FDA seeks regular mark downs
By Mary Mosquera
Published on April 14, 2008
| Incentives in contracts |
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Federal procurement provides for some incentive contracts, said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources.
For example, agencies are moving to fixed price and performance-based contracts, which use service-level agreements to detail the responsibilities of agencies and vendors.
Agency contract managers must know how to apply the incentives and how to get the best performance from a contractor through using the incentives, which can be cost or even a fixed price, he said.
“If a contractor comes in at less than the negotiated price and still meets the other terms of the contract, they can share in the savings or cost avoidance,” Bjorklund said. “If the government comes out ahead, then the contractor comes out ahead.”
— Mary Mosquera
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Like any agency, the Food and Drug Administration is always looking for a way to get the best possible price for products and services. But FDA’s latest idea might prove too burdensome for contractors.
One of FDA’s provisions in a request for information for a new contract to be called Information and Computing Technologies for the 21st Century encourages potential vendors to supply monthly volume discounts based on the agency’s total monthly spending or the contractor’s monthly revenue from the work.
However, it might be difficult to apply monthly volume discounts to complicated information technology services, procurement experts said.
Continued competition and price adjustments are appropriate elements of a good market strategy, said Stan Soloway, president of the Professional Services Council.
“But the automatic imposition of monthly volume discounts could be extremely burdensome,” he said, adding that the requirement could increase costs substantially and create disruptions for the company and the agency.
FDA’s approach is being used to encourage the contractor to provide additional discounts for large volumes of work with the government, FDA said in its RFI released March 20. The agency said it could not comment further because it is in the procurement process.
FDA, an agency of the Health and Human Services Department, also is interested in typical pricing discounts for task orders under the indefinite-delivery, indefinite-quantity contract. The agency expects prices that are equal to or lower than the supplier’s most-favored public or private customers for similar goods and services and labor.
Aggregating demand to discount large volumes of goods and services, a characteristic of strategic sourcing, allows the government to take advantage of its vast buying power, said Paul Denett, administrator of the Office of Federal Procurement Policy.
“Strategic sourcing is critical to ensuring agencies are able to meet mission needs within their budgets,” he said.
The question is how the contractor will achieve those pricing discounts — by performing more work or selling more services.
Pricing is a complex undertaking and is based on a wide range of factors, including anticipated volume and some degree of predictability, which is important to buyer and seller, Soloway said.
“It’s unusual to have the ability to quantify performance goals, ” said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources.
In pricing strategy, vendors anticipate what kind of discount they can give the government and still make a profit, Bjorklund said. Volume discounts can work for products or, for example, help-desk operations, because they can be measured. More complex tasks, such as security architecture, are not easily quantifiable.
Applying discounts to a higher order of services is unusual, Bjorklund said.
FDA said it plans to update hardware, increase standardization and move toward infrastructure as a service to implement an agencywide computing platform. FDA will develop new information systems for human drug reviews.
Volume discounts make sense if the work is routine IT support, but FDA’s requirements cover the full spectrum of IT services, Bjorklund said.
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