Aronie: The danger of discounts

Mark Twain once advised the press that “the report of my death was an exaggeration.” Although I’m no Mark Twain, and I suspect that my sabbatical from the pages of Federal Computer Week has not caused as much consternation as the premature publication of Twain’s obituary in the New York Journal did in 1897, I have received a fair number of e-mail messages asking me where I’ve gone.

I’m pleased to report that, like all of you, I’ve been rather busy. Notwithstanding efforts in the government to render the contracting process more user-friendly, contractors are enmeshed in difficult renewals, contentious audits and inopportune investigations. That’s bad for contractors, but not so bad for lawyers.

So what has roused me from my literary slumber? I have observed an unsettling trend while guiding clients through the realities of government contracting.

Vendors with schedule contracts can grant additional discounts to authorized schedule contract purchasers without triggering the price-reduction clause. That clause requires vendors to offer the government uniquely favorable pricing.

The General Services Administration also requires schedule purchasers to request — and encourages schedule contractors to grant — additional discounts on large orders. However, there is a risk in granting such discounts. Consider this scenario.

Let’s say a contractor grants a discount to a federal agency in the context of a schedule blanket purchase agreement (BPA). Let’s make it one of those must-win situations where the contractor offers pricing that comes pretty darn close to cost. There’s no problem, right? Wrong.

Although the BPA discount will not trigger the contractor’s price-reduction clause, it most likely will pique the interest of the schedule contracting officer at contract renewal time.

GSA does not ask for the disclosure of federal sales data in its Commercial Sales Practice Format, a document that informs GSA about how a contractor sells its products and services in the commercial marketplace.

However, contracting officers routinely demand federal discount data to get deeper schedule discounts for the renewal period. If that were to happen in our example, the contractor could see its BPA prices fall below its costs. That’s not good.

This tale has two morals. First, although it will pain my GSA friends to read this, contractors should think twice before discounting their schedule prices on BPAs.

Although such a discount will not trigger the price-reduction clause, it could become a financial obstacle later.

Second, if a contractor wants to grant a discount on a schedule BPA, it would be wise to incorporate a limit below which its BPA rates will not fall, simply as insurance against a zealous schedule negotiator.

There is more to write about this topic, but it will have to hold for another week. A client just called. An auditor is knocking at her door.

Aronie is a partner in the government contracts group of Sheppard Mullin Richter and Hampton in Washington and co-author of “Multiple Award Schedule Contracting.” He can be reached at jaronie@sheppardmullin.com or 202-216-0039.

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