2013-G502, Multiple Award Schedule Contracting, Administrative Changes 28

30 Questions Bill Bressette, Principal Tel: (703) , Rob Austin, Director Tel: (312) , 29