The Defense Department wants to shake up how it works with value-added resellers.

In a draft memo obtained by Federal News Network, the Pentagon would place a 5% cap on most fees charged by resellers starting with a specific special item number (SIN) for IT products. This cap would only apply to IT products sold through the General Services Administration’s schedule contract.

DoD says it spent about $2 billion in fiscal 2024 through the GSA schedule on these technology products.

The draft memo is one of two expected from the administration to address what it believes are higher than normal costs when buying IT products and services through resellers.

GSA initiated this review and proposed overhaul of the reseller market earlier this year. It started in June with a letter to 10 value-added resellers to collect data to better understand the role of such companies and what it would take for original equipment manufacturers (OEMs) to sell directly to the government. Then in early October, sources said GSA was close to issuing a memo that would establish such a cap on resellers.

While GSA has yet to issue such a memo, this undated draft memo from the undersecretary of Defense for Acquisition and Sustainment, Michel Duffey, offered more specifics into what this market cap and oversight process would look like.

Duffey references GSA’s plans in his draft memo.

Duffey wrote the initiative would “initially entail GSA contracting officers’ use new control measures to support their determinations of price reasonableness for products offered for sale under IT Special Item Number 33411. Specifically, GSA will more closely scrutinize pricing from entities that hold themselves out as resellers.”

It would focus on SIN 33411, which is for the purchasing of new electronic equipment, including desktops, laptops, servers, storage equipment, routers and switches and other communications equipment, audio and video equipment and even two-way radios.

Since this cap would only apply to purchases off the GSA schedule, DoD is returning to the idea that these prices are no longer automatically considered “fair and reasonable.”

This harkens back to 2014 when both DoD and NASA issued deviations to the Federal Acquisition Regulations that said schedule prices shouldn’t be automatically considered fair and reasonable. Several years later, DoD and NASA removed that deviation.

“When placing orders on IT contracts, I expect the department’s contracting officers to independently determine fair and reasonable pricing by considering the unique factors of a given acquisition in the same manner as GSA,” Duffey wrote in the draft memo. “Finally, and in general, we will apply the same common-sense approach to avoid paying excessive pass-through costs and avoid paying non or low-value added price markups across the complete range of the procurement.”

A third change DoD would require is for vendors to disclose in their price proposal the manufacturer or dealer price, the percentage markup from the OEM price. DoD also will require a description of the value provided that compromises the markup amount. Any markup more than 5% would require additional vendor justification and a higher level management attention. The memo doesn’t describe what either of those will look like.

Multiple emails to DoD seeking comment were not returned.

DoD’s reasoning for price caps questioned

Federal acquisition experts and resellers questioned the DoD’s rationale for applying price caps.

Three different executives who work for resellers as well as a former federal acquisition official, all of whom requested anonymity for fear of retaliation and to talk about a pre-decisional memo, said this approach flies in the face of what the Trump administration has been trying to do since January to relieve the burden of federal acquisition and encourage more vendors to participate.

One executive at a reseller says the first thing that DOGE went after was cost plus contracts. Now, DoD wants to take what this person called clean and simple transparent firm fixed price contracts for commercial products and turn these into cost plus type contracts, which the executive said makes no sense.

“Audits, narratives, justifications, additional steps and time, how is this simplifying acquisition and growing the industrial base?” the executive asked. “Are they going to cap gross profit on other items they buy like cars, furniture, office supplies, building materials, heating, ventilation and air conditions (HVAC) systems, lighting, plumbing, tools, safety gear and maintenance supplies next?  Where does it stop? Why are we being targeted?”

The executive says there seems to be a big misunderstanding about the role of resellers and even how the market works.

“It’s competition, not price controls, that drive down price. If that’s the ultimate goal,” the executive said. “Capping margins would drive out the best, service-oriented partners that invest in engineering and innovation — leaving behind low-touch resellers who only process orders. This reduces competition, supplier diversity and access to expertise.”

Another executive at a reseller says determining what constitutes an “excessive mark-up” is subjective. The source said for an administration that wants to keep things moving in a timely pace, giving contracting officers discretion about what is an excessive mark-up will cause more problems than it will solve.

“They are assuming that the contracting officers have the appropriate knowledge and training to do that,” the executive said. “Unfortunately and frequently that isn’t what the contracting officers have. There is a lack of understanding that will end up causing confusion and delays.”

VARs solve problems

A third executive questioned how DoD, or any agency, would oversee this entire initiative.

They asked whether the resellers would not need a cost approved accounting systems? If so, that would add significant costs and burdens.

Finally, the former federal acquisition executive, who spent more than 25 years in the federal government, says resellers provide a lot of value to agencies, partly because OEMs traditionally don’t sell directly to the government nor do they want to, but also because the resellers solve problems for the agency.

“They know the technology. They know the OEMs and can tell you what will work or what will not work. Resellers are invaluable,” the former executive said. “In terms of their markup, you just have to negotiate better. If you get at least two resellers to bid, you will get a good price.”

Is capping profits even legal?

All the sources agreed that if DoD or GSA wants better prices, they should do two things: ensure there is competition at the task order level and train contracting officers and other acquisition workers to be better negotiators.

“If you don’t have contracting officers who can push for better pricing at the task order level, then how are you going to have contracting officers who can make these determinations of the value of the markups that are over 5%?” asked the third executive. “You are better off training contracting officers to go after better prices at the task order level. GSA has ways to help like the 4P tool that combs all over for publicly available prices. But applying caps on fees or profit goes against capitalism. It goes against common sense and it will be detrimental to the government and its industrial base.”

Aside from just questioning the rationale behind the price caps, experts also asked whether the memo would violate the FAR and even some federal laws.

One of the reseller executives highlighted five FAR provisions and/or laws this idea seems to violate.

The executive says this requirement seems to violate the Truth in Negotiations Act (TINA) in the sense that commercial Items are not subject to TINA, which requires contractors to provide certified cost or pricing data to the government during negotiations for other items because the commercial marketplace is presumed to be a competitive environment and should drive a reasonable price.

Another part of the FAR this initiative may violate is Part 2 for the acquisition commercial items. The executive said if the government is obtaining a “fair and reasonable” price, then the focus is not about contractor costs, reasonable mark-up, or profit, it’s about the price the agency is paying.

A third section of the FAR this may violate is under Part 15. This includes a prohibition on obtaining certified cost and price data for commercial items.

Cy Alba, a procurement attorney with the firm Piliero Mazza, said if the government is buying through a firm fixed price contract, then they are not supposed to be asking for cost or price information. He added if it’s awarded through the GSA schedule and it’s below the maximum order threshold then prices are determined to be fair and reasonable by GSA.

Alba also said if it’s a commercial item, or really anything that has adequate price competition, the market is supposed to make that determination that the price is fair and reasonable. He said if the government thinks the markup is too high, then they don’t have to buy the product or service from the vendor.

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© AP Photo/Alex Brandon

While delivering capabilities at speed is at the core of the Defense Department’s acquisition system shakeup, the department’s top acquisition official said the Pentagon is not “mandating speed.”

“We’re continually going to be dependent on the judgment of program leaders who are executing these programs to understand where does the need for speed balance with the risk that we would undertake to cost and/or performance of the system,” Michael Duffey, undersecretary of defense for acquisition and sustainment, told reporters Monday. 

Last week, Defense Secretary Pete Hegseth announced a series of initiatives to overhaul the department’s acquisition process as part of what he described as a broader war on Pentagon bureaucracy. Key changes include prioritizing a commercial-first approach, cutting red tape, increasing competition and bringing more commercial firms and nontraditional contractors into the defense space and transitioning program executive offices (PAO) to portfolio acquisition executives (PAE), which would give these new portfolio officials greater authorities and responsibilities for requirements, resourcing and acquisition.

Most of the changes Hegseth unveiled last Friday are similar to measures currently making their way through Congress.

In the Nov. 7 memo, Hegseth emphasized that speed will be at the center of this sweeping transformation the department is embarking on.

“The core principles of this transformation are simple: instill the warrior ethos in the acquisition workforce and enterprise, inject a sense of urgency and relentless focus on speed by empowering those directly responsible for delivery to make and own decisions, cut through unnecessary layers to focus the [Warfighting Acquisition System] on speed, accountability and mission outcomes, and prioritize flexible requirements and resource trades to enable timely delivery at the speed of relevance,” he wrote in the memo. 

Duffey said while speed to capability delivery is key, given constant budgetary irregularities, his focus is on making the most of the department’s budget — optimizing the system to deliver the best capability at the greatest speed for the lowest cost.

“Those are the parameters we operate in, and that’s what we intend to empower the workforce to make the best judgments going forward,” Duffey said.

Portfolio acquisition executives, Duffey said, will be the ones responsible for striking the right balance between speed and risk, deciding when to accelerate and possibly cut corners to achieve speed or when to delay program delivery.

“We’re hoping to provide the flexibility to the portfolio acquisition executives to be able to move money around and to trade requirements. There’s certainly no question about the emphasis on speed but recognizing that there’s a need for judgment and flexibility in that triangle of cost schedule performance,” he said.

“One thing we’re doing around here nowadays is we’re now saying schedule performance cost instead of cost schedule performance just as a way of emphasizing the fact that speed is priority amongst us,” he added.

It’s unclear whether these portfolio acquisition executives will be the ones making that call — Duffey said the department is still working out those implementation details. “I think what you’ll find is there will be circumstances where they need to have a broader conversation, and there will be circumstances where the threshold will allow them to make that decision on their own,” he said.

Along with Hegseth’s “Transforming the Defense Acquisition System into the Warfighting Acquisition System to Accelerate Fielding of Urgently Needed Capabilities to Our Warriors” memo, the department also released the acquisition transformation strategy — five pillars laid out in the plan include expanding the industrial base; empowering the acquisition workforce to deliver at speed; introducing greater acquisition flexibility through cutting regulations and processes; developing high performance systems; and improving lifecycle risk management. 

Hegseth’s memo already directed the services to begin carrying out a number of key initiatives that emerged from those five pillars.

One of the changes the department seeks to implement is replacing what it calls “redundant and excessive” studies like the Analysis of Alternatives (AoA) that the strategy says delays the start of programs. The process, which takes place early in the acquisition process and is mandated by Congress, is designed to compare operational effectiveness, suitability and life-cycle cost of alternatives. 

The strategy calls for modifying those processes and providing “more rapid and impactful assessment of commercial solutions, existing technologies, and competing prototypes as a preferred approach to the extended document analysis.”

“I think that we can learn more from experimentation and prototyping than we can from an analysis of alternatives. We recognize there may be exceptional circumstances, specifically when it comes to large-scale weapon systems where we may need to do a study of what an alternative might be. But our intent is a heavy focus on prototyping and experimentation as the best learning and best connected to the art of cutting-edge technology,” Duffey said.

The post Speed is central to DoD sweeping acquisition reform, but not a ‘mandate’ first appeared on Federal News Network.

© DoD photo by EJ Hersom