Education Companies’ Profits on Federal Contracts to be Negotiated
New York
Education companies that sell more than $150,000 in goods or services to a school district will be required to negotiate the profit on any contracts using federal funds, under new rules that become effective Dec. 26.
The rules, released a year ago, appeared to surprise some education business executives gathered here today for the Software & Information Industry Association’s 2014 Education Business Forum, and could be an even bigger surprise to school districts themselves, according to Cheryl L. Sattler, a senior partner with Ethica, LLC, a Quincy, Fla.-based firm that helps businesses navigate federal education programs.
“This is fundamentally going to change the relationship between vendors and school districts,” said Sattler, who explained the rules as part of a workshop titled “K12 Federal Education: Understanding the Marketplace,” which was attended by about 30 education company executives.
The federal audit changes from the White House Office of Management and Budget are the most sweeping since 1988, according to Sattler. They are being made to “get the most efficiency out of federal dollars, the biggest bang for the buck,” she added.
Changes in Contracting
Sattler said school districts and companies can expect several shifts, with a greater emphasis on outcomes and performance from a contract, although no definition for “performance” was provided. The U.S. Department of Education has yet to release its guidance about how this will be interpreted, she explained.
Second, districts wil be required to have written conflict of interest policies. Vendors cannot play a role in helping to draft specifications for requests for proposal, and districts cannot designate certain brand names, nor can they name geographical preferences for vendors in specifications, either. “We expect a lot more RFPs, and a lot less sole source work,” she said.
Finally, to do business over $150,000, a district has three options: go through a procurement process with sealed bids, in which case the price will win; or by competitive proposal, in which case the price is a factor but not the only one; or by noncompetitive proposal, or sole source, which carries many restrictions.
As a result of the changes, pricing transparency will increase. Private education companies do not typically reveal their profit margins on a given contract.
Another common education business practice, in which larger school districts can sometimes receive lower “per student” pricing for the same product because they have more students than rural districts, might be characterized as “abuse” in audits under the OMB rules, she said.
Cost Analysis, Price Rules Defined
The rules—officially called the “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,”—were released on Dec. 26, 2013, and will go into effect on Dec. 26 this year. Acquisitions under $3,000, and between $3,000 and $149,999, are governed by the rules. But the biggest changes willl affect all federal expenditures at what is called the “Simplified Acquisition Threshold,” or $150,000 and above.
Districts will be required to make independent cost estimates before receiving bids or proposals, under the rules.
“The method and degree of analysis is dependent on the facts surrounding the particular procurement situation,” the rules say.
Negotiating profit is described in “Contract Cost and Price” rules in Subsection 200.323, which says, in part, that: “The non-federal entity must negotiate profit as a separate element of the price for each contract in which there is no price competition and in all cases where cost analysis is performed. To establish a fair and reasonable profit consideration must be given to the complexity of the work to be performed, the risk borne by the contractor, the contractor’s investment, the amount of subcontracting, the quality of its record of past performance and industry profit rates in the surrounding geographical area for similar work.”
States to Oversee Audits
“I suspect states are much more aware of this than are school districts,” said Sattler. It’s the state departments of education that will look at these audits of school districts, and determine what action needs to be taken for issues that arise.
The Council on Financial Assistance Reform, an arm of the Chief Financial Officers Council from the country’s largest agencies, promulgated the rules and has released an FAQ about the rules.
In answer to a question from the audience about whether these rule changes would bring contracting with federal dollars to a virtual halt, Sattler responded, “I think it’s going to be slowdown, not a shutdown. This will take time to trickle out. You now know more about this than 90 percent of the people around the country,” she said. “You have time to examine policies and practices, and find some work-arounds. The [federal] money has to squeeze through somehow.”
Education Company Contractors Are Not Subject to Substantial Changes
The sky is not falling. Readers could infer from Michele Molnar’s recent blog post, “Education Companies’ Profits on Federal Contracts to be Negotiated,” (December 9, 2014) that education companies will be required to negotiate profits on “any contract using federal funds under the new rules that become effective Dec. 26.” In fact, this requirement should only affect a minor subset of potential contracts.
New Section 200.323 of the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards provides, in pertinent part, that grant recipients or subrecipients who procure property and services using funds from a federal award “must perform a cost or price analysis in connection with every procurement action in excess of the Simplified Acquisition Threshold including contract modifications” and “must negotiate profit as a separate element of the price for each contract in which there is no price competition and in all cases where cost analysis is performed.”
The text shows that profit negotiation is limited to two circumstances: (1) when there is no price competition (i.e., sole-source or inadequate competition) or (2) in cases where cost analysis is performed. A cost analysis need only be performed when there is no price analysis. So, profit negotiation is not required when there has been price competition or if the grantee elects to perform a price analysis instead of a cost analysis.
The revisions move grant administration closer toward the Federal Acquisition Regulations (“FAR”), making the FAR instructive. The profit negotiation requirement in section 200.323 is now similar to FAR 15.404-4, which outlines methods for analyzing profit when price negotiation is based on cost analysis, but provides that profit analysis is not required when price negotiation is not based on cost analysis. Moreover, under the FAR, a price analysis “shall be used” when, among other reasons, there has been an adequate price competition or the procurement is for commercial items. FAR 403-1(b), 404-1(a)(2). The term “price analysis” is defined in the FAR to exclude evaluation of “separate cost elements and proposed profit.” FAR 15-404-1(b).
So, the negotiation of profit will probably not be required if there is either another competitor for the initial award, if the price offered is for a party’s commercial item, or even if the buyer expected there would be more than one offeror.
Jay Urwitz
I am an education law partner at Wilmer Cutler Pickering Hale and Dorr but this does not constitute legal advice.