In a Proposed Rule published in the Federal Register on March 4, 2015, GSA provided notice of its intent to make significant changes in long standing GSA pricing practices supporting its Federal Supply Schedule program. The proposed changes, if adopted, will result in winners and losers among GSA Schedule holders and other GSA contractors.
Most notably, GSA is proposing to abandon the infamous Price Reductions Clause, under which GSA has for decades required GSA Schedule holders to adopt sometimes extremely onerous price maintenance obligations. These obligations include: (1) tracking the pricing provided to certain basis of award customers (sometimes encompassing all commercial customers) and reporting to GSA changes in pricing that disturb the relationship between the pricing provided to basis of award customers and the pricing negotiated with GSA at time of award; and, (2) reporting to GSA any decrease in the commercial price list or other pricing bases upon which GSA pricing was negotiated. GSA generally requires that GSA Schedule holders reduce GSA pricing commensurately and at the same time such pricing changes impact basis of award customers. The price maintenance obligations of the Price Reductions Clause are very difficult to manage for many GSA Schedule holders; the obligations are difficult to interpret and implement operationally and the potential damages can be very high.
In return for waiving the Price Reductions Clause price maintenance obligations, GSA is proposing to require GSA Schedule holders, and other GSA government-wide acquisition contractors, to report to GSA transaction level pricing data for these contracts, including unit pricing. This information must be reported on a monthly basis for all transactions under the impacted contracts by the contractor on a new GSA web portal to be developed by GSA.
The Proposed Rule represents a dramatic potential change in GSA pricing policies applicable to GSA Schedule holders. Depending on how the changes are finalized and implemented, and depending on the nature of a particular contractor's business practices and whether a current GSA Schedule was negotiated favorably and managed well, the changes could be very helpful or could represent a significant new compliance burden.
Importantly, the Proposed Rule will not change the commercial sales practices reporting requirement (the "CSP") applicable to GSA Schedule contracts. The CSP disclosure requirement is complicated for many companies and gives rise to most of the damages claimed in pricing non-compliance cases involving GSA Schedules. While Price Reductions Clause non-compliance frequently generates the initial pricing compliance inquiry, investigation or case, eventually GSA looks to the CSP disclosure requirements and the Price Adjustment Clause in each GSA Schedule as part of its inquiry. The CSP disclosure requirement and the Price Adjustment Clause require contractors to disclose current, accurate and complete pricing information to support proposed pricing. The Proposed Rule does nothing to change the CSP disclosure requirement, and as a result, most GSA Schedule holders should not expect any relief from the Proposed Rule in terms of the pricing risk arising from their GSA Schedule contracts. To the contrary, it seems likely if the Proposed Rule is adopted that we will one day see GSA claims that an ordering activity would have negotiated better pricing but for some mistake or failure to accurately report transaction level details to GSA.
Another potential complication with the Proposed Rule is that it may create a disincentive for contractors to provide pricing concessions at the order level under their GSA Schedule contracts. As GSA accumulates transaction pricing data, it is not clear from the Proposed Rule exactly how that information will be used, or the extent to which it might be shared with other agencies. It is also not clear what safeguards will be taken to prevent unauthorized disclosure or use of the information. While there may be little to nothing that would prevent any Government agency from sharing its contract pricing data with another agency today, a database of all of a contractor's transaction level pricing data represents a valuable pricing tool for GSA and also a potential risk its contractors. At the very least, such a database seems likely to encourage new pricing demands disconnected from transactional context. GSA contractors should expect demands for their best price for each item by GSA ordering activities, which depending on the circumstances may or may not be a reasonable position. A new paradigm could readily appear where GSA Schedule contractors are expected to substantiate any quote that doesn't provide best historical Government pricing. This type of compiled pricing information -- which most companies would protect vigorously as a trade secret -- could become common knowledge and difficult to protect against unauthorized disclosure. This potential result will give most contractors pause when quoting under the GSA contracts covered by the Proposed Rule. Notably, GSA changed the Price Reductions Clause in the mid 1990s when it considered similar pricing incentives. Then, GSA changed the Price Reductions Clause to ensure that Government transactions would not trigger the clause, because including Government transactions within the basis of award was causing contractors to refrain from offering better than GSA pricing to the Government at the order level. The Proposed Rule could have a very similar effect.
There will be winners and losers from the Proposed Rule arising simply from the administrative burdens it will create. While the Proposed Rule estimates a net savings to contractors due to the time and effort saved by not having to deal with Price Reductions Clause, the estimated time and effort associated with the new reporting requirement seems specious. Undoubtedly, some contractors will be relieved from administrative and compliance burdens while others will experience significant new burdens associated with the reporting requirement. For example, GSA Schedule holders with a large catalogue of priced items or with a large number of GSA transactions will experience a substantial new reporting burden compared to those that have few products or services or few GSA Schedule transactions. It is not yet clear how friendly the new GSA reporting portal will be or the extent to which a contractor might be able to use existing systems or reporting functionality to report to GSA the additional transaction level details required. For some companies, the administrative burden associated with the new reporting requirement could become prohibitive. In addition, as described previously, the changes are unlikely to reduce pricing risk and could even exacerbate them for some contractors.
Fundamentally, the Price Reductions Clause should be abolished because it does not work for many of the reasons aptly stated by GSA in the Proposed Rule and because it has no commercial or Government equivalent. It is an unusual pricing requirement that gives rise to enormous compliance burdens for some GSA Schedule holders while failing to obtain any price maintenance assurances from others. The concept underlying the Proposed Rule, that of using historical pricing information to ensure that GSA receives fair pricing, is an old one that makes good sense and should be explored by GSA. However, the Proposed Rule envisions a pricing mechanism that continues to shift pricing responsibilities to contractors. For some contractors, that responsibility may be untenable. GSA could achieve similar results by collecting transaction level pricing data internally or in collaboration with ordering agencies without continuing its paradigm of shifting unusual pricing responsibilities and risks to its contractors.
The Proposed Rule requests comments on or before May 4, 2015. A public meeting will be conducted on April 17, 2015 where interested parties may offer oral and/or written comments.