On May 18, 2017, House Armed Services Committee Chairman Mac Thornberry introduced H.R. 2511, titled “The Defense Acquisition Streamlining and Transparency Act.” The bill drastically would change how commercial off-the-shelf (“COTS”) products are acquired by the Department of Defense, and could signal the end of the line for the GSA Schedules program. This bill aims to create a more streamlined COTS procurement system. To achieve this goal, the proposed legislation ignores longstanding procurement principles, statutes, and regulations – and even contravenes several stated positions of the Trump administration – to provide an alternative to the General Services Administration (“GSA”) Schedules program the drafters clearly believe is too burdensome, inefficient, and costly.
The bill authorizes DoD to award a contract to one or more “online marketplace providers” to facilitate the procurement of COTS items. The bill defines “online marketplace provider” as a “commercial, non-Government entity providing an online portal for the purchase of commercial products.” The bill further defines “online marketplace” by providing several required characteristics: (1) it is “widely used in the public sector,” (2) it provides “dynamic selection” and “dynamic pricing,” whereby suppliers and products may be updated frequently, (3) it allows users to sort the offerings of multiple suppliers by shipping price, delivery date, and reviews by other users, (4) it does not feature or prioritize any product based on a fee paid to the online marketplace, (5) it provides “procurement oversight controls,” (6) it provides “consolidated invoicing, payment, and customer service functions on behalf of all suppliers,” and (7) it allows sorting, as described previously, and monthly reporting of all transactions through the marketplace.
While the proposed bill is just the first step in a lengthy process in bringing this online marketplace to fruition, it raises several important questions.
- Does value matter anymore? A single, online, price-driven marketplace necessarily will drive prices down. Indeed, this is one of the key goals of the proposal. COTS sales quickly would become LPTA (low price, technically acceptable). While the inclusion of user reviews will provide some check on the downward spiral of quality and service, most of us have seen through GSA’s horizontal pricing efforts how an uber-focus on price can bring with it significant negative unintended consequences. Awarding contracts to several marketplaces instead of one certainly would enhance choice and potentially restore some element of value to the equation (if, for example, one marketplace has better customer service or more or different features from another), but “low price” still will rule the day for most, if not all, transactions. As we all know, however, lower prices does not necessarily mean greater value.
- What is the impact on small businesses? Given the emphasis on lowest price, the envisioned marketplace could harm small businesses. Although the bill specifically provides that a sale to a small business through the marketplace would count toward an agency’s small business goals, the bill does not require the marketplace be sortable by size status, and therefore identifying small business suppliers would appear to be difficult. Further, the proposal will give many small businesses little choice but to service the federal market through a large online reseller. While this vehicle may be beneficial to some small businesses, other small business operating on already small margins could be done-in by yet another hand digging into their pockets for a piece of their revenue.
- Can the Government expect lower prices without volume purchasing? For all its emphasis on low prices, the marketplace concept fails to embrace the one element that has driven lower prices for Government customers for decades – volume purchasing. Since the inception of the Schedules program, GSA has taken the position that the Federal Government, as the largest purchaser of goods and services in the world, deserves pricing commensurate with its purchasing power. As proposed, the online marketplace makes no attempt to leverage volume purchasing by Government customers, either within a single order or across all orders through the online marketplace. Accordingly, the Government will be paying the same price for 1,000 hammers as a home-owner pays for her one hammer.
- Does America Come First? The Trump Administration has stated, early and often, that it intends to put America first. This theme was most prominent in the recent “Buy American and Hire American” Executive Order, which directed all federal agencies to increase their focus on and enforcement of the nation’s current Country of Origin rules. The proposed legislation, however, makes no mention of either the Buy American Act (“BAA”) or Trade Agreements Act (“TAA”) – two statutes that provide preferences for U.S. made products. Any purchases made under the updated $5,000 DoD micro-purchase threshold are exempt from both statutes, but at $5,001, things get interesting. Will the proposed marketplace allow users to sort for TAA/BAA compliant products? Will the marketplace automatically apply the required preference for U.S. manufactured products and raise prices for non-BAA compliant products? Unless there is a significant change to the current Country of Origin laws, the proposed marketplace will have to find a way to deal with these important issues. And if Congress finds a way around these Country of Origin laws, we all can expect the Government’s supply rooms quickly will be filled with less expensive foreign COTS items.
Finally, and likely of great interest to the GSA, what are the consequences of the proposed marketplace to the GSA Schedules program? GSA already is struggling to keep the Schedules program relevant. GSA’s recent attempt to pivot away from the CSPF (“Commercial Sales Practices Format”) and the Basis of Award/Price Reductions Clause structure toward a pricing scheme powered by the recently enacted Transactional Data Reporting (“TDR”) rule has been criticized widely, and even GSA acknowledged recently it is considering making compliance with the TDR rule voluntary. The online marketplace concept, although contemplated only for DoD in its current form, seems to constitute yet another “shot across the bow” to GSA, signaling a desire within the Government to find a more efficient and expeditious way to acquire COTS items.
This is no subtle warning shot, either – the bill specifically states the envisioned marketplace “does not include an online portal managed by the Government for, or predominantly for use by, Government agencies.” In other words, anything resembling the GSA Schedules program will not fly here. Further, the bill states the contract for this marketplace (or marketplaces) may be awarded “without the use of full and open competition” and the only prerequisite for supplier participation appears to be present responsibility (i.e., the supplier is not suspended or debarred). How this idea can coexist with the current Competition in Contracting Act is yet to be seen.
Despite the ominous clouds over the Agency’s head, GSA could view this legislation as a strategic opportunity to reinvent itself. Given the many apparent deficiencies of the legislation (e.g., how it will co-exist with the Small Business Act, the Competition in Contracting Act, the Buy American Act, and the Trade Agreements Act, and the Javis-Wagner-O’Day Act), GSA could work to fill some of the voids that likely will be created by a mandated online marketplace. GSA, for example, could focus on volume purchases, or non-COTS purchases, or service procurements, or perhaps even reinvent itself as a certifying authority for the various rules and regulations that an online marketplace may not have the capabilities to handle. While the Agency has options in front of it, one thing it cannot do is stand by with its head in the sand, watching (or not watching) as the procurement landscape changes dramatically before its eyes.
Likewise, contractors must not blind themselves to the forthcoming changes. Whether it’s the current proposal or some other proposal, the procurement landscape for COTS items is changing. That train already has left the station. Those who plan ahead, will be able to help shape its destination – or at least make sure they have a seat on board. Those who don’t will be left standing at the station.