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Pentagon Plans to Cap Reseller Fees: What the 5% Rule Means for IT Acquisition
The Department of Defense (DoD) is considering a major policy shift that aims to revolutionize how it purchases information technology (IT) products through the General Services Administration (GSA) schedule. A recently obtained draft memo details plans to impose a strict cap on the fees charged by value-added resellers (VARs), sparking intense debate across the federal acquisition community.
The Push for Cost Control: A 5% Limit
The core of the draft memo reveals the Pentagon’s intent to place a 5% cap on most fees charged by resellers. This initiative specifically targets IT products sold through the GSA schedule contract.
This change is rooted in the administration’s belief that costs for buying IT products and services through resellers are currently higher than normal. The DoD reportedly spent about $2 billion in fiscal 2024 through the GSA schedule on these technology products.
The initial focus of the plan would be Special Item Number (SIN) 33411. This critical SIN covers the purchasing of new electronic equipment, including desktops, servers, storage equipment, laptops, routers, switches, and various communications and audio/video equipment.
Reshaping “Fair and Reasonable” Pricing
One of the most significant implications of this draft memo is the return to the idea that GSA schedule prices should no longer be automatically considered “fair and reasonable”. The DoD expects its contracting officers to independently determine fair and reasonable pricing by considering the unique factors of each acquisition.
To enforce the proposed cap and enhance oversight, the DoD would require major changes in vendor disclosure:
- Vendors must disclose the manufacturer or dealer price in their price proposal.
- They must disclose the percentage markup from the original equipment manufacturer (OEM) price.
- A description of the value provided that compromises the markup amount must be included.
Crucially, any markup exceeding 5% would require additional vendor justification and a higher level of management attention.
Industry Voices Concern Over Complexity and Competition
Federal acquisition experts and resellers have strongly questioned the rationale behind applying these price caps. Critics argue that this approach contradicts efforts to simplify federal acquisition and encourage greater vendor participation.
Resellers point out that competition, not price controls, is the true driver of lower prices. Furthermore, they emphasize the vital role they play, noting that OEMs often do not sell directly to the government. Resellers provide invaluable expertise, understand the technology, and solve problems for agencies.
Many experts fear that capping margins could unintentionally drive out service-oriented partners who invest in innovation and engineering, leaving behind only low-touch resellers. This reduction in competition could also diminish supplier diversity and access to specialized expertise.
Practical concerns also abound regarding implementation:
- Training and Knowledge: Executives expressed concern that contracting officers often lack the appropriate knowledge and training to accurately determine the value of a mark-up, potentially leading to confusion and delays.
- Legal Compliance: Legal experts have raised questions about whether mandating cost data for commercial items violates portions of the Federal Acquisition Regulation (FAR), specifically Part 2 and Part 15, and the spirit of the Truth in Negotiations Act (TINA). When prices are deemed fair and reasonable through adequate competition, the focus is generally on the final price the agency pays, not the vendor’s internal costs or profit.
Ultimately, opponents suggest that if the DoD truly wants better prices, it should focus on ensuring competition at the task order level and providing better training for contracting officers to become effective negotiators.
Tags: DoD reseller fees, GSA schedule, IT acquisition, 5% cap, acquisition policy, fair and reasonable pricing, SIN 33411, value-added resellers, government contracts, Defense Department, marketus