The General Services Administration introduced the Industrial Funding Fee (IFF) in April 1995 in an effort to fund certain of its operations independently of Congressional appropriations. Whether thought of as an agency user fee, inter-agency tax, or funding mechanism, the IFF serves to finance the GSA Schedule Program through sales made under contractors' GSA Schedules.
And the IFF has served this purpose well. The Federal Supply Service stands to derive almost $239 million in fees from the $31.9 billion in GSA Schedule sales in FY 2004.
Since its inception, GSA has zealously policed the IFF. Using its audit powers, GSA routinely audits a contractor's IFF payments by comparing dollar amounts a contractor has paid for the IFF against its GSA Schedule sales during the same period. 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 General Services Board of Contract Appeals (GSBCA or Board) or within one year to the U.S. Court of Federal Claims, but the appeal process is time consuming and costly. What can a contractor do to prevent IFF problems?
As noted above, when push comes to shove over the IFF, the contractor and GSA resort to the GSBCA to decide the controversy. By looking at the GSBCA's decisions in IFF cases, contractors can take the preventive steps to avoid IFF problems of their own.
In all, there are only three reported cases at the GSBCA dealing with the IFF. The first of these cases, GE Capital Information Technology Solutions-Federal Systems v. GSA, GSBCA No 15467, June 4, 2001, 01-2 BCA ¦ 31,445, concerns GSA's method for conducting an IFF audit.
In GE Capital, the contractor took issue with the GSA's examination and analysis of the contractor's sales records for purposes of calculating overdue IFF payments. Based on a review of the contractor's sales records for a single quarter, GSA found that the contractor had mistakenly treated verbal government credit card orders for contract items and certain other sales as open market orders where there was no annotation of the contract number. From this review GSA devised an estimated underreporting error rate of 33 percent.
Then, without actually reviewing the sales data for any other periods, GSA used this error rate to conclude that the contractor owed unpaid IFF for prior reporting periods going back to the beginning of the contractor's GSA Schedule contract some two years earlier. Using this procedure, GSA claimed that the contractor underreported sales by $74,128,720 and thus owed GSA an additional IFF in the amount of $741,287.20.
While the contractor conceded that its record keeping methods may have resulted in some errors, the contractor argued that GSA's claimed underpayment of $741,287.20 was based on mere extrapolation and thus was insufficient to state a claim for a sum certain, a prerequisite for filing a claim. Declining to dismiss GSA's IFF claim, however, the Board stated that "[a]lthough the amount claimed is admittedly an estimate based on extrapolation, the Government has stated a claim for a sum certain." The Board did state, however that the 33 percent error rate would "likely be insufficient for an ultimate ruling in the Government's favor."
What does GE Capital teach us? The first lesson of GE Capital is that GSA may use sampling and extrapolation to bring an IFF claim against a GSA Schedule contractor. In other words, if GSA finds even one error when sampling a contractor's IFF payments, GSA can use that error to extrapolate its damages and launch a case against a contractor that will almost certainly survive a motion to dismiss.
The second, more important lesson, however, lies in the future when the Board decides the amount of IFF payment, if any, that the contractor actually owes to GSA. Assuming for now that the Board finds the contractor underpaid the IFF during the sampling period, the significant issue is whether the Board will use GSA's samplings and extrapolations of under billing during the sampling period to fix damages payable to GSA, or whether the Board will force GSA to a more rigorous, invoice-by-invoice standard of damages.
The case of Xerox Corporation v. GSA, GSBCA No. 15190, July 27, 2001, 01-2 BCA ¦ 31,528, provides more definitive guidance. In Xerox, the issue arose whether or not Xerox was required to pay the IFF based on the GSA list price for copier equipment purchased by federal agencies, even though the agencies actually paid Xerox a lower price net the trade-in value of used equipment.
Although GSA conceded that the IFF doesn't apply to discounts granted a customer, GSA maintained that the trade-ins were within the scope of the IFF clause of the contract. In GSA's view, if Xerox discounted a Schedule list price from $10,000 to $7,500, the IFF would apply only to the $7,500 price. However, if Xerox gave GSA a $2,500 credit on a trade-in and GSA then paid a reduced price, i.e., $7,500 for the new product, then the IFF would still apply to the $10,000. GSA's argument was based in part on the fact that the trade-ins had little or no commercial value to Xerox.
In Xerox, the IFF had not been part of the Schedule contract at the time of initial award. Moreover, as part of its initial offer, Xerox had made it clear to GSA that discounts for trade-ins of old equipment would be conducted as open market transactions and thus were not subject to the Schedule contract or its Price Reductions clause. Thus, discounts granted for trade-ins were outside the scope of the contract. Xerox argued that since these same discounts were outside the scope of the contract for the purposes of the Price Reductions clause, they were likewise outside the scope of the contract for the purposes of the IFF. The Board agreed.
It's an open question, however, whether the Board would have found for Xerox if it had not expressly negotiated the contract award to account for trade-ins. Absent Xerox's clarification about trade-ins, the GSBCA might have very well held that the IFF applied to the list price regardless of trade-in credits.
To be clear, GSBCA didn't rule that the IFF was inapplicable to trade-ins for all Schedule vendors, but rather held that the terms of Xerox's contract expressly stated that trade-in allowances weren't included. Accordingly, by carefully negotiating its contract terms, Xerox was able to avoid paying the IFF for these trade-ins.
