Putting the cards on the table
Like most large organizations and most people, the government buys things on credit. If someone in the government needs a stapler or whatever, that person can ask a "purchase-card holder" to go out and buy the stapler at the local store and charge it to the purchase card. Effectively, we're talking about credit cards.
Because of its size, the government ends up spending a lot of money using purchase cards every year! According to public data from the GSA SmartPay program, the government puts more than $30 billion per year on plastic.[1] That's not nothing![2] I mean, Blu Cantrell, Sole, and Mia could definitely hit 'em up style with that sort of a credit limit.
And like many credit-card holders, the government often gets "cash back" for using purchase cards from the "card issuers". Again, according to the SmartPay program, in Fiscal Year 2022, the federal government received almost $426 million in refunds. That's also not nothing; about 1.5% cash back. Presumably, though, the government declined the club-lounge perk.
Although I'll be the first to admit that I don't fully understand the mechanics of how it all works, I have read this Bits About Money post. And, based on that reading and some other googling on the internet, it is pretty evident that card issuers make money by charging merchants a fee (called "interchange fees") and the card issuers "share" a percentage of that fee with the government. Those merchant fees are why I have travel points, and those merchant fees are why federal agencies get a rebate check at the end of the year.[3]
With that background, today we are going to talk about a particular type of purchase card—the Defense Logistics Agency’s (DLA) aviation into-plane reimbursement ("AIR Card") program—and a protest at the GAO that teaches an important lesson about the business of government contracting.
The AIR Card program is a "government program that provides the Department of Defense military services and federal civilian agencies a means to procure aviation fuel, fuel-related supplies and approved ground services worldwide at both DLA Energy contract locations and commercial airports."
In June 2021, DLA issued a solicitation for a company to "provide transaction processing services, customer service, a retail merchant network, issuance of charge cards, and an electronic access system" for the AIR Card program.[4]
As part of the evaluation criteria, DLA explained that it would evaluate proposals using a best-value tradeoff, with multiple factors including technical and management approaches. Least important for the solicitation, but most important for our purposes, DLA indicated that it would also evaluate "price." But, as explained above, the price criteria was not about how much money the government was going to spend on the contract; the price was going to be determined by the size of the refund the issuer would provide to the government:
Offerors are expected to propose competitive pricing at the minimum 1% or greater based upon AIR Card® Program Total Sales History (non-contract fuel, non-contract fuel related charges, and non-contract ground services transactions) to calculate refunds of this request for proposal. The sales refund based on the volume of spend will be the only price evaluated for the purpose of the award. Price will be evaluated based on the Total Net Refund for the base period and all option periods.
A few months later, the incumbent—Kropp Holdings, Inc. (KHI)—and Associated Energy Group, LLC (AEG) both submitted proposals. Then, in June 2022, DLA awarded the contract to AEG, concluding that AEG had a better technical proposal and a better refund rate than the incumbent.
Naturally, a protest followed. After several rounds of corrective action and new protests and more correction action, DLA made several amendments to the solicitation and reopened portions of the proposal for resubmission.
As part of Amendment 15, the Contracting Officer provided historical AIR Card sales data for fiscal years 2021 and 2022. And, critically, on September 28, 2023, the CO accidentally sent KHI a copy of the internal memorandum that supported the decision.
Now, here's the thing. We've all experienced the agony of sending the wrong attachment. Plus, this went down literally days before the end of the fiscal year. Mistakes happen. And yet, this is govcon, which means that every inadvertent email can be an opportunity for a bidder to try and get its competitors disqualified!
Hence, AEG protested at the GAO that the email potentially violated the Procurement Integrity Act and gave KHI an unfair advantage. Why? Because the CO suggested in the memorandum that the sales volume was relevant to both offerors' proposals! As the CO put it:
Additionally, both AEG’s and KHI’s price proposals included rates and projections based on estimated sales volume on the contract. It’s reasonable to conclude that the merchant fees and refund rates are based, at least in part, on the projected volume of sales in the contract and therefore changes in the recent sales volume may reasonably impact the proposed rates and fees. Since the offerors are authorized to submit full revisions, the offerors may decide to revise their price proposals as part of the revisions.
Now, on the merits, let's just agree that this case is extremely weak. I don't even think it's that useful to explain why. You don't need to read a Bits About Money article to know that a company will use historic sales volumes to support its pricing proposal.
This is just so obvious. GAO certainly believed that it was obvious. And the protest was denied.
Still, I can understand why AEG feels frustrated. One of the weird dynamics of government contracting is the debrief, where the government tells you why you lost and the other vendor won. And during the debrief after AEG won the award, the government told KHI how much AEG's refund would have been.
So now, after the earlier protest and the correction actions, if you're AEG putting together your final proposal after Amendment 15, you have a strategic choice to make: Do you stick to your previous proposal (which was better than KHI's)? Or do you increase your refund (anticipating that KHI will do so to try and beat you)? It's a tough choice!
And, as GAO noted, AEG is not particularly happy about that choice:
AEG suggests that because DLA disclosed the protester’s refund rate during KHI’s debriefing, and is now allowing for KHI to revise its own rate, DLA is fostering a reverse auction competition, where offerors will race to the bottom to provide the lowest price (or, as applied here, the highest refund rate).
GAO, however, rejected that argument, noting the broad discretion afforded to agencies for this sort of a thing. And, though I feel for AEG about the potential need to revise its price given the earlier protest and the debrief, that's just how it goes.
Them's the breaks.
But the case is still a good reminder that, in govcon, protests don't just happen when the government is going to cut you a check. No, in govcon, protests can happen even when you're fighting about who can give more money to the government.
After all, $30 billion adds up to a lot of points.
[1] One nuance is that there are different types of purchase cards. The three main ones are "purchase cards", "travel cards", and "fleet cards." The biggest in terms of overall spend is purchase cards. But there are more fleet and travel transactions, and more travel cards than there are purchase cards.
[2] I mean, in government scale, $30 billion may not seem like a lot. But it is, like, the entire gross domestic product of Iceland. That'd buy a lot of skyr.
[3] A thing I don't know about, but am desperate to know the answer to, is whether the government pays interest on its purchase cards. I just have to assume the answer is no, that the government is a "deadbeat" for the card issuer, and the government pays in full and on time. And therefore the interchange is what pays the card issuers' rents. But if any of my readers know the answer definitively, please let me know!