The new law will cannibalize IDIQ contracts

It's time for the federal government to reconsider its indefinite-delivery,
indefinite-quantity (IDIQ) contract policies, particularly when the government will not
obligate itself to buy reasonable quantities of goods through these contracts.

The government just loves IDIQ contracts. From the government's perspective, the key
feature of an IDIQ is that the awarding agency is obligated to buy only a limited volume
of goods, even if it has led would-be sellers to believe it might buy much more.

If an agency projects a huge requirement for an item, but then buys few of it, the IDIQ
format generally has been interpreted to leave the vendor with no recourse. Some IDIQ
contracts are so limited that the government merely has to buy one of each item
(identified by a contract line item number or CLIN), when they already needed one of each
item for first-article testing and acceptance. Big deal.

Sometimes the government does buy a lot of products from an IDIQ contract, such as with
the Desktop PC contracts. However, more and more the IDIQ experience is a bust, with sales
never approaching the volume the agency led contractors to expect.

Contractors recognize the risks inherent in such IDIQ contracts. But like the owners of
major league baseball teams who cannot stop themselves from buying up star players in the
free-agent market, the vendors seemingly cannot stop themselves from bidding hard for
these IDIQ contracts.

IDIQ bidders must recognize that, in view of legal and market trends, the projected
government volume is unlikely to materialize.

Sometimes particular government requirements or individual IDIQ CLINS are essentially
sole-sourced, particularly with software. This can present enormous problems for a prime
contract bidder. It encourages one-product mom-and-pop software companies, whose product
just happens to fit that CLIN perfectly, to request buyouts of their product, in the form
of a master license, rather than sales by the drink. This can be disastrous for the prime
who must have a product for each of the 900 or 1,000 CLINS or forgo bidding.

These primes can lapse into wishful thinking and let themselves believe the government
actually will buy a significant portion of the amount proposed in the pricing model of the
IDIQ. If the government comes through, the prime is OK. If the government doesn't live up
to its projections, the IDIQ vendor can lose its shirt.

The government should expect vendors to begin filing more and larger claims for
redress, given the government's superior knowledge and its contractual control. This is
one painful way IDIQ abuses can be contained.

These IDIQ problems existed before last month's legislative repeal of the Brooks Act,
with the corresponding end of the delegation process, and before the change in the
Multiple-Award Schedule program six months ago. Now the IDIQ problems will become even
more profound.

Because many agencies charge a service fee for Economy Act buys that exceed their costs
of processing such sales, this can be a profitable transaction for the agency. In the
past, such Economy Act buying was limited by the General Services Administration's
delegation process.

In addition, the new Federal Supply Service managers of the MAS program already are
collecting their 1 percent cut on MAS transactions and encouraging their MAS vendors to
compete with the IDIQ contracts in several ways.

First, FSS will let MAS contractors reduce their prices below the negotiated MAS price
to compete on particular transactions without having the entire MAS contract price
automatically reduced under the old price reduction clause.

Second, FSS will permit an agency to use a basic ordering agreement when it plans a buy
exceeding the maximum order limitation in the MAS program. The MAS program is going to
compete hard with IDIQ contracts.

If the government doesn't rethink its overall IDIQ policy, IDIQ contracts will become
less attractive, cannibalized on one side by the more aggressive MAS program and on the
other by the Economy Act.

Prices on IDIQ contracts gradually will become less competitive, and more pricing games
will be played. For example, in order to get well, vendors will provide competitive prices
for items that are in the evaluation model but higher prices for items that are not
heavily evaluated.

Service will suffer because the contractors will not be able to afford the service
organization and inventory necessary to respond quickly to government needs.

It is not clear who does the successful integration of the billions of dollars of goods
bought each year through IDIQ and MAS buys. Greater thought must be given the overall
value to the government from buying items with services and integration included.

Contracts that allocate all the risk to one party or create a never-ending bazaar of
price competition are unlikely to evoke the best response from contractors. Contracts with
commitments to greater volume or requirements will attract more bidders and bigger
discounts.

If both parties to a transaction share the risks, the result is a more careful
evaluation of how each can benefit. That is the commercial way of contracting.

Stephen M. Ryan is a partner in the Washington law firm of Brand, Lowell & Ryan. He
has long experience in federal information technology issues. His Internet address SMR@blrlaw.com.