Monday, March 9, 2015

"Freebies" Given to Purchase Card Holders

Contractors that issue purchase cards to employees for small purchases need to consider whether their policies and procedures cover the fairly common practice by retailers to offer something "free with purchase". Who gets the freebies? The card holder or the company?

So for example, on today's Office Depot website, you can get a free $15 gift card when you purchase $75 in HP (Hewlett Packard) ink. Does that $15 belong to the company or can the card holder retain it for personal use? What if the company didn't need $75 worth of ink? What if the company needed only $60 worth of ink but the card holder, in order to get $15 for himself, added another ink cartridge to his shopping cart. After all, its easy to rationalize that the ink will eventually be needed, right? Or suppose that the same cartridges that cost $75 at Office Deport were only $65 on Amazon but the card holder bought from Office Depot in order to secure that gift card. Its very easy to see that the prospect of gaining freebies can lead to poor purchasing decisions.

The very nature of purchases using purchase card - many small dollar items by many employees makes it difficult to monitor the activities for which the cards are being used. A "reviewer" - whatever that title brings - looking over a charge card statement would probably not even hesitate at a $75 dollar charge to Office Depot. Such a charge would be a reasonable use of purchase cards held by an employee responsible for office supplies. But that charge card statement would not have disclosed that a gift card had been issued.

Does it happen a lot? Is there a significant problem where purchase decisions are influenced with the promise of freebies and where the freebies are not going to the company but to private use? We have no way of knowing. But we will say this. Those gifts, gift cards, and other freebies should be considered company property. The company, not the employee, should be making the decision on how to dispose of the property. Gift cards can be used to defray the cost of future purchases. Other gifts, if not usable for business purposes, can be given to charities. There are other options but the thing companies need to avoid is situations where such gifts influence purchase decisions. Any time a purchase decision is so-influenced, bad things are likely to happen.

Contractor policies and procedures governing the use of purchase cards should directly address this matter. Gift cards, rebates, etc. are the property of the company and procedures should address the process for disposition of these items.

FAR 31.201-5 states that the applicable portion of any income, rebate, allowance or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government. This FAR cost principle would likely extend to gifts accruing from purchase card transactions.

March 16, 2015 UPDATE:

Here's an example to illustrate our point.

Let's say you need some bond paper for your copier and printers. Your employee checks in on the Office Depot website and find it's only $27.99 per case and if you buy $75 or more, you get a free gift.

So, the employee buys three cases for a total of $83.97 and gets to choose a free gift.

However, if you look Office Depot's weekly add (found in the Sunday paper), you will find the same paper selling for $19.99. Buying three cases at that price totals $59.97, a $24 savings. That means you've paid 40 percent more than you should have just so your employee can obtain his/her free gift.

We say, avoid the freebies and go for the cheapest price.

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