Buy Lines: Contractor drops the dime on competitors

Steve Charles

An opportunity for yet another cottage industry has emerged in the federal ecosystem. It's called blowing the whistle on competitors with noncompliant contracts, and it pays well.

In the past six months, three major office-supply contractors ? OfficeMax Inc., Office Depot Inc. and Staples Inc. ? paid $22 million to the Treasury Department. The government then paid two executives of Safina Office Products Inc. of Houston $3.2 million as their reward for helping auditors and investigators build a case against the three under the False Claims Act. More such cases appear to be in the works.

As for the alleged false claims in these settlements, it turns out that selling the federal government items made in countries that have not signed a reciprocal trade agreement with the United States is prohibited under the Trade Agreements Act.

In these cases, the contractors allegedly violated their General Services Administration schedule contracts by selling the items. The Justice Department determined that each order involving noncompliant products is a false claim.

The False Claims Act empowers the Justice Department to charge treble damages plus punitive fines of $5,500 to $11,000 per incident. In these cases, the government calculated treble damages as three times the amount paid for the offensive items. Under the qui tam provisions of the False Claims Act, the whistleblower can be awarded up to 25 percent of the settlement.

To its credit, GSA has embarked on an immediate campaign to rid its schedule contracts of offending items. Items not made in countries compliant with the trade act are being removed from schedule contracts and from GSA Advantage.

Negotiators in the U.S. Trade Representative's office must be smiling. In their view, this gives them leverage to negotiate more favorable free-trade agreements with countries such as China, Malaysia, Taiwan and Thailand.

But what is really happening in the global supply chain? I suspect there's a lot of leakage.

Manufacturer part numbers are unique to an item regardless of its point of manufacture. Many companies move manufacturing along a network of plants juggling a complex set of global economic and operational variables. Their distribution networks aren't tasked with routing products from a certain plant to a particular customer. These goods flow into global distribution networks, and low price wins.

The obvious solution is to create unique federal part numbers and implement the systems necessary to maintain a separate channel to the federal government. The problem with this is that it creates government-unique products and systems, all of which turn a commercial item into a government-unique or developmental item. This triggers a cascading list of procurement requirements that Congress decided in the Federal Acquisition Streamlining Act of 1994 were too costly to be applied to commercial items.

A proposed rule to exempt commercial items from the Trade Agreement Act prohibition has been in the rulemaking process for two years now.

But since the Sept. 11, 2001, terrorist attacks, politics have swung toward protectionism, and we now have both the protectionists and the free traders opposing the commercial-item exemption.

Nor have agency executives been helpful. They report being able to buy whatever they need. True, there's always a supplier ready to offer anything in demand, including those slick, handheld phones and personal digital assistants made in China and Malaysia.

Thus, for those items now inextricably bound into the fabric of the global economy, the parties at risk when selling to the federal government are the suppliers. Seller beware.

Steve Charles is cofounder of immixGroup Inc., a government business-consulting firm in McLean, Va. Send him your comments at Steve_Charles@immixgroup.com.

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