Government contracting is not for the faint of heart when it comes to compliance woes. Private companies looking to do business with the government face a regulatory maze so great that it may inspire references to Greek mythology, labyrinth and all. Few contract clauses reflect this sentiment of compliance pitfalls better than the General Services Administration’s (GSA) Price Reduction Clause (PRC) – a provision found in all Federal Supply Schedule (FSS) contracts that essentially restrains a contractor from providing its customers with a discount that it did not also provide to the government. Penalties for PRC violations have reached in the millions of dollars and have resulted in lengthy False Claims Act litigation.

As big a stick as the PRC might be for federal agencies, at least some in the government believe that the time for change is now. On March 4th, the GSA announced a proposed rule that would replace the PRC with a new reporting requirement that the GSA believes will provide a more effective model for ensuring fair and reasonable prices. Vendors involved in federal procurement should stay abreast of this development as it may bring new and critical reporting requirements for federal contracts.

PRC’s Basis of Award Structure

The PRC mandates certain disclosure requirements and creates a complex pricing relationship between the contractor, the government agency, and the contractor’s private customers. This underlying relationship is known as the basis of award. GSA awards a contract to a company based on the price discount it will receive relative to the price discount given to the company’s Most Favored Customer (MFC). In other words, when GSA awards a contact, the award is based on the the price given to the vendor’s MFC who makes purchases under similar conditions (e.g., same items, similar quantities) as GSA.

Under the PRC, vendors must monitor their pricing over the life of the contract. If the vendor increases the price discount it gives to its MFC, the company must generally do the same for the agency. In addition to the basis of award tracking requirement, the PRC also allows vendors to voluntarily offer—and for agencies to request—a price reduction any time when lower prices are being offered to the MFC.

Out With the Old, in With the New

GSA now proposes a new contract clause that would require vendors to report transactional data from orders and prices paid by ordering activities. GSA’s potentially game-changing move appears to stem, at least in part, from the Office of Federal Procurement Policy (OFPP) initiative to streamline and simplify the federal contracting marketplace through “category management.” We previously blogged about the OFFP’s effort here.

Category management describes a process whereby purchases are grouped by categories governmentwide and expert category managers will oversee the categories and share information across agencies. In similar fashion, GSA’s new rule requires contractors to report prices paid for products and services delivered during the performance of the contract, including under FSS orders and blanket purchase agreements (BPAs) through a new online reporting system. This mandatory report would include transactional data elements such as unit measure, quantity of items sold, universal product code (if applicable) prices paid per unit, and total price.

According to GSA, the prices paid for information will help cure inefficiencies in the current procurement system, particularly where prices paid have significantly varied across agencies for duplicate purchases. GSA believes this clause will be especially impactful when combined with the market expertise provided to agencies through the category managers.

Proposed Rule Will be Phased in for FSS Contract and Immediately Applicable to GWACs and IDIQ Contracts

If passed, the proposed rule will apply as GSA’s Governmentwide Acquisition Contracts (GWACs) and Governmentwide Indefinite Delivery Indefinite Quality (IDIQ) contracts immediately. FSS contracts, on the other hand, would phase in the new clause beginning with select products and services. Through the FSS pilot phase, vendors will not have to report on the PRC basis of award tracking requirement. The proposed changes will not apply to the Department of Veterans Affairs FSS contract holders.

GSA will use the FSS pilot phase to study whether its proposed transactional-based method provides a more effective pricing model than the basis of award. Not wanting to completely shut the door on the PRC, GSA does state that should the pilot program reveal that the proposed method is not as effective, GSA will reinstitute basis of award tracking requirements. More information on the scope of the pilot program can be found here.

Notice of a Public Meeting and Request for Comment

GSA contractors should take advantage of the opportunity to comment on the potential administrative impact of this proposed rule. A public meeting will be held on Friday, April 17, 2015, at 9:00 a.m (EST) in Washington, D.C. and written comments can be submitted on or before Monday, May 4, 2015 to be considered in the formulation of a final rule.