GSA Pricing Fraud Basics: What is it and what should you look for?

by | May 5, 2017 | Whistleblower Law

If you have ever purchased a car, you already know the many headaches associated with price negotiation. You may purchase the car of your dreams only to find out two days later that a friend bought exactly the same car from the same dealer for thousands less. After a bit of internet research, you may also find out that in the last year the salesman offered numerous other buyers substantially lower prices for that car without telling you. Unfortunately, car buyers facing this situation are often left with little choice but to enjoy their new vehicle and avoid speaking with their friends about it until the sting wears off. However, it surprises many to learn that when vendors use these same negotiating tricks with the US Government, they may be engaging in fraudulent activity that materially violates the terms of their General Services Administration (“GSA”) contracts. Unsurprisingly, the Government feels just like a jilted car buyer when a contractor overcharges it for products and services. Overcharging the Government in this manner takes taxpayer money and puts it in the hands of unscrupulous contractors seeking to game the system. Thankfully, the Government is armed with a number of contract clauses unavailable to an individual car buyer that it can use to “take action against contractors who withhold information and cause the government to pay more than it should for commercially available items.”

The U.S. Government negotiates procurement contracts with Most Favored Commercial Customer arrangements in mind. This means that the Government is entitled to receive pricing equivalent to “the customer or class of customer that receives (s) the best discount and/or price agreement on a given item from a supplier, regardless of terms and conditions.” The Government determines the best price a vendor offers for its goods and services by reviewing commercial sales, pricing, discounts, and other practices relating to all entities with which the vendor does business. Unlike the car salesman who controls which information he decides to reveal to a buyer regarding his pricing history, vendors are required to submit full disclosures to the Government when negotiating their GSA contracts. In order to ensure that these disclosures are complete and accurate, GSA contracts typically include the Price Adjustment Clause, FAR 552.215-72, which entitles the Government to immediate price reductions for every order issued under the contract if, for example, the vendor inflated its best price by failing to disclose the fact that it has been giving commercial customers substantially lower prices than the price it seeks to charge the Government. The vendor must further report any changes to its pricing to the Government that took place after the completion of the negotiation. Accordingly, vendors cannot agree to one price honestly negotiated with the Government on the basis of past pricing information and then proceed to offer commercial customers better prices after it signs its GSA contract. Vendors that fail to adhere to these standards can be liable for the amount of the overpayment and interest. They are also open to False Claims Act liability which can include treble damages and statutory fees for each fraudulent transaction.

Additionally, GSA contracts generally include the Price Reduction Clause, FAR 552.238-75, which seeks to maintain a specific Government discount throughout the life of the GSA contract. Once the vendor has identified each of its commercial customers, and their respective pricing arrangements, to the Government, the Government and vendor will identify a customer or class of the vendor’s customers whose pricing will serve as a “basis of award.” Essentially, this basis of award represents the vendor’s best commercial price. Once this best commercial price has been identified, the Government and the vendor must agree to the Government’s discount relative to the best commercial price. As stated above, the agreed-upon discount should generally give the Government the best price available from the vendor. The relationship between the Government’s price and the best commercial price is expressed in a ratio. For example, if the Government negotiated to pay 80% of the best commercial price, then the ratio applied to the basis of award price is 8/10 or .8. Therefore, if the best commercial price for a given product is $100, the government’s price should be $80 ($100 x .8 = $80). According to the Price Reduction Clause, this discount ratio must be maintained for the life of the contract. To maintain this discount ratio, any price decrease that a vendor offers to a commercial customer must also be offered to the Government, and the vendor may not demand a price increase from the Government if its commercial customers did not also receive one. These price changes could cause a “disturbance” to this discount ratio that will, in turn, cause the Government to pay more than its negotiated discount could.  This consequence could result in fraud and could cause a vendor to be liable for damages under the False Claims Act.

Whistleblowers who notice that vendors are overcharging the Government by ignoring the negotiated discount ratio in their GSA contracts can contact a whistleblower lawyer (or “qui tam” lawyer) to file a False Claims Act lawsuit. Because False Claims Act suits concern the interests of the United States in addition to those of the whistleblower, interested whistleblowers must engage a qui tam attorney to make the filing. Filing a False Claims Act suit initiates civil litigation on behalf of the whistleblower and the United States and makes it possible for the whistleblower to receive 15-30% of any recovery made by the Government. This has resulted in substantial recoveries for both the Government and whistleblowers, particularly with regards to the type of pricing fraud described above. On March 10, 2017, for example, the Department of Justice’s Commercial Litigation Branch and the U.S. Attorney’s Office for DC announced a $45 million settlement with CA Inc. to resolve allegations that the company “did not fully and accurately disclose its discounting practices to GSA contracting officers” during the initial 2002 contract negotiation and during extension discussions in 2007 and 2009. The settlement further resolved claims that “CA violated the price reduction clause in the contract by not providing government customers with additional discounts when commercial discounts improved.” The whistleblower reporting this fraud received a $10.195 million share of the recovery.