Price clause spurs more questions

What the fuss is all about

The wording of the price reduction clause in the General Services Administration’s schedule contracts leaves some companies and procurement experts scratching their heads. Here is how it reads.

Price Reduction Clause
(c)(1) A price reduction shall apply to purchases under this contract if, after the date negotiations conclude, the contractor-

(i) Revises the commercial catalog, pricelist, schedule or other document upon which contract award was predicated to reduce prices;

(ii) Grants more favorable discounts or terms and conditions than those contained in the commercial catalog, pricelist, schedule or other documents upon which contract award was predicated; or

(iii) Grants special discounts to the customer (or category of customers) that formed the basis of award, and the change disturbs the price/discount relationship of the government to the customer (or category of customers) that was the basis of award.

Source: General Services Administration

What does the price reduction clause mean? Contractors and government procurement officials say they often are confused about what it means, which is why the General Services Administration created a panel to study that and other questions related to its schedule contracts.

The clause gives companies instructions about how they should price their products and services when they sell to the government.

Members of a Multiple Award Schedules Advisory Panel, which is reviewing the clause, listened last month to critics and defenders of the contract language. Mark Sims, section chief at GSA’s Greater Southwest Acquisition Center, told the panel he could answer questions about the clause only on the basis of how his office interprets it. GSA’s regional offices have differing interpretations, especially when they apply its language to services contracts, he said. GSA officials who manage services contracts say they often have a difficult time determining whether one service offering is comparable to another.

Those differences of interpretation aren’t necessarily to be avoided, said David Drabkin, acting chief acquisition officer at GSA and a member of the panel. Interpretations of contract language should change to fit evolutions in business, Drabkin said. The language should “recognize the commercial market it’s in and adapt to that market as it changes.”

However, some GSA contracting officials who work with schedule contracts for services said the price reduction clause hinders business. The clause was created when schedule contracts were used primarily to buy commodities, and it doesn’t fit today’s services market, said Kathleen Sewell, leading contracting officer at a management services center in GSA’s Northwest-Arctic Region.

“I don’t see how it adds value,” Sewell told the panel. Agencies get the lowest prices because of competition for task orders on schedule contracts, not because of the price reduction clause, Sewell said. If the clause were dropped and employees received more training in negotiation skills, the government could ensure that it buys at reasonable prices, she said. 

The clause has been debated and scrutinized since it first appeared in schedule contracts in 1982 and was revised in 1994 and 2004. GSA officials and lawmakers have not let it die.

“The price reduction clause, in spite of many attacks over a long period of time, has proven to be very resilient,” said Peter Levine, a government procurement expert and general counsel for the Senate Armed Services Committee.

Some members of Congress view the clause as a necessary barrier to prevent contractors from needlessly raising the prices they charge the government.

Defenders of the clause say its purpose is to save the government money by requiring any company that has a GSA schedule contract to offer its goods and services to the government at prices that are the same or less than the prices the company charges its best commercial
customer.

In theory, the clause works like this: When a contractor submits an offer to GSA for a schedules contract, the company must disclose the best prices or discounts it gives its best customer. The contracting officer then uses that information as a starting point in pricing negotiations. When the contract is finalized, the company must include a statement about the negotiated prices and name the customer the company used as a pricing benchmark. At that point, an agreed-upon price is only a starting point and rarely will an agency pay the price quoted initially.

In reality, the clause is rarely applied consistently.

John Howell, a partner at law firm McKenna Long and Aldridge, said the language of the clause is somewhat ambiguous about what triggers its requirements. That is a concern for businesses, because an alleged violation can harm their reputation or standing in the federal market.

Two key provisions that can trigger the clause are clear, Howell said. A company can risk violating the terms of its schedule contract if fails to tell the government that it changed its pricing catalog or gave special discounts to a customer other than the government.

A third provision of the clause causes most of the confusion, Howell said. That provision states that contractors cannot “grant more favorable discounts or terms and conditions than those contained in the commercial catalog” or that are the basis for the negotiated schedules contract.

That language is vague and imprecise when compared with the other provisions, Howell said. It’s unclear whether those discounts, terms and conditions are somehow different from the special discounts and price lists named in the other two provisions, he added.

If the panel could clarify that confusion, Howell said, “folks would have a better idea of where they stand.”

More clarification of the provision
in the clause might keep some contractors out of trouble, some acquisition experts say. As it is, inspectors general, contracting officers and industry officials interpret the clause in their own way. Howell recommended that the panel consider clarifying what it means to “grant more favorable discounts or terms and conditions.”

Former GSA Administrator Lurita Doan created the panel by appointing 12 government procurement executives and four representatives from industry associations to review the schedules program and its pricing policies.

Doan said companies have grown increasingly dissatisfied with the GSA schedules program, largely because of uncertainty about the pricing clause.

At a May 22 meeting, the panel decided on three paths of action for its June 16 and 17 meetings. Panelists are expected to come with their views on the purpose and expectations of the schedules program and be ready to offer ideas about how to ensure fair and reasonable pricing.

The panel will advise GSA on whether any policy changes are necessary to help the agency’s Federal Acquisition Service negotiate the lowest prices for federal agencies. The panel’s charter states that it will report its initial findings and recommendations to GSA’s administrator by November.

Many people have declined to speculate about what the panel might advise or what it should recommend. However, David Bibb, GSA’s acting administrator, said he doesn’t want to make major changes to the schedules program. 

Bibb said the clause has created problems for GSA, noting that several major schedule contract holders have left the program, partly because of it. Getting the best prices is desirable, he said. However, he added, “We want to make sure that’s not done in a burdensome way for everybody.”

The schedules program could also be hurt if GSA exchanged one clause for another less satisfactory clause, he said. 

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