The Defense Department wants to shake up how it works with value-added resellers.
In a draft memo obtained by Federal News Network, the Pentagon would place a 5% cap on most fees charged by resellers starting with a specific special item number (SIN) for IT products. This cap would only apply to IT products sold through the General Services Administration’s schedule contract.
DoD says it spent about $2 billion in fiscal 2024 through the GSA schedule on these technology products.
The draft memo is one of two expected from the administration to address what it believes are higher than normal costs when buying IT products and services through resellers.
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GSA initiated this review and proposed overhaul of the reseller market earlier this year. It started in June with a letter to 10 value-added resellers to collect data to better understand the role of such companies and what it would take for original equipment manufacturers (OEMs) to sell directly to the government. Then in early October, sources said GSA was close to issuing a memo that would establish such a cap on resellers.
While GSA has yet to issue such a memo, this undated draft memo from the undersecretary of Defense for Acquisition and Sustainment, Michel Duffey, offered more specifics into what this market cap and oversight process would look like.
Duffey references GSA’s plans in his draft memo.
Duffey wrote the initiative would “initially entail GSA contracting officers’ use new control measures to support their determinations of price reasonableness for products offered for sale under IT Special Item Number 33411. Specifically, GSA will more closely scrutinize pricing from entities that hold themselves out as resellers.”
It would focus on SIN 33411, which is for the purchasing of new electronic equipment, including desktops, laptops, servers, storage equipment, routers and switches and other communications equipment, audio and video equipment and even two-way radios.
Since this cap would only apply to purchases off the GSA schedule, DoD is returning to the idea that these prices are no longer automatically considered “fair and reasonable.”
This harkens back to 2014 when both DoD and NASA issued deviations to the Federal Acquisition Regulations that said schedule prices shouldn’t be automatically considered fair and reasonable. Several years later, DoD and NASA removed that deviation.
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“When placing orders on IT contracts, I expect the department’s contracting officers to independently determine fair and reasonable pricing by considering the unique factors of a given acquisition in the same manner as GSA,” Duffey wrote in the draft memo. “Finally, and in general, we will apply the same common-sense approach to avoid paying excessive pass-through costs and avoid paying non or low-value added price markups across the complete range of the procurement.”
A third change DoD would require is for vendors to disclose in their price proposal the manufacturer or dealer price, the percentage markup from the OEM price. DoD also will require a description of the value provided that compromises the markup amount. Any markup more than 5% would require additional vendor justification and a higher level management attention. The memo doesn’t describe what either of those will look like.
Multiple emails to DoD seeking comment were not returned.
DoD’s reasoning for price caps questioned
Federal acquisition experts and resellers questioned the DoD’s rationale for applying price caps.
Three different executives who work for resellers as well as a former federal acquisition official, all of whom requested anonymity for fear of retaliation and to talk about a pre-decisional memo, said this approach flies in the face of what the Trump administration has been trying to do since January to relieve the burden of federal acquisition and encourage more vendors to participate.
One executive at a reseller says the first thing that DOGE went after was cost plus contracts. Now, DoD wants to take what this person called clean and simple transparent firm fixed price contracts for commercial products and turn these into cost plus type contracts, which the executive said makes no sense.
“Audits, narratives, justifications, additional steps and time, how is this simplifying acquisition and growing the industrial base?” the executive asked. “Are they going to cap gross profit on other items they buy like cars, furniture, office supplies, building materials, heating, ventilation and air conditions (HVAC) systems, lighting, plumbing, tools, safety gear and maintenance supplies next? Where does it stop? Why are we being targeted?”
The executive says there seems to be a big misunderstanding about the role of resellers and even how the market works.
“It’s competition, not price controls, that drive down price. If that’s the ultimate goal,” the executive said. “Capping margins would drive out the best, service-oriented partners that invest in engineering and innovation — leaving behind low-touch resellers who only process orders. This reduces competition, supplier diversity and access to expertise.”
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Another executive at a reseller says determining what constitutes an “excessive mark-up” is subjective. The source said for an administration that wants to keep things moving in a timely pace, giving contracting officers discretion about what is an excessive mark-up will cause more problems than it will solve.
“They are assuming that the contracting officers have the appropriate knowledge and training to do that,” the executive said. “Unfortunately and frequently that isn’t what the contracting officers have. There is a lack of understanding that will end up causing confusion and delays.”
VARs solve problems
A third executive questioned how DoD, or any agency, would oversee this entire initiative.
They asked whether the resellers would not need a cost approved accounting systems? If so, that would add significant costs and burdens.
Finally, the former federal acquisition executive, who spent more than 25 years in the federal government, says resellers provide a lot of value to agencies, partly because OEMs traditionally don’t sell directly to the government nor do they want to, but also because the resellers solve problems for the agency.
“They know the technology. They know the OEMs and can tell you what will work or what will not work. Resellers are invaluable,” the former executive said. “In terms of their markup, you just have to negotiate better. If you get at least two resellers to bid, you will get a good price.”
Is capping profits even legal?
All the sources agreed that if DoD or GSA wants better prices, they should do two things: ensure there is competition at the task order level and train contracting officers and other acquisition workers to be better negotiators.
“If you don’t have contracting officers who can push for better pricing at the task order level, then how are you going to have contracting officers who can make these determinations of the value of the markups that are over 5%?” asked the third executive. “You are better off training contracting officers to go after better prices at the task order level. GSA has ways to help like the 4P tool that combs all over for publicly available prices. But applying caps on fees or profit goes against capitalism. It goes against common sense and it will be detrimental to the government and its industrial base.”
Aside from just questioning the rationale behind the price caps, experts also asked whether the memo would violate the FAR and even some federal laws.
One of the reseller executives highlighted five FAR provisions and/or laws this idea seems to violate.
The executive says this requirement seems to violate the Truth in Negotiations Act (TINA) in the sense that commercial Items are not subject to TINA, which requires contractors to provide certified cost or pricing data to the government during negotiations for other items because the commercial marketplace is presumed to be a competitive environment and should drive a reasonable price.
Another part of the FAR this initiative may violate is Part 2 for the acquisition commercial items. The executive said if the government is obtaining a “fair and reasonable” price, then the focus is not about contractor costs, reasonable mark-up, or profit, it’s about the price the agency is paying.
A third section of the FAR this may violate is under Part 15. This includes a prohibition on obtaining certified cost and price data for commercial items.
Cy Alba, a procurement attorney with the firm Piliero Mazza, said if the government is buying through a firm fixed price contract, then they are not supposed to be asking for cost or price information. He added if it’s awarded through the GSA schedule and it’s below the maximum order threshold then prices are determined to be fair and reasonable by GSA.
Alba also said if it’s a commercial item, or really anything that has adequate price competition, the market is supposed to make that determination that the price is fair and reasonable. He said if the government thinks the markup is too high, then they don’t have to buy the product or service from the vendor.
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