First there is a Vendor who sells a Product
Ms. Vendor has a new company that sells entire pitchers of lemonade at her stand. She typically sells this lemonade for $15 for each pitcher. A number of parents in one neighborhood love her lemonade, but think that the price is too high. Mr. GSA is a parent in the neighborhood. He wants to negotiate on behalf of the neighborhood with the goal of creating value and efficiency for his neighbors.
GSA Negotiates with Vendor
Mr. GSA tells Ms. Vendor that there are a lot of kids in his neighborhood. In fact, there are more in his neighborhood than any other neighborhood. A lot of kids in his neighborhood will buy lemonade from Ms. Vendor as long as she agrees to sell it to the kids in his neighborhood at her absolute lowest price. Ms. Vendor agrees to do so knowing that her lowest price to any of her customers is $10 per pitcher.
What is the IFF
The parents of the neighborhood really appreciate that Mr. GSA coordinated these efforts and negotiated on their behalf. Because of this, the parents agree to pay an Icey Fluid Fee (IFF) of 10% that could be added to the price of each pitcher. This fee would be collected by Ms. Vendor and remitted to Mr. GSA at the end of every quarter.
The Vendor Sells the Product
Ms. Vendor begins selling pitchers of lemonade for $11 per pitcher; $10 for the cost of her pitchers plus $1 for the IFF. The agreement made between Mr. GSA and Ms. Vendor is a hit! Over the course of three months, she was able to sell 100 pitchers in Mr. GSA’s neighborhood, collecting $1,100.
The IFF Calculation
Appreciatively, she calculates the amount of IFF that she needs to pay to Mr. GSA. She multiplies her total collections from Mr. GSA’s customers to the IFF rate. Specifically, Ms. Vendor takes her collections of $1,100 and multiplies it by the 10% IFF rate to determine that she owed $110 to Mr. GSA. But Ms. Vendor is confused because she sold 100 pitchers and collected $1 of IFF on each pitcher. She wondered why her IFF payment wasn’t $100?
What’s Wrong with the Math?
Ms. Vendor’s common sense is correct. The key point is that when Ms. Vendor collects money from the customer, she is collecting two different streams of money: 1) the revenues from the sale of the product, and 2) the contributions for the IFF. For this particular example, she collected $1,000 of sales revenue and $100 of IFF contributions. The $100 of IFF contributions are 10% of the $1,000 of sales revenue.
The problem with her original calculation is that she was calculating 10% of all of the money she collected, which is $1,100. This included the $100 dollars which were the IFF contributions she had collected. By multiplying 10% to $1,100, Ms. Vendor was compounding her IFF payment by paying a fee on both the sales revenue portion of her collections as well as the IFF contributions she also collected. This subtle error in calculation led to an extra $10 in calculated IFF (i.e., 10% of the $100). It is no coincidence that this is also the difference between Ms. Vendor’s original IFF calculation of $110 and her common-sense assessment of $100.
The General Services Administration and the Industrial Funding Fee
The General Services Administration (“GSA”) has facilitated efficiencies and negotiated discounts in the government procurement process for many years. Currently all schedule sales have an administrative fee built into the pricing of all products and services offered under GSA Schedule programs. Vendors collect this Industrial Funding Fee (“IFF”) and remit it to the GSA on a quarterly basis. The rate has changed over time and isn’t always the same for each GSA Schedule or Special Item Number (SIN). However, for most contracts the IFF is currently 0.75%.
This means that if a vendor collects money from GSA-Schedule sales of products/services to government customers, the amount collected can be separated into two distinct streams: 1) sales revenues and 2) IFF contributions. In the example of a vendor collecting $1,007,500 from GSA-Schedule sales to government customers, the company has received $1 Million in sales revenues and $7,500 (=$1M * 0.75%) in IFF contributions.
In my role as a Forensic Data Analyst, I often review GSA contracts for government contractors and analyze their detailed historical financial data and actual IFF payments. Surprisingly, I have noticed that many vendors are computing their IFF as though the fee was not already included in the contract price. In the example above, they would calculate IFF as $1,007,500*0.75%=$7,556.25 which is an extra $56.25 on every $1 million in actual revenues, or 0.005625%. In effect, they are falling prey to the same error that Ms. Vendor noticed in the lemonade example above.
You might say that this amount of money is not a lot and you may be correct on the surface. The companies that are overpaying IFF, may not even notice the “Cherry” that they pay on top of their quarterly IFF payments. However, it is interesting to note that total annual GSA sales are currently over $50 billion annually. This sales volume suggests that this particular Cherry could be costing Government Contractors close to $3 million a year.
Government contractors who have GSA schedule contracts should review their policies and procedures to determine if they are computing their IFF payments accurately. GSA states that vendors should “multiply total Federal Supply Schedule sales reported by the IFF rate in effect” (see “72A Quarterly Reporting System” https://72a.gsa.gov/ifffaq.cfm#12 ), but clearly care should be taken to determine true Schedule Sales, exclusive of IFF, before multiplying by the IFF rate in effect.
If you think you overpaid IFF in the past, but would like a neutral eye to review, please reach out. I would be happy to help. If you want to correct for historical overpayments, the GSA suggests that contractors direct questions regarding IFF calculations to their Administrative Contracting Officers. For contractors that choose not to correct historical IFF overpayments, my guidance would still be to ensure that they are calculating their quarterly payments properly going forward. It’s a simple fix that will save money.