Office of Audits
Office of Inspector General
U.S. General Services Administration

Improper Pricing on the McKinsey
Professional Services Contract May
Cost the United States an Estimated
$69 Million
Report Number A170118/Q/6/P19004
July 23, 2019

A170118/Q/6/P19004

 Executive Summary
Improper Pricing on the McKinsey Professional Services Contract May Cost the United States
an Estimated $69 Million
Report Number A170118/Q/6/P19004
July 23, 2019
Why We Performed This Audit
We performed this audit as a follow-up to a preaward audit of the proposal for the option to
renew GSA Contract Number GS-10F-0118S, with McKinsey & Company, Inc. Washington D.C.
(McKinsey). McKinsey refused to provide the records required to complete the preaward audit;
therefore, the audit report advised the contracting officer to obtain the necessary information
or cancel the contract. However, instead of addressing the contractor’s lack of cooperation
during the preaward audit, a Federal Acquisition Service (FAS) division director (Division
Director) removed the contracting officer from the contract negotiations and awarded the
contract pricing with rates that were at least 10 percent higher than those originally proposed.
As a result, we had concerns about how the contract pricing was awarded and how pricing was
determined to be fair and reasonable. Our objective for this audit was to determine whether
FAS administered Contract Number GS-10F-0118S in accordance with applicable laws,
regulations, and policies.
What We Found
FAS did not administer Contract Number GS-10F-0118S in accordance with applicable laws,
regulations, and policies. We determined that the Division Director used invalid price
comparisons, relied on unsupported information, and performed insufficient analyses to justify
the awarded contract pricing. We also found that the Division Director violated standards of
conduct by advocating for McKinsey to other procurement officials. Finally, the Division
Director impeded the audit by failing to take appropriate action as required by the Federal
Acquisition Regulation to obtain required data to complete the preaward audit.
The Division Director’s actions to justify and award this pricing violated federal regulations and
the trust placed in him as a government employee with fiscal responsibilities to the federal
government and taxpayers. As a result of these actions, we estimate GSA customers could pay
an additional $69 million over the option period. FAS should take the appropriate actions and
establish controls to remedy the issues outlined in this report.
What We Recommend
We recommend the FAS Commissioner:
1. Cancel McKinsey’s Contract Number GS-10F-0118S.
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 2. Cancel McKinsey’s Schedule 70 Contract Number GS-35F-646GA.
3. Review all FAS contracts with team-based pricing to ensure they comply with Federal
Acquisition Regulation requirements.
4. Establish additional controls to ensure contracting staff obtain required audit records to
perform audits prior to awarding contract actions.
5. Assess whether the Division Director should be involved in future McKinsey contact or
contract actions.
6. Establish additional controls to ensure that FAS contracting staff maintain independent
and impartial relationships with FAS contractors in accordance with federal regulations.
7. Take appropriate action to address the Division Director’s use of invalid price
comparisons, reliance on unsupported information, and violation of standards of ethical
conduct.
8. Take appropriate action to address the Washington Branch Chief’s actions on the
McKinsey Schedule 70 contract award and this audit.
FAS agreed with the concerns outlined in the findings and partially agreed with the
recommendations. The FAS Commissioner’s written comments are included in their entirety at
Appendix B.

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 Table of Contents
Introduction ..................................................................................................................... 1
Results
Finding 1 – Awarded contract services do not comply with regulations for Federal Supply
Schedule contracts .................................................................................................. 5
Finding 2 – The Division Director failed to comply with federal laws, regulations, and GSA
policy in awarding the contract pricing .................................................................. 6
Finding 3 – The Division Director violated the standards of ethical conduct by advocating on
behalf of McKinsey. ................................................................................................. 9
Finding 4 – The Division Director impeded the audit of the proposed pricing by failing to
take appropriate action to obtain required data to complete the preaward
audit ...................................................................................................................... 13
Conclusion...................................................................................................................... 15
Recommendations .................................................................................................................. 15
GSA Comments ........................................................................................................................ 15
OIG Response .......................................................................................................................... 16
Appendixes
Appendix A – Scope and Methodology.......................................................................... A-1
Appendix B – GSA Comments ........................................................................................B-1
Appendix C – Report Distribution................................................................................... C-1

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 Introduction
The audit team performed an audit of the GSA Federal Acquisition Service’s (FAS)
administration of GSA Contract Number GS-10F-0118S with McKinsey & Company, Inc.
Washington D.C. (McKinsey).
Purpose
The audit team performed this audit as a follow-up to a preaward audit of the proposal for the
option to renew Contract Number GS-10F-0118S with McKinsey. During the preaward audit,
McKinsey refused to provide the required records; therefore, the audit report advised the
contracting officer to obtain the necessary information or cancel the contract. However,
instead of addressing the contractor’s lack of cooperation during the preaward audit, the
Division Director removed the contracting officer from the contract negotiations and awarded
the contract pricing with rates that were at least 10 percent higher than those originally
proposed. As a result, we had concerns as to how the contract pricing was awarded and how
FAS determined the contract pricing to be fair and reasonable.
Objective
Our objective was to determine whether FAS administered Contract Number GS-10F-0118S in
accordance with applicable laws, regulations, and policies.
See Appendix A – Scope and Methodology for additional details.
Background
According to FAS, GSA’s Federal Supply Schedule Program establishes long-term governmentwide multiple award schedule contracts with companies to provide federal agencies with access
to commercial products and services at volume discount pricing. A goal of the program is to
leverage the buying power of the federal government to achieve savings by combining the
purchases of multiple government agencies under one contract. FAS administers this program
and collects an Industrial Funding Fee to cover its cost of operating the program.
On January 27, 2006, FAS awarded Contract Number GS-10F-0118S to McKinsey. 1 The contract
was for 5 years with three 5-year renewal options. Under its contract, McKinsey offers
management consulting services to improve performance issues related to strategy,
organization, operations, and business technology. McKinsey’s contract offers weekly teambased pricing as opposed to hourly labor category-based pricing. The current contract option
expires on January 26, 2021. Sales under the contract totaled $956.2 million through March 31,
McKinsey is a subsidiary of McKinsey & Company, Inc., a global consulting company that has been in business
since 1926.

1

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1

 2019. Since its award, FAS has realized $7.2 million in Industrial Funding Fee revenue from this
contract.
In July 2015, as part of its offer to renew the contract, McKinsey proposed no change to its
existing weekly team-based rates for the option period. The contracting officer awarded the
contract option effective January 27, 2016, with no change in pricing pending the results of a
preaward audit.
The preaward audit of McKinsey’s proposal was performed and the report was issued on March
24, 2016. The report found that McKinsey’s proposal did not provide sufficient information for
the government to evaluate the offered pricing or establish fair and reasonable contract prices.
The audit determined that McKinsey should provide either related party commercial sales from
its parent company, McKinsey & Company, Inc., or cost buildup information to support its
proposed pricing. McKinsey refused to provide either. As a result, the report advised the
contracting officer to require McKinsey to provide this information or cancel McKinsey’s
contract. On May 19, 2016, the initial contracting officer formally agreed with the preaward
audit findings and attempted to obtain the required audit information.
Subsequently, between July 6 and July 15, 2016, McKinsey exchanged several emails with the
FAS Chief of Staff and the GSA Administrator’s assistant regarding concerns about its contract
and the contracting officer. The Administrator’s assistant engaged the FAS Chief of Staff to look
into the issue. The FAS Chief of Staff repeatedly encouraged McKinsey to address its concerns
with the contracting officer. The FAS Regional Commissioner agreed and on July 13, 2016,
emailed the FAS Chief of Staff stating, “[S]enior GSA Leadership should not be involved in this.”
Following this communication, the GSA Administrator’s office and the FAS Chief of Staff became
less involved in the contract. On the same day, the Division Director began assisting the
contracting officer with contract negotiations.
On July 28, 2016, the Division Director asked the audit team for a list of information needed for
the audit so he could forward it to McKinsey. The audit team provided the list to the
contracting officer. However, the Division Director subsequently altered the list by deleting the
requests for information from McKinsey’s parent company and deleting any references to cost
buildup information. The altered list was forwarded to McKinsey on August 2, 2016. On August
4, 2016, the audit team learned about the altered list and contacted the contracting officer
because the audit team disagreed with the changes and sought to clarify the request. On
August 29, 2016, McKinsey provided information in response to the altered list.
On August 30, 2016 – while the Division Director was negotiating the option pricing – the FAS
Regional Commissioner met with McKinsey’s Senior Partner at McKinsey’s Washington, D.C.
offices. The FAS Regional Commissioner told us this was a one-on-one meeting and that they
did not discuss anything specific to the contract. On August 31, 2016, the audit team informed
the contracting officer that the information McKinsey provided was not responsive to the audit
requests.

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 Although the Division Director did not obtain the information the audit team needed, he moved
forward with negotiating the contract pricing. On September 21, 2016, the Division Director
provided the audit team with the draft pricing award documents. On the same day, the Division
Director wrote a memorandum which formally reassigned the contract negotiations from the
contracting officer to himself. On September 28, 2016, the audit team informed the Division
Director that the draft pricing award documents did not address the audit findings. Despite the
outstanding audit issues, the Division Director awarded the pricing modification to McKinsey on
October 5, 2016.
The awarded pricing was at least 10 percent higher than the rates originally proposed by
McKinsey.
Contract Terms Negotiated
As noted earlier, in July 2015, as part of its offer to renew the contract, McKinsey originally
proposed no change to its existing weekly team-based rates for the option period. In
September 2016, McKinsey revised its proposal to request a 10 to 14 percent rate increase, the
same month the Division Director reassigned the contract to himself. The contract option
pricing the Division Director awarded in October 2016 increased McKinsey’s weekly rates by at
least 10 percent over McKinsey’s original proposal. See Figure 1. The Division Director also
negotiated an additional increase up to 3 percent effective January 2017, effectively granting
McKinsey the requested 14 percent rate increase.
Figure 1 – Awarded Contract Pricing
Team
A

Full-Time Team Makeup
(includes undefined parttime leadership and staff)
Engagement Manager, 1
Associate Or Business
Analyst (BA)

Original
Proposed
Weekly Rate

Weekly
Rate
Awarded

% Above
Existing
Rate

Annualized
Rate

$120,186

$133,196

11%

$6,926,192

B

Engagement Manager, 2
Associates/BAs

$151,539

$167,943

11%

$8,733,036

C

Engagement Manager, 3
Associates/BAs

$181,805

$201,485

11%

$10,477,220

D

Engagement Manager, 4
Associates/BAs

Not Proposed

$217,801

N/A

$11,325,652

E

1 Associate/BA

$51,442

$56,707

10%

$2,948,764

The contract outlines McKinsey’s individual labor categories but does not include individual
rates for them. These labor categories include the experience and education requirements
outlined in Figure 2.

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 Figure 2 – Awarded Labor Categories and Minimum Requirements
Senior Partner

•Bachelor's Degree
•10 Years Experience

Partner

•Bachelor's Degree
•5 Years Experience

Engagement Manager

•Bachelor's Degree
•2 Years Experience

Associate

•Bachelor's Degree
•1 Year Experience

Business Analyst

•Bachelor's Degree
•No Experience

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 Results
The Division Director did not administer McKinsey’s contract for consulting services under
Contract Number GS-10F-0118S in accordance with applicable laws, regulations, and policies.
The services awarded under the contract do not comply with regulations for Federal Supply
Schedule contracts. We determined that the Division Director failed to comply with federal
laws, regulations, and GSA policies by using invalid price comparisons, relying on unsupported
information, and performing insufficient analyses to justify the awarded contract pricing. We
also found that the Division Director violated standards of conduct by advocating for McKinsey
to other procurement officials. Finally, the Division Director impeded the audit by failing to take
appropriate action as required by the Federal Acquisition Regulation (FAR) to obtain required
data to complete the preaward audit.
As a result, we estimate GSA customers could pay an additional $69 million over the course of
the option period.
Finding 1 – Awarded contract services do not comply with regulations for Federal Supply
Schedule contracts.
The contract terms, conditions, and offered services do not comply with applicable laws and
regulations. According to FAR 8.404, Use of Federal Supply Schedules, “Services offered on the
schedule are priced either at hourly rates, or at a fixed price for performance of a specific task
(e.g., installation, maintenance, and repair).” 2 McKinsey’s contract is a services contract, but
does not meet these requirements. The contract includes team-based weekly rates but does
not define the number of people on each team, the number of hours each employee is required
to work, or specific tasks to be performed.
In interviews with the OIG, the Division Director could not define the contract requirements.
For example, he could not define what specific task the government would receive for a week
of McKinsey’s services or what constituted “full-time” or “part-time” staff as included in the
contract. When questioned how many hours are included in McKinsey’s weekly rates, the
Division Director responded that the number of hours is irrelevant because McKinsey provides
services without defined hours. However, the Division Director could not identify any contract
clause that would hold McKinsey accountable for performance of any specific task.
The Division Director’s award of the McKinsey rates did not comply with FAR 8.404
requirements. The awarded services are not priced at hourly rates or at a fixed price for
performance of a specific task, and the Division Director could not define any such
requirements.

2

FAR 8.404(d).

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 Finding 2 – The Division Director failed to comply with federal laws, regulations, and GSA
policy in awarding the contract pricing.
In awarding the contract pricing modification, the Division Director did not comply with federal
laws, the FAR, and GSA policy. To justify the awarded pricing, the Division Director performed
invalid price comparisons, relied on unsupported information, and performed insufficient
analyses. The Division Director’s focus on awarding contracts rather than achieving fair and
reasonable contract pricing failed to comply with applicable laws and regulations.
The Division Director Performed Invalid and Unsupported Price Analyses
The Division Director performed invalid, unsupported, and insufficient analyses of McKinsey’s
proposed contract rates. As a result, he did not appropriately determine the negotiated rates as
fair and reasonable. His analyses failed to comply with FAR 15.404-1, Proposal Analysis
Techniques, which requires an evaluation of the reasonableness of the offered prices, and FAR
15.406-3, Documenting the Negotiation, which requires the preparation of a price negotiation
memorandum documenting the reasons for any variances from audit recommendations, the
price analysis performed, and the determination of fair and reasonable pricing.
We found numerous problems with the price analyses performed in awarding the contract
pricing modification. For example, we found that the Division Director:
•
•
•
•
•
•
•
•

Used unsupported information to convert the proposed weekly rates to hourly rates;
Performed invalid price comparisons of the proposed rates to future competitor rates;
Performed invalid price comparisons of the proposed labor categories to competitor
labor categories requiring more experience;
Manipulated the GSA Pricing Tool to skew the price analysis;
Analyzed an outdated pricing proposal;
Overestimated weekly rates for McKinsey competitors;
Failed to consider information showing pricing exceeds market rates; and
Incorrectly claimed cost savings despite the substantial increase in government costs.

These issues are discussed below.
Unsupported information used to convert the proposed weekly rates to hourly rates.
As described in Finding 1, the Division Director told us that McKinsey provides services without
defined weekly hours. However, in an effort to justify McKinsey’s rates, the Division Director
attempted to compare McKinsey’s weekly rates to the hourly rates of its competitors in the
price analysis. To do so, the Division Director converted McKinsey’s weekly rates to hourly rates
by assuming McKinsey team members work 65 hours per week. In an interview, the Division
Director acknowledged that he had no support for using a 65-hour week. By using the 65-hour
week, the Division Director’s computed hourly rates appeared more reasonable compared to a
standard 40-hour week. However, these computed hourly rates were still high: the Division

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 Director calculated rates for an Associate with 1 year of experience at $467 per hour ($1.6
million per year) and an Engagement Manager with 2 years of experience at $1,046 per hour
($3.5 million per year). The Division Director used the GSA Pricing Tool discussed below to
compare these calculated rates to the rates of McKinsey’s competitors.
Invalid comparison of current contract rates to future and fabricated rates on competitor
contracts.
The Division Director compared two of McKinsey’s 2016 contract rates to a competitor’s
escalated 2019-2020 rates. He also compared four separate McKinsey labor categories to a 5year average of that same competitor’s escalated labor categories for 2015-2020. Further, he
fabricated labor category rates for two other competitor labor categories. By using fabricated
and future rates, the Division Director inappropriately inflated competitor rates to support
awarding higher contract pricing to McKinsey. The Division Director said that these were
mistakes; however, the file documentation shows the Division Director performed calculations
and specific searches to identify these rates. We concluded that the Division Director computed
these invalid comparisons to justify the awarded rates.
Invalid comparison of McKinsey labor categories to more experienced competitor categories.
The Division Director also compared McKinsey’s labor categories to competitors’ labor
categories for much more experienced personnel. For example, the Division Director compared
the McKinsey Associate labor category, which requires 1 year of experience, to a competitor’s
Experienced Senior Project Director category, which requires 10 years of experience. Typically,
the more experience required, the higher the rate; so this comparison would result in the
McKinsey rate appearing more reasonable. The Division Director stated that he was comparing
functional duties, but the descriptions for these two categories were not comparable. The
Division Director consistently used similar invalid comparisons to justify the awarded rates.
Manipulation of the GSA Pricing Tool to skew the price analysis.
The Division Director attempted to use the GSA Pricing Tool to compare McKinsey rates to
other GSA schedule contractors. The GSA Pricing Tool searches other schedule contract labor
categories based on key words, experience, and education requirements. The Division Director
inputted incorrect search criteria, resulting in higher rate comparisons with a wider range of
pricing. For example, the Division Director compared a McKinsey Associate with 1 to 5 years of
experience and a Bachelor’s degree to Executives with 1 to 20 years of experience and Master’s
degrees. We performed similar queries using correct search criteria and found the Division
Director’s comparison rates were overstated by $96 to $385 per hour.
Analysis performed on outdated pricing proposal.
In July 2015, McKinsey proposed no change to the then-existing contract rates for the option
period as outlined in Figure 1. However, McKinsey revised its proposal with higher rates in
September 2016. The Division Director did not analyze McKinsey’s revised proposal as required
by FAR 15.404-1. The Division Director evaluated McKinsey’s existing contract pricing despite
receiving the revised proposal and stating in the price analysis his intention to award higher
rates. He subsequently awarded rates at least 10 percent higher than the existing contract
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 rates. In interviews with the OIG, the Division Director stated he could analyze either the
existing contract rates or the revised proposed rates. By analyzing the existing contract rates,
the Division Director attempted to make McKinsey’s rates appear more reasonable compared
to its competitors.
Overestimation of weekly rates for McKinsey competitors.
In an attempt to make McKinsey’s rates appear reasonable, the Division Director also tried to
compare McKinsey’s weekly rates to its competitors. Since none of these competitors have
weekly team rates, the Division Director converted other contractors’ hourly rates to weekly
rates using invalid and unsupported assumptions. After adjusting for these invalid and
unsupported assumptions, we found the Division Director overstated the converted weekly
rates for three of McKinsey’s competitors by as much as 470 percent.
Failure to consider information showing pricing exceeds market rates.
The Division Director performed an analysis which showed that McKinsey’s rate increases
throughout the original contract period exceeded market rates by 43 to 53 percent, indicating
that a further price increase for the option period was not warranted or supported. However,
the Division Director disregarded this information in evaluating both the 10 to 11 percent price
increase and the subsequent 3 percent increase, stating that this analysis is only one method of
determining price reasonableness.
The Division Director also determined that the existing contract rates exceeded market prices
by as much as 193 percent. However, this information did not prevent the Division Director
from awarding rates at least 10 percent higher than those rates and granting a subsequent 3
percent increase.
Incorrect claim of cost savings.
Despite awarding 10 to 11 percent price increases, the Division Director stated in the price
analysis that the rates awarded resulted in cost savings of $4 million. We estimate that the
price increases awarded by the Division Director could actually increase costs to the
government by an additional $69 million over the course of the option period.
As summarized above, the Division Director performed invalid price comparisons and relied on
unsupported information to justify McKinsey’s high contract pricing. The Division Director told
us that he was “trying to back into” McKinsey’s rates and that he was “trying to get to the
offered price” by fitting “a square peg in a round hole.” As a result, the Division Director failed
to analyze the proposal or justify the negotiated rates as fair and reasonable as required by FAR
15.404-1 and FAR 15.406-3.
The Division Director Failed to Comply with the Competition in Contracting Act and GSA
Policies
Federal laws and GSA policies emphasize the importance of fair and reasonable pricing on
schedule contracts. For example, the Competition in Contracting Act of 1984 (CICA) (41 U.S.
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 Code 152) requires GSA multiple award schedule orders and contracts to be at the lowest
overall cost to meet the needs of the government. In addition, General Services Administration
Acquisition Manual 538.270-1, Evaluation of offers without access to transactional data,
requires contracting officers to seek to obtain the offeror’s best price.
The Division Director failed to comply with CICA and GSA requirements. By using invalid price
comparisons, relying on unsupported information, and performing invalid price analyses, the
Division Director did not ensure that the pricing would be at the lowest overall cost to meet the
government’s needs. The Division Director also did not seek to obtain the offeror’s best price.
In interviews with the OIG, the Division Director made statements that were contrary to these
requirements and demonstrated a lack of concern regarding pricing. He stated, “Rates on every
[schedule] contract are not the lowest overall cost to meet the needs of the government.” He
also stated, “Ordering agencies should not rely on GSA’s determination of fair and reasonable
pricing” when placing orders against schedule contracts. Regional staff also told us that FAS
regional management focused on awarding contracts and did not focus on pricing. This is
reflected in staff performance evaluations that emphasize timeliness and productivity rather
than pricing.
We issued previous reports recommending that FAS prioritize pricing. On July 31, 2007, we
issued Review of Multiple Award Schedule Program Contract Workload Management, in which
we recommended that FAS “Establish performance measures that evaluate [contracting
officers/contract specialists’] (a) verification of vendor disclosures related to commercial sales
practices, (b) effectiveness in analyzing prices and conducting negotiations, and (c)
consideration of the field pricing assistance.” In our September 30, 2009, report, Review of
Program Performance Measurement for Procurement, we found that “FAS needs to strengthen
performance measures for contract pricing.” In our July 22, 2016, report, IT Reseller Contracts
Present Significant Challenges for GSA’s Schedules Program, we recommended that FAS
establish performance measures that reinforce the objective to obtain most favored customer
prices during price negotiations. The actions taken to award the McKinsey contract show a
recurring issue related to FAS’s lack of emphasis on pricing.
Overall, the Division Director’s award of the McKinsey contract pricing was not in compliance
with GSA policy, FAR requirements, or CICA. As a result, the Division Director’s determination
that McKinsey’s contract pricing is fair and reasonable is baseless. We estimate the price
increases awarded by the Division Director could cost the government an additional $69 million
over the current contract option period.
Finding 3 – The Division Director violated the standards of ethical conduct by advocating on
behalf of McKinsey.
The Division Director violated requirements governing ethical conduct in federal acquisitions in
his dealings with McKinsey. Acquisition professionals are required to adhere to a variety of laws

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 and regulations when awarding and administering contracts. For example, FAR 3.101-1,
Standards of Conduct – General, states:
Government business shall be conducted in a manner above reproach and,
except as authorized by statute or regulation, with complete impartiality and
with preferential treatment for none. Transactions relating to the expenditure
of public funds require the highest degree of public trust and an impeccable
standard of conduct. The general rule is to avoid strictly any conflict of
interest or even the appearance of a conflict of interest in Governmentcontractor relationships. While many Federal laws and regulations place
restrictions on the actions of Government personnel, their official conduct
must, in addition, be such that they would have no reluctance to make a full
public disclosure of their actions.
Similarly, the Standards of Ethical Conduct for Employees of the Executive Branch (5 Code of
Federal Regulations 2635) provide that “[e]mployees shall endeavor to avoid any actions
creating the appearance that they are violating the law or the ethical standards.”
In addition to conducting a defective pricing analysis, the Division Director engaged in a pattern
of conduct towards McKinsey that called into question his impartiality. We describe that
conduct below.
The Division Director Advocated on Behalf of McKinsey for a GSA Schedule 70 Contract
At McKinsey’s request, the Division Director acted on behalf of the contractor to help it obtain a
separate contract with FAS’s Schedule 70 for information technology professional services. The
Division Director intervened in the matter to assist McKinsey even though he was not the
assigned contracting officer and could not justify his involvement in the contract award.
McKinsey failed multiple times to obtain a Schedule 70 contract through FAS’s Fort Worth,
Texas office. The Fort Worth contracting officer handling these offers told us she could not
determine McKinsey’s offer to be fair and reasonable, stating McKinsey’s rates were
“ridiculous” and unsupported. She also stated that McKinsey’s consultant told her if she kept
rejecting the offers, McKinsey would continue resubmitting until it received a contract.
After failing to persuade the Fort Worth contracting officer to accept its offer, McKinsey asked
the Division Director to intervene. On September 8, 2016, a McKinsey representative sent the
following memo to the Division Director:
We would really appreciate it if you could assist us with our Schedule 70
application. In particular, given that you understand our model, it would be
enormously helpful if you could help the Schedule 70 Contracting Officer
understand how it benefits the government.

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 On November 28, 2016, the Division Director sent an email to GSA’s FAS Washington Branch
Chief and other GSA personnel, stating:
[McKinsey] told us [the Schedule 70 offer] was rejected due to issues in
pricing documentation. We went through an audit with [McKinsey] and have
just updated pricing. They would like to get on [Schedule] 70, and asked us if
we could reach out and walk you through how we were able to substantiate
the pricing.
On February 13, 2017, the Division Director and the Washington Branch Chief met with
McKinsey representatives in Washington, D.C. On February 24, 2017, McKinsey resubmitted its
Schedule 70 offer and sent the Washington Branch Chief an email notifying him of the
submission.
Schedule 70’s normal practice is to assign resubmitted offers to the contracting officer who
handled the previous rejection. However, the McKinsey Schedule 70 offer was not handled
according to this practice. Instead of being assigned to the Fort Worth contracting officer, it
was assigned to the Washington, D.C. office.
The Washington Branch Chief told us he did not know why the contract was transferred to his
office. However, GSA emails show that on the same day the Washington Branch Chief received
notice from McKinsey of its resubmitted offer, the Branch Chief sent an email to the
responsible Schedule 70 analyst specifically requesting assignment of the offer to the
Washington Branch.
The Washington Branch Chief also stated he did not know the contract was previously rejected
by the Fort Worth office. However, he was included in the Division Director’s November 28,
2016, email described above regarding the rejection of McKinsey’s previous offers. The same
November 28, 2016, email chain discussed Schedule 70’s practice of assigning resubmitted
offers to the contracting officer who handled the previous rejection.
After the contract was reassigned to the Washington, D.C. office, McKinsey was awarded a
Schedule 70 contract (Contract Number GS-35F-646GA) on August 30, 2017. The Schedule 70
contract has reported $1.6 million in sales since its award and has not been audited.
When we asked the Division Director about his involvement with McKinsey’s Schedule 70 offer,
he initially told us that he called the Washington Branch Chief to offer assistance in leveraging
the work the Division Director had already done. He later stated, “My only interest is helping
out my contractor.”
In this instance, the Division Director acted as an advocate for McKinsey by contacting Schedule
70 personnel regarding McKinsey’s proposal. In addition, the Washington Branch Chief deviated
from Schedule 70’s normal procedure without a valid explanation to award the contract to

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 McKinsey and provided inaccurate information in response to our inquiries regarding his
involvement in the Schedule 70 contract award.
The Division Director Acted on Behalf of McKinsey for Contracts with Other Agencies
McKinsey also requested the Division Director’s help in obtaining various non-GSA contracts.
For example, GSA documents show that McKinsey asked the Division Director to contact the
National Oceanic and Atmospheric Administration (NOAA) to provide information on
McKinsey’s pricing structure in connection with McKinsey’s efforts to secure a contract with
that agency. In an email exchange with a McKinsey representative dated February 14, 2017, the
Division Director stated:
The below [table] helped us "deconstruct" the team and price it based upon
our typical market survey methodology. We also analyzed financial
information from the financial statements provided…I have a feeling NOAA
would like this information, but we would not provide without further
discussion with McKinsey.
The McKinsey representative replied:
Thank you for yesterday and for talking to NOAA. We are comfortable with
you sharing the table with NOAA. If you could add the following, that would
be great.
*McKinsey prices on a firm-fixed price basis and not on an hourly basis. The
estimated hours are not a commitment but are reflective of the average time
spent on similar projects and are for evaluation purposes only. We would
prefer to not share financials unless asked.
Similarly, McKinsey requested the Division Director’s assistance with its efforts to obtain a
contract with the Department of Interior. On April 16, 2018, the McKinsey representative sent
an email to the Division Director stating:
I hope all is well. I just left you a voicemail. We would really appreciate your
help in talking to the person listed below from the Department of the Interior.
She is asking for hourly information that we don’t have (as you know well),
and we thought maybe talking to you would be helpful. Would you be willing
to call her and explain how you were able to do a price justification?
GSA documents reflect that McKinsey made similar requests of the Division Director in early
2018 with respect to its efforts to obtain a contract with the Centers for Medicare and Medicaid
Services.
The Division Director acknowledged to the OIG that he contacted other agencies at McKinsey’s
request and discussed McKinsey’s pricing structure with them. When we asked why he did this,
A170118/Q/6/P19004

12

 he said that he “talk[ed] with contractors all the time.” However, he said he could not recall
sharing pricing information with other agencies at any other contractor’s request. We asked
multiple contracting officers if it was normal for a contractor to request their assistance in
obtaining another federal contract. We were repeatedly told it is not, and it would be
“inappropriate” and “a conflict of interest.”
Government employees should conduct business in a manner above reproach and avoid even
the appearance of a conflict of interest in government-contractor relationships. In this case, the
Division Director abandoned his role as an impartial contracting officer when he intervened to
assist McKinsey in obtaining a Schedule 70 contract and in advocating for McKinsey’s pricing
structure with other agencies. By providing McKinsey such assistance, the Division Director
potentially gave McKinsey an unfair competitive advantage. Moreover, the Division Director
told us he could not recall helping other contractors the way he helped McKinsey by contacting
multiple agencies on McKinsey’s behalf and assisting McKinsey in obtaining government
contracts. Under the totality of the circumstances, the Division Director’s conduct appears to
contravene the broad principles of conducting business above reproach and showing
“preferential treatment for none” outlined in FAR 3.101. This conduct creates the appearance
of impropriety in violation of 5 CFR 2635 and FAR 3.101.
Finding 4 – The Division Director impeded the audit of the proposed pricing by failing to take
appropriate action to obtain required data to complete the preaward audit.
The primary purpose of a preaward audit of a multiple award schedule contract is to ensure
that the information submitted by the contractor is sufficient for the contracting officer to
determine whether the proposed prices are fair and reasonable. In accordance with FAR
15.404-2(d), when an audit determines that the data is not sufficient, the contracting officer is
required to take appropriate action to obtain the data.
However, for the McKinsey contract, the Division Director failed to take appropriate action to
obtain the information needed for the audit. In essence, the Division Director worked to
prevent the determination of fair and reasonable pricing for this contract.
As discussed previously in the background of the report, a preaward audit was performed on
McKinsey’s proposal to extend the contract for the current option and the audit report was
issued on March 24, 2016. The audit found that McKinsey’s proposal did not provide sufficient
information to evaluate the offered pricing or establish fair and reasonable contract prices. The
audit determined that McKinsey should provide either related party commercial sales from its
parent company, McKinsey & Company, Inc., or cost buildup information to support its
proposed pricing. However, McKinsey refused. As a result, the audit advised the contracting
officer to require McKinsey to provide this information or cancel McKinsey’s contract.
The initial contracting officer agreed with the preaward audit findings and attempted to obtain
the required audit information. However, the Division Director removed the initial contracting

A170118/Q/6/P19004

13

 officer from the contract and on October 5, 2016, the Division Director awarded contract
pricing at rates at least 10 percent higher than McKinsey originally proposed.
In awarding the contract, the Division Director failed to take action to obtain requested records
from McKinsey as required by FAR 15.404-2, Data to Support Proposal Analysis. According to
FAR 15.404-2(d):
[I]f the data provided for review is so deficient as to preclude review or audit,
or if the contractor or offeror has denied access to any records considered
essential to conduct a satisfactory review or audit....The contracting officer
immediately shall take appropriate action to obtain the required data. Should
the offeror/contractor again refuse to provide adequate data, or provide
access to necessary data, the contracting officer shall withhold the award or
price adjustment and refer the contract action to a higher authority.
[emphasis added.]
The Division Director did not require McKinsey to produce the data the OIG required to perform
the audit. As a result, the Division Director violated FAR requirements and awarded
unsupported contract pricing as outlined in Finding 1 and Finding 2.

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14

 Conclusion
The Division Director did not administer McKinsey’s contract for consulting services under
contract number GS-10F-0118S in accordance with applicable laws, regulations, and policies.
The services awarded under the contract do not comply with the FAR. In addition, we
determined that the Division Director failed to comply with laws, regulations, and GSA policies
by using invalid price comparisons, relying on unsupported information, and performing
insufficient analyses to justify the awarded contract pricing. We also found that the Division
Director violated standards of ethical conduct by advocating for McKinsey. Finally, the Division
Director impeded the audit by failing to take appropriate action as required by the FAR to
obtain required data to complete the preaward audit.
As a result, we estimate GSA customers could pay an additional $69 million over the course of
the option period. FAS should take the appropriate contract and administrative actions and
establish controls to remedy the issues outlined in this report.
Recommendations
We recommend the FAS Commissioner:
1. Cancel McKinsey’s Contract Number GS-10F-0118S.
2. Cancel McKinsey’s Contract Number GS-35F-646GA.
3. Review all FAS contracts with team-based pricing to ensure they comply with FAR
requirements.
4. Establish additional controls to ensure contracting staff obtain required audit records to
perform audits prior to awarding contract actions.
5. Assess whether the Division Director should be involved in future McKinsey contact or
contract actions.
6. Establish additional controls to ensure that FAS contracting staff maintain independent
and impartial relationships with FAS contractors in accordance with federal regulations.
7. Take appropriate action to address the Division Director’s use of invalid price
comparisons, reliance on unsupported information, and violation of standards of ethical
conduct.
8. Take appropriate action to address the Washington Branch Chief’s actions on the
McKinsey Schedule 70 contract award and this audit.
GSA Comments
FAS agreed with the concerns outlined in the findings and partially agreed with the
recommendations. The FAS Commissioner’s written comments are included in their entirety at
Appendix B.

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15

 OIG Response
In his response, the FAS Commissioner stated he will address the pricing issues the OIG’s audit
identified in the two McKinsey contracts by first, seeking bilateral modifications to renegotiate
the contracts, and second, canceling the contracts if McKinsey declines or renegotiations do not
yield a result in the Government’s best interest. In light of the substantial issues the audit found
in McKinsey’s team-based pricing, the OIG urges GSA leadership to ensure that any
renegotiation results in pricing with either hourly rates or a fixed price for a specific task in
compliance with FAR 8.404. We also urge GSA leadership to ensure that McKinsey produces all
information needed to support its proposed pricing. The OIG is available to offer pricing support
to FAS through a preaward or post-award audit, as necessary.
Audit Team
This audit was managed out of the Heartland Region Audit Office and conducted by the
individuals listed below:
Michelle Westrup
Erin Priddy
Shane Dunlay
David Garcia

A170118/Q/6/P19004

Regional Inspector General for Auditing
Audit Manager
Auditor-In-Charge
Auditor

16

 Appendix A – Scope and Methodology
We examined the actions of the Division Director regarding the administration of Contract
Number GS-10F-0118S with McKinsey. Specifically, we examined his actions related to the price
increase awarded on October 5, 2016.
To accomplish our objective, we:
•
•
•
•
•
•

Reviewed contract file documentation;
Analyzed contract award information;
Assessed the reliability of information relied on in the contract actions;
Reviewed email records;
Reviewed the FAR, the General Services Administration Acquisition Manual, GSA policy,
contract requirements, and other relevant criteria; and
Performed interviews with GSA and other government agency staff.

We conducted the audit between September 2017 and September 2018 in accordance with
generally accepted government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objective. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our audit
objective.
Internal Controls
Our assessment of internal controls was limited to those necessary to address the objective of
the audit.

A170118/Q/6/P19004

A-1

  

Appendix GSA Comments

 



 

19, 2015

MEMGHANDUM FDR:

FRDM:

SUBJECT:

GSA FL-Llerel hcquIHm-on Eareize

Fisher
Acting Regional Inepecler for Auditing
Heartland Ftegion Audit Df?ce [Jet-E}

Alan B. Thomas. Jr. 

Commissioner 

Federal Acquisition Service ill}

Response to Draft Report "improper Pricing on the McKinsey

Contract May Beet the United States an Estimated $59
M?iien," Report Number A1 he 13

Thank you for the opportunity to comment on the referenced draft audit report impmper
Pticing on the Contract May Beet the United States an Estimated $59 
Report Nun'iher A1 Till 1 3. dated June acts. and fer your cooperation in working
with us. We carefullyr reviewed the draft report and agree with the concamst The
pricing as presented on page 3 of the draft report is concerning. and the price analysis
techniques outlined raise questions which require further review.



iiewerci Sen-ices Administration
tile-2i Street. NW
Ii'Ii'i-lz-ih 73H: 

B-l

Te address the ccncerns. Federal Acquisiticn Serylee is taking the 
mam:

1. FAS will reassign the Prcfessicnal Seryices Schedule and
Schedule it! la a new team.

2. Since the DIG clears us in share the audit with McKinsey. PAS will immediately
pursue a bilateral ecntract medi?caticin tc preyent placement at new orders while
FAS attempts in negctiate better pricing. PAS ccnsidered adapting the
recemn'iendaticn tn cancel the ecntracts: hnweyer. we decided in pursue
the bilateral three reascns: ?rst. it prctects taxpayers by
immediately stepping any new under the semi it EIIUWS
agencies is ccnlinue ta perl'crn'i missicn critical work: and third. it FAB the
tc negctlate better pricing with a cantractcr that wants with agencies
aci'ess chernn'ient. On the ether hand, cancelling the centracts dces net
pretect taxpayers as quickly because it new wcrit tc be awarded until the
cancellatlcn is e?ectiye [cc days alter receipt at the nclice cf the cancellaticn].
cancellaticn may step missicn critical warts. and it dces FAS the
tc negcliate better pricing fer the Scyernment. ll McKInsey declines
in accept a bilateral centract medi?caticn er renegctiatiens dc yield a result in
the Geyemi'nent?s best interest. FAS will cancel the 

a. GSA's Prccurarnent Management Fteyiew team team} is examining all
team based the Federal Supply Schedules cr Schedules]
The team is part at the Utlice cf Gayernnient-wide Felicy 
nut part at FAS, and thus an independent reylew.

4. Dnce the DIS clears us te discuss the audlt publicly, FAS will reach cut is
custcmer agencies in matte sure they are aware ef ccncerns about the pricing
and help them naylgate patential cf acticns taken an the 

In addlticn In these immediate acticns tn the sericus ccncerns raised, FAS prcyides
respenses in each at the speci?c cf the draft repcrt as 

B-2

Ql? Recommendation l1tl1

Cancel MoHinsey?s Contract Number GB?toF-?t 1B5.

FAB Response: Based upon the ?ndings. FAB agrees that there were errors made in
the price evaiuation.

once the BIG clears FAB to share the audit with FAB will immediately
pursue a bilateral contract modi?cation. which will prevent placement of new orders
while FAB attempts to negotiate better pricing. FAB strongly considered adopting the
DIG's recommendation to cancel the contract: however. we decided to pursue the
bilateral contract modi?cation and negotiation for better pricing for three reasons: ?rst. it
protects taxpayers by immediawa stopping any new work under the contract: second. it
allows agencies to continue to perform mission critical work; and third. it affords FAB the
opportunity to negotiate better prising with a contractor that works with agencies across
Government. Do the other hand. cancelling the contract does not protect taxpayers as
quickly because it allows new work to be awarded until the cancellation effective (as
days after receipt of the notice of the cancellation). cancellation may stop mission
critical work. and it does not afford FAB the opportunity to negotiate better pricing for the
Government.

It McKinsey declines to escapt a bilateral contract modification or renegotiations do not
yield a result in the Government's best interest. FAB will cancel the contract.

gl? ?it-gmmendation 

Cancel McKinssy?s Contract Number 

FAB Response: Based upon the ?ndings. FAB agrees that there were errors made in
the price evaluation.

Dnce the BIG clears FAB to share the audit with Mcttinsey. FAB will immediately
pursue a bilateral contract modi?cation. which will prevent placement of new orders
while FAB attempts to negotiate better pricing. FAB strongly considered adopting the
?le's recommendation to cancel the contract: however. we decided to pursue the
bilateral contract modi?cation and negotiation for better pricing for three reasons: ?rst. 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 FAB the
opportunity to negotiate better pricing with a contractor that works with agencies across
Government. Do the other hand. cancelling the contract does not protect taxpayers as
quickly because il allows new work to be awarded until the cancellation is effective 

B-3

days after receipt of the notice of the cancellation}. cancellation may stop mission
critical worI-r. and it does not afford FAS the opportunity to negotiate hatter pricing for the
Goyernment.

ll' Meltinsey declines to accept a bilateral contract modification or renegotiations do not
yield a result in the Goyernment's best interest. FAB will cancel the contract.

DIG Recommendation lids

Review all FAB contracts with team-based pricing to ensure they comply with
FAR requirements.

FAS Response: FAB agrees with this recommendation. GSA's PMR team has already
begun a reyiew of e_ l team based pricing across the Schedules Programr Because the
PMR team is part of not part of FAS, this is an independent review.

DIE tidal

Establish additional controls to ensure contracting staff obtain required audit
records to periorm audits prior to awarding contract actions.

FAs Response: FAB concurs with this recommendation. FAB has made strides in this
area by launching a contract audit working group in partnership with the GIG. instituting
reviews, updating relevant policies and procedures. and conducting training
FAS will continue working collaboraliyely with the BIG Dilice of Audits on Improying the
contract audit process. particularly in terms of obtaining required audll records to
perform audits. FAE will continue to build on these shade to address this
recommendation.

A1 B-4

gig Ecommendation DDS

Assess whether the Division Director should be involved in future Mcttinsev
contact or contract actions.

FAB Response: FAB concurs with this recommendation and agrees to take
appropriate action. The Director of Contract ?pera?ons is no longer the assigned
Contracting Officer for McKinsev?s Professional Services Schedule contract. Further.
FAB is taking immediate action to reassign the contract to a new contracting team.

DIG Recommendation til-DE

Establish additional controls to ensure that FAB contracting staff maintain
independent and impartial relationships with FAB contractors in accordance with
federal regulations.

FAB Response: FAB concurs with this recommendation and agrees to take
appropriate action. Furthermore FAB will institute ethics training speci?cally focusing on
independent and impartial relationships with contractors for its contracting stall.

DIG Recommendation 

Take appropriate action to address the Division Director?s use of Invalid price
comparisons. reliance on unsupported and violation of standards of
ethical conduct.

FAB Response: FAB shares the concern on invalid price comparisons and is
addressing this ?trough the PMR reviews. bilateral contract modi?cation and negotiation
of better price-lg- FAB taltes seriously,?r ccncems about ethical conduct. and agrees to
review the facts and circumstances regarding potential vIolations of standards of ethical
conduct and latte appropriate action.

B-5

DIG Recommendation lHiE

Take appropriate action to address the Washington Branch  I:hiat"s actions on the
McKinsey schedule so contract award and this audit.

FAE Response: This employee is no longer a FAS employee and FAB no longer has
supervisory authority over the employee. In addition. the employee has no further
involvement in this matter. FAB is coordinating with the employee's current
organisation to take appropriate action.

Thank you again for the opportunity to review this draft audit report. FAB is deeply
ooncemad hy the DIG's ?ndings. Is taking the immediate actions outlined above.
reviewing all facts and circumstances surrounding these issues. and take
appropriate actlon. As we move forward. we appreciate the assistance in
obtaining any information needed to talte appropriate action.

B-6

Appendix C – Report Distribution
GSA Administrator (A)
GSA Deputy Administrator (AD)
Commissioner (Q)
Acting Deputy Commissioner (Q1)
Deputy Commissioner (Q2)
Chief of Staff (Q0A)
Senior Advisor (Q0A)
Program Analysis Officer (Q1A)
Assistant Commissioner, Office of Policy and Compliance (QV)
Financial Management Officer, FAS Financial Services Division (BGF)
Director of Financial Management (BG)
Chief Administrative Services Officer (H)
Audit Management Division (H1EB)
Assistant Inspector General for Auditing (JA)
Director, Audit Planning, Policy, and Operations Staff (JAO)

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C-1