Few regulations governing federal contractors cause as much consternation as 48 CFR § 552.238-75, or as it is more commonly known, the Price Reduction Clause (PRC). On March 4, the General Services Administration (GSA) requested industry feedback on proposed changes to the PRC that would significantly change contractor responsibilities under the PRC, as well as how the government uses the PRC to ensure that it receives the best possible pricing. Contractors holding government-wide Federal Supply Schedule (FSS) and non-FSS contracts should pay close attention to GSA's proposal and take advantage of this opportunity for dialogue with the government.
A fundamental component of the PRC is the determination of which of the contractor's customers will be the "basis of award" and the price or discount the contractor offers those customers, which are used to determine the pricing or discount offered to the government. Thereafter, the contractor is required to report any pricing reductions given to the basis of award customers and immediately pass on such discounts as appropriate. This scheme greatly favors the government customer, has often proved difficult and expensive for countless FSS contract holders to administer, and has even underpinned a great number of False Claims Act cases.
GSA now expresses concern that this approach focuses exclusively on "vertical" pricing, in that the pricing offered to the government is compared only against the pricing that the contractor offers its other customers, with comparatively little emphasis on "horizontal" pricing, which compares a contractor's pricing to that of its competitors. Furthermore, GSA has found that the vast majority of price reductions have been the result of commercial pricelist adjustments and market rate changes, rather than the improvement of pricing to basis of award customers.
Seeking a different approach, GSA has proposed to replace the customer tracking requirement with monthly online reporting of transactional data elements such as unit measures, quantity of item sold, universal product code (if applicable), price paid per unit, and total price. GSA believes this offers several benefits:
- It will allow contracting officers across all agencies to examine pricing paid throughout the government, thereby facilitating price analysis by agencies and driving price competition by contractors whose customers will have better market intelligence.
- Because of better pricing on GSA contracts, agencies will have less incentive to establish separate contracts, which will reduce government administrative burdens and lower barriers to small business participation.
- Contractors will no longer bear the administrative burden of customer tracking. GSA estimates that the annual burden of transactional data reporting would be over 85% less than that associated with customer tracking.
For FSS contracts, GSA proposes a phased implementation, initially through a pilot that would focus on high-volume products and services. Participation would be mandatory for contractors selling the selected products and services. Notably, while contractors in the pilot would not be responsible for maintaining their customer tracking data, they still would be subject to commercial sales practices requirements and GSA would retain the right to seek updates to contractors' commercial sales formats to ensure that prices remain fair and reasonable. GSA proposes to evaluate the results of the pilot before moving to broader implementation, and may revert back to the customer tracking model if the transactional data approach proves not to be an effective pricing tool.
With respect to government-wide non-FSS contracting vehicles, GSA proposes to apply this change immediately. While a number of non-FSS contracts already require transactional data, GSA's proposed change would standardize the practice for such contracts.
These proposed changes have the potential to radically restructure the operation of the PRC, and GSA accordingly has provided multiple avenues for comment. GSA will hold a public hearing in Washington, D.C. on April 17, 2015, and interested parties may attend in person or online. Parties seeking to provide oral presentations, which will be limited to 15 minutes, must submit their presentations by email to firstname.lastname@example.org by April 8, 2015. All oral presentations must be followed up in writing through regulations.gov by May 4, 2015. Written comments are due by May 4, 2015, and must be submitted through regulations.gov. The case number is GSAR Case 2013-G504.
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If you have any questions about how these proposed rules could affect your business, please contact Dismas Locaria, Nathaniel Canfield, or any of the attorneys in Venable's Government Contracts Practice Group.