The General Services Administration has terminated the multiple award schedule contract of McKinsey and Company.
The company and the agency’s inspector general confirmed GSA’s decision in separate emails to Federal News Network.
The decision comes 10 months after a critical inspector general report found McKinsey’s prices were 10% higher than originally proposed, meaning the government paid as much as $65 million in additional costs.
“We are disappointed with the GSA’s decision, and that a GSA schedule is not available to our clients at this time,” a McKinsey spokesman said in an email statement. “We attempted to negotiate in good faith and disagree with the GSA’s evaluation. We will nevertheless continue to serve the public sector in the United States.”
A GSA spokesperson said the agency took action against McKinsey after not being able to renegotiate better pricing on the schedule contracts despite numerous attempts.
“Since our attempts to renegotiate the contracts did not yield acceptable prices, we cancelled the contracts. We are working closely with customer agencies to identify alternative solutions to carry out mission-critical work,” the spokesperson said. “In accordance with the GSA Office of Inspector General’s recommendation, GSA continues to examine all team-based pricing across the Federal Supply Schedules program. ”
A person familiar with GSA and McKinsey said that the company had been in discussions with GSA for over a year on its contract renewal.
The source said GSA officials were concerned that McKinsey’s prices were higher, sometimes substantially so, than similar services provided by other schedule companies.
The source said it ultimately looks like GSA said “no thank you” and pulled the plug on McKinsey.
This is the first time GSA canceled a major vendor’s schedule contract since 2012 when it kicked Oracle off of the IT Schedule 70. Oracle eventually left the schedule altogether in 2016.
When the IG issued its report last July, GSA said it would take immediate steps to fix the problems auditors found, including pursuing a bilateral contract modification to prevent placement of new orders while the Federal Acquisition Service attempts to negotiate better pricing.
“FAS strongly considered the OIG’s recommendation to cancel the contract. However, we decided to pursue the bilateral contract negotiation and better pricing for three reasons: first, it protects taxpayers by immediately stopping any new work under the contract; second, it allows agencies to continue to perform mission critical work; and third, it affords FAS the opportunity to negotiate better pricing with a contractor that works with agencies across the government,” the agency said last summer.
But in the end, the two organizations couldn’t come to an agreement.
The decision to end McKinsey’s schedule contract is surprising to some observers.
“This is just the most recent of a low price technically acceptable approach permeating the MAS program at the contract award level that is limiting competition for best value commercial solutions at the order level,” Roger Waldron, president of the Coalition for Government Procurement, in a statement.
Larry Allen, a long-time procurement expert and president of Allen Federal Partners, said McKinsey has a great reputation in the federal sector and agencies will find them to do business with or without a schedule contract.
“I think McKinsey were a stretch for the schedules program from the start, though,” Allen said. “Their rate structure is typically higher than most and I think that’s always been a challenge for GSA. Tough for people who’ve never been in the private sector to ascribe value to above-average price points.”
McKinsey’s schedule contract accounted for a vast majority of its federal business, according to federal databases.
GSA’s Sales Query database said McKinsey won $173 million in contracts in fiscal 2019 and almost $500 million since 2016.
The USASpending.gov portal says McKinsey won only $731 million outside of schedule contracts since 2008.
“We stand by the quality of our service and the value it delivers to the public sector. In the last year, this includes 15-plus federal agencies and departments, and 25-plus states,” the McKinsey spokesman said. “We believe that in selecting providers, federal agencies should have the right to choose among a wide range of options, to identify the vendor who provides the best capabilities and value for the task at hand.”