GSA Schedule Services Contracting: Pricing, Compliance Challenges and Best Practices

2. GSA Schedule Services Contracting: Pricing, Compliance Challenges and Best Practices Breakout Session # 308 Presenters: Tony Fuller and Bill Bressette Date: Monday, July 19, 2010 Time: 4:00pm – 5:15 pm 1

3. Objectives This session is intended to help you: Understand the current GSA Schedule contracting environment and common challenges faced by services contractors; Recognize key considerations for optimizing labor category pricing and staffing flexibility; Identify best practices for mitigating risk and maintaining compliance as a services contractor under the GSA Schedules; Understand proposed policy changes and their potential impact to the future of GSA Schedule services contracting.

4. A High Priority for Service Contractors With a heightened focus on transparency, accountability and oversight, the government is attempting to reduce wasteful spending through increased scrutiny of state and federal procurements. Inspector General audits are on the rise, and labor charging compliance has always been highly scrutinized. Proactively addressing these issues now will help to mitigate future compliance risk and minimize the long-term cost of compliance. Understanding how to optimize the use of labor categories on GSA Schedule contracts provides significant competitive advantages in an increasingly crowded marketplace. With considerable changes on the horizon, as a contractor it is important to understand where the future of services contracting under the MAS program is headed.

5. Agenda GSA Contracting Overview – The Current Environment The Disconnect Between Services Contracting and the GSA Contracting Model Pricing & Compliance Challenges, Best Practices and Other Considerations Developing a GSA Labor Category and Pricing Strategy Pre-award CSP Disclosures Using a Cost-build Approach to Pricing Post-award Contract Administration and Compliance The Future of GSA Schedule Services Contracting Questions?

6. GSA Schedule Contracting Overview:The Fundamentals GSA Multiple Award Schedule (MAS) program is the preferred means by which federal government agencies purchase commercial goods and services. GSA Schedule contracts are indefinite delivery, indefinite quantity (IDIQ) awards for a base period of five years with up to three option periods of five years each. The competition requirements and ordering procedures are streamlined compared to other forms of government contracting. Pre-award “commercial pricing” disclosures form the basis for pricing negotiations with GSA, whose negotiation objective is “Most Favored Customer” pricing (i.e., lowest prices). A contractor’s GSA Pricing is linked to the negotiated Basis of Award (BOA) customer(s) for Price Reduction Clause (PRC) purposes.

7. GSA Schedule Contracting Overview:Recent Statistics In FY 2009, GSA reported schedule sales of approximately $37.5 billion. Currently, 16,000+ contractors offer more than 11 million products and services across 40+ GSA Schedules. The government’s acquisition of services through the program has increased significantly; today, approximately 65% of total sales are derived from services. Four of the five top selling Schedules are largely services oriented: Information Technology Schedule 70: $15.6 billion Mission Oriented Business Integrated Solutions: $4.3 billion Professional Engineering Services: $2.9 billion Financial and Business Solutions: $1.1 billion

8. Fitting a Square Peg Into a Round Hole:TheDisconnect Between Services Contracting and the GSA Contracting Model The unique nature of professional services business practices and pricing do not fit well within the current GSA contracting model. Some reasons for this disconnect include: 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; Services contractors frequently do not have a published commercial pricelist; Pricing decisions are often decentralized and vary dramatically by project/client; High turnover of commercial customers and inconsistent/undefined customer groups make defining the optimal BOA very difficult for services contractors; and Monitoring for compliance with the PRC is difficult given ambiguity surrounding its application/mechanics as well as system and data limitations. Schedule solicitations, administrative requirements and regulatory guidance has not been adequately updated to accommodate the sale of services under the GSA Schedules

9. Fitting a Square Peg Into a Round Hole:TheDisconnect Between Services Contracting and the GSA Contracting Model To make matters worse, GSA contracting officers and OIG auditors do not fully understand the services industry. How to apply the established guidance to services contracts Inconsistent understanding and application across Schedules The expanding use of professional services has led to challenges in virtually all aspects of GSA MAS contracting pricing and compliance, including: Pre-award disclosures Post-award compliance GSA OIG Audits Current initiatives at GSA will potentially result in significant changes to the MAS program: MAS Advisory Panel Recommendations GSAR Part 538 Rewrite

10. Developing a GSA Labor Category and Pricing Strategy:Challenges Commercial labor categories often do not mirror a contractor’s internal labor categories or job titles. Presents a challenge in mapping internal or commercial, project-specific labor categories to those proposed under the GSA Schedule for disclosure purposes. System data is often insufficient to determine resources’ labor categories and billing rates for each project. Internal labor categories or job titles are often poorly defined, making the mapping process difficult and cumbersome in the absence of reliable data. May require a detailed review of commercial proposals, contracts, RFP/RFQ’s to determine commercial labor categories and requirements for mapping purposes. Employees may qualify for multiple labor categories which may further complicate the mapping process and impact pricing strategy. Services contractors should attempt to identify the optimal mix of labor categories that provides adequate staffing/pricing flexibility while maximizing profits. Too few labor categories may reduce pricing, staffing flexibility. Too many labor categories may increase the administrative burden of compliance.

11. Developing a GSA Labor Category and Pricing Strategy:Best Practices GSA labor categories should reflect your business practices and your people: Be prepared to demonstrate commercial sales of all labor categories proposed. Labor categories should resemble commercial or internal labor categories. Providing a crosswalk between labor categories may be necessary during negotiations. 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 methodology for substituting experience for education.

12. Developing a GSA Labor Category and Pricing Strategy:Best Practices Review published policies and procedures for pricing/discounting guidance. Standard versus non-standard practices Are there really ever standard practices for a services firm? Perform a historical pricing analysis on at least 12 months of commercial sales data. Map “commercial” or “internal” labor categories to proposed GSA categories. Perform a discount frequency analysis - if frequency and depth of discounts are significant, consider other options, perhaps even a cost-build approach. Review results to understand actual pricing practices and customer categories Develop fallback BOA and pricing strategies Maintain adequate documentation of the underlying analysis (including mappings) that was performed to arrive at the proposed labor categories and prices.

13. Pre-award CSP Disclosures:Challenges Contractor is required to disclose CSP data as part of its proposal package CSP-1 was originally developed to reflect products, not services. The standard CSP form requires that you: State whether the discounts and any concessions you are offering to the Government are equal to or better than the best price offered to any customer Complete a matrix listing (i) customer categories; and (ii) best discounts per written policy or standard practice (where written policies do not exist) for each customer category that receives a better pricing than GSA Explain any deviations (including frequency of occurrence) from your disclosed written policies or standard practices and whether they result in better discounts (lower prices) or concessions. Many contractors cannot disclose their actual pricing/discounting practices without performing a detailed historical review. Yet systems are often not sufficient to capture and disclose all transactions; Those who can perform this analysis must incur significant cost and understand the intricacies of GSA contracting to properly disclose. The information provided is expected to be current, accurate, and complete as of 14 calendar days prior to its submission.

14. Pre-award CSP Disclosures:Best Practices Populate the CSP-1 based on the historical pricing analysis. May be required to modify the format CSP-1 and price proposal to reflect services Draft a pricing narrative to accompany the submission that includes: Overview of the business, its service offerings and organizational structure Overview of customer categories (e.g., State & Local, Commercial, Healthcare, etc.). Detailed description of the analysis performed to arrive at the proposed prices. Description of standard, non-standard pricing practices – thoroughly explain any deviations from standard pricing practices and the frequency with which they occur. Explanation of the proposed prices, out-year escalation. Overview of the proposed BOA customer(s) and an explanation of why that customer is appropriate. Detailed interpretation of the PRC and its application – clearly note any exceptions.

15. Using a Cost-build Approach to Pricing:Key Considerations In the absence of a commercial pricelist or market based pricing, a contractor may support GSA prices using a cost build approach. May be met with some resistance from the Contracting Officer. May be required to submit “other than cost or pricing data” to support proposed prices. May allow for greater stratification of labor categories. Generally results in lower profit than pricing based on a commercial price list or market rates. Cost-build rates are derived by applying fringe, overhead, G&A and profit to some measure (e.g. average, 75th percentile) of the cost of service. Profit is a point of negotiation – aim high with the expectation that GSA will attempt to negotiate downward. Because an average, blended or percentile cost of service generally serves as the basis for pricing under this approach, it presents significant challenges in preparing the CSP and establishing an effective price/discount relationship for PRC purposes.

16. Using a Cost-build Approach to Pricing:Key Considerations Presents a unique set of challenges related to the BOA and price/discount relationship to be monitored for PRC purposes. Whether/how to disclose the requested MFC information (profits v. rates) on the CSP-1? Whether/how to establish an effective price / discount relationship for PRC purposes? Should the PRC even apply when using a cost-build approach to pricing? Consider proposing a fixed out-year escalation based on a historical, government approved index or tie out-year escalation to an agreed-upon market indicator. Bureau of Labor Statistics’ Employment Cost Index Consumer Price Index GSA typically prefers that services contractors use a five-year historical average to support fixed out-year escalation.

17. Post-award Contract Administration and Compliance: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? As standard pricing/discounting practices, customer groups or service offerings evolve, contractors should update their disclosures to reflect these changes. What constitutes a change in standard commercial pricing practices? 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. Post-award Contract Administration and Compliance: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. Based on the location in which the work is performed.

19. Post-award Contract Administration and Compliance:Best Practices Ensure that internal labor categories (job titles) are relevant and well defined. 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. 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.

20. Post-award Contract Administration and Compliance:Best Practices 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. Consider teaming arrangements with other schedule holders offering complementary services as part of your overall strategy.

21. The Future of GSA Schedule Contracting:MAS Advisory Panel Recommendations In February 2010, the MAS Advisory Panel issued its final report. Based on the current environment and the unique attributes of products, services and solutions, the panel provided separate recommendations to improve the MAS program for each. Key recommendations include: PRC and Task/Delivery Order Competition: For all services contracts, eliminate the PRC and mandate competition requirements similar to those under Section 803 for all federal users of the MAS program. Price Reasonableness: Issue clear and consistent guidance stating that the price objective for services is to obtain fair and reasonable prices at the time of contract award by pursuing the lowest cost alternative to the government. Disclosure: Disclose the basis upon which the contracting officer determines that contract prices for services are fair and reasonable. Contract Type: Explore the addition of cost type SINs for services contracts on a voluntary basis for those contractors with the ability to manage cost type contracts. Program Evaluation and Review: Review the length of MAS Schedule contracts.

22. The Future of GSA Schedule ContractingGSAR Part 538 Rewrite GSA is currently in the process of rewriting its acquisition policy manual (GSAM) to maintain consistency with the FAR. Proposed changes are tentative and remain subject to final approval. Of particular interest to Schedule Contractors is GSAR Part 538, published in the Federal Register Vol. 74, No. 15, 1/26/2009, which suggests the addition of a CSP-2 for services/solutions without an established catalog price. Requires more detailed labor category, contract information. Explicitly permits the disclosure of federal customers’ pricing when there are insufficient commercial sales of a service. Language has been removed allowing contractors the option to provide this information in their own format. Does not address a proposed implementation plan. Provides other clarifications surrounding Contractor Partnering Arrangements, currently known as Contractor Teaming Agreements. Includes 96 additional provisions including the new clauses, modified clauses and other clauses relocated from other sections of the GSAM.

23. Questions?

24. About Baker Tilly Founded in 1931 as a certified public accounting firm Currently operate in six states with over 1,400 professionals Member of Baker Tilly International, the world’s 8th largest network of accounting firms Headquartered in Chicago East Region is located in Washington, D.C. with over 275 professionals East Region provides a range of professional services including: Financial statement audit Tax planning and compliance Consulting services to private and publicly traded companies across many industries Government contract and grant consulting Forensic and litigation services Mergers and acquisitions Technology management

25. Speakers Tony Fuller, Principal Tony leads the Government Contractor Advisory Services practice in the East Region of Baker Tilly. He has over 17 years experience providing a broad range of business consulting services to government contractors in many industries. Tony has helped government contractors with accounting, financial and contract compliance issues in many areas of their government business operations. He has deep expertise in all aspects of commercial item acquisition and GSA Schedule contracting, including pricing analysis, proposal preparation, contract administration, compliance and audit support, and he has authored numerous articles and frequently speaks on GSA related matters. Tony is an active member of several professional organizations, and currently serves on the advisory board for BNA’s Federal Contracts Report. He also serves as Vice Chair of the Commercial Products and Services Committee of the ABA’s Section of Public Contract Law. Tel: (703) 923 8688, tony.fuller@bakertilly.com

26. Speakers Bill Bressette, Principal, CPCM Bill has over 13 years experience in government contracting and corporate compliance including contract analysis and administration, rate development and analysis, development and management of contracts and compliance organizations, corporate policies and procedures, organizational risk management, cost estimating and proposal development. Bill has extensive experience helping contractors with virtually all aspects of GSA Schedule contracting, including feasibility assessments, strategic pricing analysis, proposal preparation, contract administration, compliance and audit support. He has both consulting and industry experience in these areas, has authored many articles, and speaks often on matters related to contract compliance. Bill is a NCMA Fellow, President-Elect of the Board of Directors for the Tysons Chapter, and he is Vice Chair of the Commercial Products and Services Committee of the ABA’s Section of Public Contract Law. Tel: (703) 923 8624, bill.bressette@bakertilly.com

27. Examples: Pricing Flexibility Substitution Tables Appendix

28. Example – Pricing Flexibility • Company A • Engineer I: $50 • Engineer II: $100 • Company B • Civil Engineer I: $50 • Civil Engineer II: $75 • Electrical Engineer I: $75 • Electrical Engineer II: $125 • A task order comes out requesting services to inspect and maintain the wiring of several buildings on Ft. Belvoir. The task order calls for a Junior and Senior level electrical engineer to perform the work. Both Company A and Company B are qualified and have the resources to do the work. • Company B will be able to charge $25 more per level for the work because they have split their engineers into two separate labor categories to account for higher paid resources. • Company A will have a lower cost of compliance because have half the number of labor categories to monitor and they do not have to differentiate engineer types.

29. Example – Substitution Table Labor Category Mapping Civil Engineer I: $50 BS Civil Engineering Minimum 5 years of experience Civil Engineer II: $75 MS Civil Engineering Minimum 10 years of experience Joe would normally be mapped to a Civil Engineer I, however a substitution table can be used to substitute years of experience for education requirements. A Civil Engineer II requires a Master’s Degree, which equal 2 years in the substitution table. In order to become a Civil Engineer II without a Master’s Degree you would need 12 years of experience (10 years from the labor category requirement + 2 years from the substitution table). Joe has 14 years of experience and can therefore be mapped to a Civil Engineer II . • Joe Smith • BS in Civil Engineering • 14 years of experience