Potential Major Shift in the Federal Marketplace as GSA Awards Contracts to Open Online Marketplaces to Micro-Purchases by Federal Users

The US General Services Administration (GSA) today announced award of three contracts to online marketplaces (to Amazon Business, Fisher Scientific and Overstock.com) which will open those marketplaces to micro-purchases (generally up to $10,000) by federal users.¹ Federal users will be able to purchase goods and services directly, without going through a traditional contracting process.² GSA's "commercial platforms" initiative³ has been very controversial, in part because it may displace existing and well-developed vendor relationships with government customers.

Congress launched this initiative several years ago,⁴ but left most of the implementing details to GSA.⁵ After an extended exchange with industry and other stakeholders, GSA decided to forego other policy options (for example, enhancing the government's own online marketplaces such as www.gsaadvantage.gov, or allowing users to buy direct from online vendors) and instead opted to enter into "no-cost" contracts which will open online commercial marketplaces to federal customers.⁶ Awards of those contracts, originally delayed by the COVID-19 pandemic,⁷  have now occurred. GSA expects access to online marketplaces under this initiative to launch within 30 days.⁸

This is a three-year proof-of-concept initiative,⁹ in part because a number of questions about the shape and scope of the effort remain to be resolved.

Contractors May Need to Join Online Marketplaces Rapidly: Now that GSA has made awards on the pending solicitation,¹⁰ contractors know which commercial marketplaces will be awarded access to approximately 4.5 million federal military and civilian personnel.¹¹ This raises a practical question for vendors who provide goods or services that could be sold through the electronic marketplaces, at amounts below the micro-purchase threshold (see below): how can those vendors move quickly to join the platforms newly opened to federal customers.

Micro-Purchase Threshold May Rise: While the cap on micro-purchases is normally $10,000, that cap has increased to $20,000 in the pandemic, and GSA and the Office of Management and Budget have urged Congress to increase the limit to $25,000 for purchases through GSA's approved portals.¹² A rising micro-purchase cap means that more of the market could be swallowed by what is, in practical terms, a new procurement method. Under the current $10,000 cap, GSA estimates that $6 billion in sales could go to these new electronic marketplaces. Micro-purchases across the federal government, however, total several times that amount.¹³

Fee to Centralized Purchasing Agency: While the transactions through these electronic marketplaces will be directly between vendors and federal users, GSA will garner a .75% referral fee on each sale, or $45 million on a conservative estimate of $6 billion in sales every year.¹⁴ This fee matches the "industrial funding fee" charged by GSA for sales through the Multiple Award Schedules contracts, though the electronic marketplaces entail almost no workload or legal obligations for GSA. This fee to a centralized purchasing agency may be very attractive to other centralized purchasing agencies, at state and municipal levels and worldwide, when those other agencies consider entering into similar arrangements with Amazon or other online marketplaces.

Almost No Legal Requirements—Including for Competition or Transparency: Unlike traditional federal contracts, micro-purchases under FAR Part 13 carry almost no regulatory requirements.¹⁵ This means that buyers and vendors ordering through the awardee commercial platforms will be able to avoid the competition and transparency normally required for federal procurements, and will not need to meet socioeconomic requirements such as the Buy American Act.¹⁶

Supply Chain Resilience: Unlike private supply chains, which emphasize close and resilient supply chain relationships, public supply chains have traditionally stressed the need for open competition to ensure best value. GSA will not require the new commercial platforms to impose those same competition requirements, perhaps on an assumption that if users are allowed to make direct purchasers they will be best able to assess best value, even without enforced competition. This shift to a private model for procurement may increase supply chain resilience, which has been a critical issue as public procurements have failed in the pandemic.

Human Capital Shortfall: One important issue for GSA and other federal agencies to resolve will be user training, to ensure that users purchasing from the online marketplaces are appropriately educated in market research and achieving best value.¹⁷ Although federal officials have long been able to use government purchase cards to make micro-purchases, this new initiative may regularize these types of direct purchases—and thus broaden the number of federal users who should be trained.

Cybersecurity: The government, concerned with its exposure to hostile state and non-state actors, is imposing tighter cybersecurity requirements, such as the Cybersecurity Maturity Model Certification (CMMC) being implemented at the U.S. Department of Defense.¹⁸ While the GSA solicitation for the commercial platforms initiative explicitly excludes certain products from vendors such as Kaspersky Labs and Huawei, other security issues may arise because of the very open nature of the online marketplaces.

Debarment as a Protective Strategy: Unlike traditional federal contracts, vendors joining the online marketplaces and selling directly to federal users will not go through the same careful vetting for price, quality and qualification (responsibility). Individual users purchasing through these marketplaces may not have the technical and market skills necessary to assess quality and price in detail. As a result, the government may have to retreat to one of its last lines of defense—contractor responsibility—to exclude vendors that pose serious corruption, reputational or performance risks. This may lead to a spike in debarment actions, especially against firms suspected of selling counterfeit goods through the electronic marketplaces, because of the Trump administration's aggressive enforcement efforts against counterfeits available online.¹⁹

Impact on Other Procurement Markets: GSA's initiative is apparently the first major effort in the industrialized world to open commercial platforms to government buyers. Other governments and agencies may well follow, which means that contractors may need to shift their strategies—especially for goods and services sold in increments below the micro-purchase threshold—across many government markets.

The next months could prove a pivotal time for this initiative, now that GSA has awarded contracts to open commercial platforms to micro-purchases by federal users.²⁰ To prepare, contractors will need to assess whether and how their federal market strategies may shift if federal users turn to this new sales channel. For government agencies it will also be a time of assessment, as agencies weigh whether federal customers—specifically, non-procurement personnel—should be specially trained to take on more authority for direct micro-purchases. For much of the federal marketplace, the awards to open these new commercial platforms may well bring substantial change, with both new challenges and new opportunities.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.