The General Services Administration has tightened the rules on use of the Price Reduction Clause. Pictured: GSA headquarters. (Staff)
A modification that the General Services Administration issued late last year for its Federal Supply Schedules program could mean more discounts for federal customers: A long-canceled rule that some contractors still used nevertheless to avoid reducing prices is no longer to be allowed.
The Price Reductions Clause holds, in general, that if a supplier provides a better discount price to a certain type of commercial customer than it lists on its Federal Supply Schedules contract, it has to offer an equal or better discount for the government. The commercial customers have to be those that fall into the “basis of award” category specified on the contractor’s schedules contract, and there are other conditions that also apply.
For years, at least some contractors on the schedules believed any order that exceeded the maximum order threshold (MOT) established in their contract was exempt from the price reductions rule. But that was, GSA says, a misunderstanding of the actual rules. GSA is moving to tighten controls.
The exemption based on the MOT is supposed to apply only to firm, fixed-price definite quantity contracts with specified delivery.
In late 2013, GSA began issuing mass modifications, removing the contract clause that had led to the misinterpretation, which is known as clause I-FSS-125. That clause reads, in part, that the Price Reductions Clause is not applicable to orders placed over the maximum order. GSA has also sent an interpretation letter to all Federal Acquisition Service offices to clarify the intended interpretation. The wording in I-FSS-125 means that discounts vendors grant to other government — not commercial — customers in excess of the MOT will not trigger the reduction, according to the letter.
GSA canceled the clause in 2004, after publishing the current Price Reductions Clause, an agency spokesperson said. “In time it became clear that language reflective of the former I-FSS-125 clause still remained in some GSA Federal Supply Schedule contracts,” leading to the ongoing effort to weed it out, the spokesperson said.
That retention of the older rule happened for several reasons, including the 20-year duration of the contracts and simple habit, according to Matthew Koehl, a government contracts attorney at Holland&Hart LLP.
“They keep incorporating it into new contracts. I see the clause even now,” he said. “I think it’s just made its way into the lore of contractors, that as long as you’re over the MO, you don’t have to worry about” the Price Reduction Clause.
Matter of interpretation
In 2013, the GSA inspector general found two vendors who had not passed on a combined $100 million in price reductions that they should have, citing I-FSS-125 as the justification.
According to James Corcoran, the Mid-Atlantic regional GSA IG who conducted the 2013 audit, GSA and the IG agreed that the companies were holding to an erroneous understanding of the process. Corcoran, in a report to Federal Acquisition Service Commissioner Tom Sharpe, said the audit also found that the outdated clause language still appears in some contracts, meaning it remains in effect despite the revocation of the provision a decade ago.
“Some of the vendors were interpreting that the clause meant they did not have to provide discounts to the government when the orders were above the maximum order threshold,” said Sarah Breen, a spokewoman for the IG’s office. “The instruction letter clarified that the government should be seeking more discounts.”
Koehl noted that the GSA’s renewed attention is likely to have a greater effect on service providers than product suppliers. The exemption for firm fixed-price contracts, he said, does not often bear on services. “I don’t think that really helps you if you’re doing something that’s purely on a labor hour basis,” he said. “There’s nothing to do but understand that you may be triggering the Price Reduction Clause.”
Some vendors argue the change is unjustified.
Hope Lane, a partner at consulting firm Aronson LLC, referred to GSA’s own regulations, which list four exemptions to the Price Reductions Clause, including the one specifying sales to commercial customers under firm, fixed-price definite-quantity contracts with specified delivery in excess of the maximum order threshold.
“The way that’s been interpreted for as long as I can recall is, if you had an actual contract value greater than the MOT,” that was enough to claim an exemption from reducing prices, she said. “Now GSA has put out this instructional letter that is being very specific. They’re being very literal in their interpretation..”
GSA now insists the exemption does not apply except in the narrow terms specified, rather than the broader interpretation of I-FSS-125, she said.
“As long as I’ve been doing this, the first thing that closed that door [on the Price Reductions Clause] was to say, ‘Oh, the (commercial) order is over MOT,’” she said.
Whether the Price Reductions Clause applies in a given case or not, the government customer is unlikely to pay the listed prices, Lane added. “Anybody who’s going by the price list prices isn’t doing acquisition anyway,” she said. “We know competition goes on at the task order level.”
She warned that some vendors may decide to leave the government market as a result of this policy change.
“I have Fortune 500 companies I work with who only do a little bit of government business, and they do it through the GSA Schedules,” she said. “The idea of now having to monitor that might be enough for a commercial company to decide there’s not enough reward” to justify the price risk.
Koehl, on the other hand, believes many schedule holders are not even aware of the importance of the change yet.
“As a general matter, I don’t think the community’s reacting to this,” he said. “There’s no urgency because there’s been no enforcement. And it’s kind of complicated. You read the mass modand unless you really think about it, it seems innocuous.” Contractors are not likely to abandon the government market “until somebody gets stung” by some heavy enforcement penalties, he said.
Contractors should take stock of how much they have relied on the exemption that is no longer in effect, and adjust their practices accordingly.
“It’s just very murky how it works” for service providers, he said. “The schedule has these [set] labor rates. If you offer a better price to the commercial sector, you’ve got a price-reduction triggering event. On the other side of that, nobody sells their services that way in the commercial sector.” ■