Last year we discussed the General Services Administration's (GSA) request for comments on a proposed rule relating to 48 CFR § 552.238-75, or as it is commonly known, the Price Reduction Clause (PRC). While there is no question that the PRC and its compendium requirement, the disclosure obligations under the confusing and much maligned Commercial Sales Practices (CSP), places a tremendous burden on contractors and has led to substantial noncompliance findings and penalties, on June 23, 2106, the GSA released a final rule that significantly alters the GSA’s approach for monitoring and ensuring fair and reasonable pricing under its various contracting programs, including the Federal Supply Schedule (FSS) program. 81 Fed. Reg. 41104 (June 23, 2016). GSA predicts that this approach will considerably reduce the burden on the agency contractors alike, but it opens the door to a host of new questions and issues.
Background
As explained in the initial request for comments, GSA (as well as the government at large) has grown skeptical of focusing on "vertical" pricing, where the pricing offered to the government is compared only against the pricing that the contractor offers its commercial customers, while paying little emphasis and attention to "horizontal" pricing, which compares a contractor's pricing to that of other contractors. Given the difference between the federal government and virtually all commercial entities, the change in focus is welcomed. Indeed, one would be hard pressed to identify commercial companies that require other companies to meet the myriad of socio-economic and contractual requirements of the federal government. Thus, GSA's new rule requires the submission of government sales data that should better allow the government to view pricing among contractors for similar products and services.
The New Rule
Pursuant to the new rule, GSA has amended the GSA Acquisition Regulation (GSAR) to include a new clause – GSAR 552.238-74, Industrial Funding Fee and Sales Reporting (Alternate 1) – that will require contractors to report on a monthly basis, at no additional cost to the government, transactional data from orders placed against certain FSS contracts, Government wide Acquisition Contract (GWACs), and indefinite-delivery, indefinite-quantity (IDIQ) contracts. By "transactional data," contractors must report eleven data points on a monthly basis, including manufacturer name, manufacturer part number, universal product code, unit of measure, quantity purchased, price per unit and total price.
GSA will first implement this process through a pilot program whereby it will select specific Schedules and Special Item Numbers (SINs) for participation. The selected contractors will have to comply with the new reporting requirements, but will no longer be subject to existing requirements concerning the Commercial Sales Practices disclosures or the PRC basis of award monitoring and reporting obligations. Specifically, within sixty days of the issuance of this rule (but not before July 1, 2016), GSA will introduce phases of this pilot program to eight FSS contracts and the SINs thereunder, including the popular IT Schedule (Schedule 70):
- Schedule 03FAC, Facilities Maintenance and Management: All SINs.
- Schedule 51 V, Hardware Superstore: All SINs.
- Schedule 58 I, Professional Audio/Video, Telemetry/Tracking, Recording/Reproducing and Signal Data Solutions: All SINs.
- Schedule 72, Furnishing and Floor Coverings: All SINs.
- Schedule 73, Food Service, Hospitality, Cleaning Equipment and Supplies, Chemicals and Services: All SINs.
- Schedule 75, Office Products: All SINs.
- Schedule 00CORP, The Professional Services Schedule: Professional Engineering Services (PES) SINs.
- Schedule 70, General Purpose Information Technology Equipment, Software, and Services: SINs 132 8 (Purchase of New Equipment); 132 32, 132 33, and 132 34 (Software); and 132 54 and 132 55 (Commercial Satellite Communications (COMSATCOM)).
Notably, while the reporting requirements will be included in the solicitations for the above Schedules and thus incorporated into new contracts, contactors that already hold a Schedule contract that includes any one of the covered Schedules and SINs may choose whether to opt in to the new program or, continue under the current regulatory regime.
New Issues and Questions
This major change to GSA's approach and focus, while ridding contractors of the PRC and CSP, leaves many open issues and concerns:
- First and foremost, what will GSA be doing with all of this data a contractor submits? GSA will receive a tremendous amount of data (to say nothing about their capability to accept and timely process all the data). Nevertheless, it is unclear how GSA will analyze and interpret this data. Currently, discounts to federal agencies do not trigger the PRC. Thus, contractors can provide one agency significant discounts to a federal customer with no impact to its future pricing with other federal customers. However, this requirement seems to imply that GSA will be comparing contractors’ pricing to various federal agencies. Is it then possible that a deep discount to one agency could require similar deep discounts across all federal agencies? Such an approach would obviously have a significant impact on how contractors approach discounting to federal agencies and could potentially cause contractors to provide fewer discounts to the government.
- How will GSA use contractors’ data collectively? As noted above, it is potentially problematic that GSA will apply discounts given to one federal customer to all federal customers, but another substantial concern might arise from the collective analysis of multiple contractors’ data whereby GSA may recognize one customer providing deep discounts on certain products or services to federal customers and thus demand other contractors follow suit or risk losing their Schedule contract. In leveraging this information, it remains to be seen whether GSA will have any appreciation or understanding of the complexity of individual business needs, sales strategy, costs and pricing capabilities. Currently, contractors are viewed based upon their own commercial practices and discounting policies, but this shows a clear move to pitting contractors against one another in a way that may ultimately lead to less competition.
- How will the government press for lower prices? Currently, the PRC requires price reductions if the basis of award customer receives price reductions. The new clause – GSAR 552.238-75, Price Reductions – appears to make price reductions elective, stating “[t]he Government may request from the Contractor, and the Contractor may provide to the Government, a temporary price reduction at any time during the contract period.” Unfortunately, the new regulation does not explain how the government will press for lower prices? Will the government threaten cancelling a contractor’s FSS contract if it does not agree to lower prices? This remains to be seen.
- How quickly will GSA move with its data analytics? For some industries and businesses, timing is everything. Contractors pricing and discounts can often be driven by circumstances not within the transactional data being sought. For instance, some contractors price their goods and services based on the cost of raw materials, the season and other external forces. The government’s ability to quickly analyze and process data has never been its strong suit. Further, given the deluge of information that GSA will be receiving, how quickly will the agency be able to review and process this information and will its conclusions be timely at the time they are made and/or implemented, or will they be outdated due to other external forces? If the latter is the case, what recourse might a contractor have to reject or modify such conclusions of GSA, especially if they mandate reduced pricing?
The replacement of the PRC and CSP is certainly a welcome change, though it will likely be a mixed bag given some of the uncertainties surrounding the GSA's new approach. Above are only a few of the questions; but, at the end of the day, much of the practical implications will have to be worked out through GSA's pilot program. We will certainly keep a close eye on these issues and provide appropriate updates.