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GSA’s 5% Markup Cap: Are Federal Acquisition Leaders Applying Price Controls to Resellers?
The General Services Administration (GSA) is escalating its efforts to drive down contracting costs, and its latest target is the value-added reseller (VAR) market. Sources indicate that the Federal Acquisition Service (FAS) Commissioner, Josh Gruenbaum, is expected to issue a controversial memo in the coming weeks that could fundamentally reshape how VARs do business with the federal government.
The Proposal: A Hard Cap on Reseller Markups
The impending memo, which may potentially be co-signed by the Defense Department, proposes capping the markup for value-added resellers at 5%. This move is part of the administration’s continued focus on resellers, driven by the belief that they currently cost the government more than they should. This new limitation is anticipated to apply specifically to GSA schedules and other contracts managed by the agency.
If implemented, this proposal would include some exceptions to the 5% cap. However, industry sources note that these exceptions would require approval above the contracting officer level and necessitate additional data analysis.
Defining the 5%: Profit vs. Overhead
A major point of contention and ambiguity surrounding the proposed cap is exactly what the GSA defines as the “markup.” Experts are concerned about whether this 5% refers solely to the company’s profit, or if it must also include operational costs like general and administrative (G&A) overhead.
Industry executives warn that if the cap includes G&A overhead along with profit, 5% is simply not viable for most companies. One expert suggested that requiring companies to operate at such a rate would result in the government receiving “crappy service” and ultimately cost more in the long run—a classic example of being penny-wise and pound-foolish.
It is critical to understand that VAR margins naturally range widely—from just a few percentage points for basic transactions up to 15% to 20% for complex services, particularly those requiring specialized cyber experts cleared at the top secret level.
Policy Conflict and the Threat to Free Markets
Many industry observers are labeling GSA’s action as a form of price control—a measure that seems to demonstrate a fundamental lack of understanding of modern operational business costs. These critics argue that necessary business costs won’t magically disappear just because an artificial cap has been placed on contractors.
Furthermore, this requirement for cost analysis—necessary for any exceptions to the 5% cap—runs directly counter to the administration’s stated goal of rewriting the Federal Acquisition Regulations (FAR Overhaul). The FAR Overhaul generally expanded preferences for price-based commercial acquisitions to align better with the commercial market and reduce barriers to entry, especially for small businesses. If GSA forces vendors to provide cost analysis, it would necessitate specialized cost accounting systems, a heavy burden many small businesses are unprepared to take on.
Legal Challenges and Undercutting the Ecosystem
The experts agree that if this policy moves forward, everyone loses: the government customer, the original equipment manufacturers (OEMs), and the resellers. The policy risks disrupting an already efficient marketplace.
The very ecosystem that allows for efficient, secure, and mission-focused federal IT acquisition is at risk of being undercut. Instead of delivering intended savings, the margin caps are predicted to discourage innovation, reduce supplier variety, and potentially incentivize the low-value, transactional VARs the GSA aims to eliminate.
Some experts even question the legality of the measure, pointing to provisions in the Federal Acquisition Streamlining Act (FASA) that prohibit agencies from demanding separated profit details outside of price negotiations. A lawsuit challenging the implementation of these caps would not be surprising. Better negotiating skills and improved strategies to drive costs down, rather than setting an arbitrary cap, may be the more effective solution.
Tags: acquisition, GSA, VAR, value added reseller, price controls, federal acquisition, Josh Gruenbaum, contracting, procurement, federal IT, marketus