The General Services Administration wants to cap how much money value-added resellers can make from the government.
Federal Acquisition Service Commissioner Josh Gruenbaum is expected to issue a memo in the coming weeks that would cap the markup for value added resellers at 5%, sources tell Federal News Network.
The memo, which also may be signed by the Defense Department, would include some exceptions to the 5% markup, but they would have to be approved above the contracting officer level and require more data analysis.
“The memo is part of the continued focus on resellers by GSA. The administration believes they cost the government more than they should,” said a source familiar with the memo, who requested anonymity in order to discuss the pre-decisional document. “Every so often you get people in government who believe the government is being ripped off by resellers and the government should only do business with original equipment manufacturers. We saw this in the mid-2000s with the Veterans Affairs Department and its resellers. The irony is when you look at some of GSA’s OneGov deals, particularly for artificial intelligence tools, a fair amount are made possible through resellers.”
Sources believe the limitation of the markup would only apply to GSA schedules and other contracts the agency manages. It’s also unclear how GSA is defining what constitutes the 5% markup.
Experts said the “markup” could be just the profit a company makes, or it could be any costs, including general and administrative overhead, above the price of the product or service.
“If GSA is just focused on profit, maybe it would be fine for some contracts. But if it includes G&A overhead and profit, 5% will not work well for most companies,” said one industry executive familiar with the reseller sector. “The government would end up getting crappy service at that rate, and it will cost them more money than what they think they are saving. It would be penny-wise and pound-foolish.”
Multiple emails to GSA seeking comment were not returned.
Capping gross profit?
The impending memo is part of an ongoing effort by GSA to reduce the amount of money paid to contractors.
It started in the winter with a series of letters to consulting companies and extended to the value-added reseller (VAR) market in the summer. On May 28, GSA sent a letter to 10 VARs or similar companies asking for data and details about their model.
Sources said GSA responded after seeing the VARs’ data, asking clarifying questions and then engaging in multiple conversations focused on reducing costs.
“The first time on the phone is when we heard for the first time they may not try to kill VARs but instead cap their gross profit,” said another industry executive, who requested anonymity for fear of retribution. “The first idea was to simply get rid of VARs. When that became infeasible, the next idea was to cap gross profit. Both of these quick fixes show a lack of understanding and appreciation for the work we do everyday side-by-side with key government employees. Remember, margin is fundamentally an external commission paid and varies widely deal by deal. The OEMs do a darn good job squeezing us and only pay what we earned. GSA would never think to cap what an OEM pays their internal sales team and sales engineers. Why are VARs being singled out? What industry is next to have artificial caps on gross profits without consideration for cost of sales and overall expenses?”
The first source said the exceptions included in the memo would require some cost analysis, which runs counter to the administration’s effort to rewrite the Federal Acquisition Regulations. As part of the FAR Overhaul, the FAR Council and Office of Federal Procurement Policy are attempting to remove any need for cost-type contracts for commercial items.
The source says the exceptions to the markup would fly in the face of President Donald Trump’s acquisition executive orders because GSA would require vendors provide a cost analysis, breaking down each component of the total price.
“The FAR Overhaul expanded preferences for price-based commercial acquisitions, which is more in line with the commercial market. It also reduces the barriers to enter the federal when agencies use price-based acquisitions,” the source said. “If GSA requires cost-based acquisitions, then the vendor would need a cost accounting system that measures and tracks costs. These are specialized software systems that lot of small businesses wouldn’t invest in.”
No winners with price caps
Another industry observer called what GSA is attempting to do a form of price controls.
“This against a backdrop of increased costs of doing business generally due to inflation, including tariffs, it demonstrates a fundamental lack of understanding of operational business costs,” the expert said. “These business costs are not going to magically disappear because a ‘socialistic’ price cap has been placed on government contractors. Everyone loses in this situation: the government customer, the OEMs and the resellers. It simply makes no business sense. If GSA’s customers are demanding the caps, there should be transparency as to why and how they believe it is a sound business practice.”
Experts say VAR margins can range from a few percentage points for a basic product to 15% to 20% for complex services that require, for example, cyber experts cleared at the top secret level.
The first industry executive said creating a “one-size-fits-all” on the market shows a continued lack of understanding of how the VAR market works.
“There are some VAR transactions where there isn’t any value and they are making 7% to 8%. That’s an example of where competition isn’t working correctly. But those are not the majority of transactions. In a lot of cases, the VARs are adding huge value relative to what they are being paid,” the executive said. “GSA is viewing everything where the VAR is just passing paper. I don’t think that’s even close to the majority of transactions for VARs. A lot of manufacturers have outsourced a significant portion of their engineering to their partners because it’s cheaper for the OEM not to have this overhead.”
Experts say GSA is trying to disrupt an already efficient marketplace with the hope of driving down prices.
“It still comes down to the fact that GSA doesn’t know what we do, how we do it, or why we are so important to OEMs and government decision makers alike,” said the second industry executive. “While this may appear to reduce procurement costs on the surface, it risks undercutting the very ecosystem that enables efficient, secure and mission-focused federal IT acquisition. This policy would not only discourage innovation and competition but also reverse decades of progress in making federal procurement accessible to commercial firms. In fact, not only will margin caps fail to deliver the intended savings, but they will also unintentionally incentivize the emergence of the very type of low-value, transactional VARs the policy aims to eliminate. Enabling free market dynamics is essential to avoid undermining core market principles, which can lead to reduced supplier variety, limited innovation, and higher long-term costs for the government.”
Better negotiating skills needed
Some experts questioned whether GSA could even legally put a cap on how much profit any company could make. The experts pointed to provisions in FASA that prohibit agencies from asking vendors this level of pricing details.
“They are not allowed to ask the contractor what their profit is separately outside of the price negotiations. I’m not sure how they are planning to do this legally … I wouldn’t be surprised if there is a lawsuit,” the second industry expert said. “I’m not sure what kind of amateur hour is going on here. If there was a procurement expert with veto power they would say let’s figure out a different way to do this because you can’t do it this way.”
One former GSA official said Gruenbaum, instead, should focus on improving the teams doing the negotiations in the first place by giving them better strategies to drive costs down instead of setting an arbitrary cap on the resellers’ fee.
“The driver of costs is government’s own rules and processes. Either the reseller will provide these services or the OEMs will do it in house. If they hire additional people, they will put that back into cost of product; there is no way around it. So if you think the OEMs will eat 5% to 7% to do business directly with the government, then you are fooling yourself,” the former GSA official said. “This is another example of the Trump administration not trusting the market and having the government step in to establish price ceiling or a cap. On one hand, they are doing all these things to make buying commercial easier and reinvigorating the Federal Acquisition Streamlining Act, but then doing something like this is just the opposite of that. It doesn’t make sense to me.”
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