For  the 2003 contract, the current supplier was the only company to submit a  proposal. Requirement for U.S. ownership. Two of the barriers to competition that paper manufacturers identified are  within BEP’s control, but these barriers—the security requirements for the  manufacturing facility and the technology required to insert  anticounterfeiting features, such as the security thread—remain because  they are essential for currency paper. We agree with BEP that some of the remaining barriers are outside its  control; however, we found that BEP’s outreach to paper manufacturers is  limited and is generally done in conjunction with its other procurements. For example, BEP does not conduct industry briefings for its potential  suppliers. BEP Took Several Steps, Consistent with the FAR, to Determine Fair and Reasonable Prices for Currency Paper

The FAR states that an agency’s contracting officer is responsible for  evaluating the reasonableness of the offered prices to ensure that the final  price is fair and reasonable. Consequently, BEP  used price analysis—a comparison of the two proposals—as a basis for  determining that the 1999 contract prices, which totaled $207 million, were  fair and reasonable. For the 2003 contract, BEP determined that adequate price competition did  not exist because, although several companies requested copies of the  solicitation, only the current supplier submitted a proposal. Establishing a technical analysis team to examine various aspects of the  current supplier’s manufacturing process that affect price. BEP Has Taken Some Action to Address Uneconomical Contracting Practices Identified in 1998

In 1998 we reported that two BEP procurement practices contributed, or  could contribute, to higher-than-necessary currency paper costs. This thread is inserted into all U.S. currency denominations greater than $2. These increased costs would result from, among  other things, high capital equipment costs for a new supplier, according to  BEP. Analyzing the advantages and  disadvantages of obtaining a second supplier would help BEP determine if  a second supplier would be cost effective over the long term, weigh the  benefits of obtaining a second supplier against the potential security and  quality concerns associated with a second supplier, and ensure that BEP  can maintain an adequate supply of currency paper. Finding itself relying on a single supplier in the early 1990s for the clad  metal it uses to make coins, the U.S. Mint weighed the advantages and  disadvantages of obtaining a second supplier and decided that the  advantages outweighed the disadvantages. Although BEP concluded in its August 1996 currency paper study that  competition was not immediately feasible because the current supplier was  the only domestic source of currency paper that could meet its  requirements, BEP has not weighed the advantages and disadvantages of  obtaining a second supplier—including the impact on the cost, security,  quality, and adequacy of the currency paper supply—since 1996. Recommendations for Executive Action

To obtain the views of paper manufacturers on barriers to competition and  to determine if there is a need for a second supplier of currency paper, we  are recommending that the Secretary of the Treasury direct the Director of  BEP to take the following two actions:  Before issuing solicitations for currency paper contracts in the future,  increase outreach activities with paper manufacturers to allow them to  provide their views on the barriers to competition, identify the steps  BEP should take to address these barriers, and comment on the  solicitations. Arrange for postaward audits of the current supplier’s  costs. Objectives, Scope and Methodology

To determine the steps the Bureau of Engraving and Printing (BEP) took to  encourage competition for the 1999 and 2003 currency paper contracts, we  interviewed BEP officials and reviewed the changes BEP made to the  contract solicitations. To determine the steps BEP took to determine that the prices it paid for  currency paper under the 1999 and 2003 contracts were fair and  reasonable, we reviewed documents in BEP’s contract files for the 1999  and 2003 contracts.
Why GAO Did This Study

For over 125 years, the Bureau of Engraving and Printing (BEP), within the Department of the Treasury, has relied on a single contractor to supply the paper for U.S. currency. Such a long-term contracting relationship could contribute to higher costs and other risks. Another federal agency that relied on a single contractor, the U.S. Mint, decided to obtain a second supplier for coin metal. In solicitations for currency paper contracts in 1999 and 2003, BEP took steps to address barriers to competition that GAO had identified in 1998 through a survey of paper manufacturers. This report updates GAO's 1998 report using data from a second survey. It addresses (1) the changes BEP made to encourage competition and the results of its efforts, (2) the steps BEP took to ensure that it paid fair and reasonable prices, and (3) the analysis BEP has done of the advantages and disadvantages of obtaining a second supplier.

What GAO Found

To encourage competition for the 1999 and 2003 contracts, BEP modified its solicitations to, among other things, indicate that it would provide bidders with the security thread that is inserted into most currency paper and extend the time for initial deliveries. For the 1999 contract, one additional supplier submitted an initial proposal but later withdrew it, and for the 2003 contract, only the current supplier submitted a proposal. This company remains the sole supplier of U.S. currency paper. According to paper manufacturers, several barriers to competition remain, including the high capital costs of and technological requirements for producing currency paper. BEP said it has not addressed these barriers because the requirements are either essential to preserve the security of currency paper or they are outside BEP's control (e.g., anticounterfeiting features are recommended by a federal committee). While some of the remaining barriers are outside BEP's control, BEP's outreach to paper manufacturers has been limited. For example, BEP does not meet regularly with them, as the Departments of Defense and Homeland Security meet with potential suppliers of their procurements, to identify additional steps that could be taken to encourage competition. To the extent that BEP has reached out to paper manufacturers, it has generally done so in conjunction with other BEP procurements. For the contracts awarded in 1999 and 2003, BEP took several steps, consistent with the Federal Acquisition Regulation's requirements, to determine that the prices it paid under these contracts were fair and reasonable. For the 1999 contract, it used price analysis (a comparison of two proposals) to determine that the two proposals it initially received were fair and reasonable. This analysis was sufficient because BEP had determined that adequate price competition existed. For the 2003 contract, BEP performed several cost analysis activities to ensure that the final agreed-to price was fair and reasonable, since the current supplier was the only company that submitted a proposal. For example, BEP obtained certified cost and pricing data from the current supplier, requested an audit review of the current supplier's price proposal, and established a technical analysis team to examine steps in the current supplier's manufacturing process that affect price. BEP also arranged for postaward audits of the current supplier. BEP has not analyzed the advantages and disadvantages of obtaining a second supplier of currency paper since 1996. At that time, it concluded that the costs would outweigh the benefits, but it did not analyze the long-term effects. As a result, it does not know how a second supplier would affect the costs, quality, security, and supply of currency paper over time. Analyzing the advantages and disadvantages of obtaining a second supplier would help BEP determine the need for one.