Industrial Funding Fee Update

The Industrial Funding Fee (IFF) has been around long enough for some contractors to have forgotten what life was like without it. The IFF was instituted soon after the 1994 election that swept the Republicans to power in Congress.

In keeping with their promise to reduce the size of government, Congressional Republicans threatened to close GSA down as yet one more unnecessary agency. In response, GSA's Federal Supply Service (FSS) figured that if it became self-funded, Congress would lose interest in terminating its program. So, FSS introduced the IFF to its Schedule contractors over the next few years.

The IFF has served well its purpose of funding FSS. With Schedule sales rising from $2.5 billion in 1996 to almost $31.9 billion in FY04, FSS will derive approximately $239 million in fees from Schedule contract orders. That goes a long way to fund FSS. Of course, there have been a few bumps in the road along the way, which is to be expected in any new program.

Calculating the IFF. The first problem encountered was how to calculate the IFF. If a straight 0.75 percent was added to a contractor's Schedule and then 0.75 percent of total sales were remitted to GSA, the contractor came out 0.0075 percent short. This may not seem like much, but it adds up over time. It also became a bone of contention to some contractors who were unhappy at becoming unpaid collection agents for GSA.

The calculation problem is now history, however, since GSA expects a contractor to include the 0.75 percent IFF in the contractor's FPR (Final Proposal Revision) pricing. Because the award price now includes the IFF, there is no need to increase pricing by 0.75 percent to make up for the IFF. A contractor must remember that payment of the IFF is included in the Schedule price, however, and negotiate the final price accordingly.

Defining Sales. Also a question mark in the beginning was how to determine what a sale is for the purposes of the IFF. Before the IFF was introduced, Schedule contractors were required to report orders, but GSA realized that an order and a sale aren't always synonymous. GSA has been flexible in this regard, and has allowed each contractor to define a sale as it would for ordinary accounting purposes. GSA has also allowed a contractor to offset returns against amounts due for the next quarter. This makes sense, since a sale isn't really a final sale if returned to the contractor.

Dealer Sales. Harder for the contractor has been how to track dealer sales. A Schedule contractor is responsible for the IFF, not its dealers authorized to sell under the Schedule. That is, if an authorized dealer sells, invoices, and receives payment under a Schedule, the contractor is still ultimately liable for payment of the IFF.

To effect compliance, a contractor should establish procedures requiring the dealer to report sales and remit the IFF to the contractor if the dealer is to continue to receive favorable discounts. The contractor should also require the dealer to indemnify the contractor for the payment of the IFF, plus any interest and penalties, that the contractor is forced to pay because the dealer failed to report the sale and remit the IFF to the contractor.

Open Market Sales. It's common practice for a contractor to include open market items in a Schedule contract order so long as the open market items are related to the Schedule order and are incidental to its total cost. After the IFF was introduced, the question arose whether to treat the open market item portion of a Schedule order as covered by the IFF. Most contractors have answered that question in the negative, because their open market pricing didn't include an IFF component. To my knowledge, GSA has gone along with this interpretation.

On the other hand, GSA has apparently questioned the practice of many Schedule contractors to sell on an open market basis the same products they have on Schedule. The issue to GSA is whether these open market orders should in fact be treated as Schedule orders subject to the IFF.

GSA's reasoning is that some contractors may be trying an end run around the IFF by swapping Schedule for open market orders, thus saving the 0.75 percent IFF. However, if the agency asked for an open market order, GSA is probably over-reaching, since the contract vehicle is ultimately the agency's choice. If a contractor is unilaterally changing Schedule orders to open market orders without telling the agency, that would be a problem.

Audits and Disputes. GSA has been assiduous in collecting the IFF from contractors. GSA has used every renewal and extension opportunity to require contractors to certify that they have paid the IFF in full. GSA has also sent auditors to many contractors to review the contractors' compliance with the IFF.

If GSA believes that a contractor hasn't paid the IFF in full, GSA demands payment of the balance, or else. If the contractor balks, GSA then sends out a final decision formally demanding payment. The contractor can appeal the final decision within 90 days to the GSA Board of Contract Appeals or within one year to the U.S. Court of Federal Claims.

The IFF is now an accepted part of the Schedule program. To the extent that it is a user fee ultimately paid by agencies for using the Schedule, the IFF works well. The IFF has, however, subjected Schedule contractors to increased work and audits, all without any additional compensation. Given the partnership that GSA has imposed on contractors through the IFF, GSA should tread lightly in resolving IFF problems that arise with contractors in the future.