Is the GSA schedule price reduction clause necessary?

Tuesday - 8/3/2010, 3:37pm EDT

Jonathan Aronie, partner, Sheppard, Mullin, Richter & Hampton, LLC

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The price reduction clause could be called one of the most hated and controversial provisions of the General Services Administration's schedule contracts.

But what exactly is it?

Jonathan Aronie literally wrote the book on GSA schedule contracts and explains what the price reduction clause is, and why it doesn't always work out to be the lowest price.

He's a partner at Sheppard, Mullin, Richter & Hampton, LLC and author of Multiple Award Schedule Contracting.

He explains what the price reduction clause does.

"It guarantees to the government uniquely favorable pricing treatment, where, at the outset of a GSA schedule contract, the government identifies one or more commercial customers to which [it] will compare the contractors' pricing and, if the government starts not being treated as well as this group of commercial customers, then the government demands better pricing from that date going forward."

He adds that, when it comes to pricing, a lot of misconceptions surround who is offering the lowest.

"The key is, when you negotiate your contract, whatever ratio is established needs to be maintained. For some companies, it's the lowest price. For some companies, the government might get five percent worse than commercial customers. So, it's not necessarily the lowest, but it is an established negotiated relationship that has to be monitored and maintained."

This, however, can be subjected to negotiation, and Aronie says it is especially important that smaller companies understand this. Savvy contractors, he adds, always walk into the room knowing that the price reduction clause can be up for debate.

There are, of course, a lot of exceptions to the clause, as well, which can make things even more complicated.

"Not every discount to a commercial entity triggers the clause. Any GSA schedule contractor has to have a system to monitor compliance. It has to be able to look at its commercial customers that are within what's called the 'basis of award,' -- within this tracking category. You have to monitor those sales to know if the pricing is below what it should be. Then, you look to see if an exception applies, and then you look to see if you have an obligation to reduce the government's price."

This monitoring process can be quite daunting, too, because a lot of companies see the GSA schedule as a way to break into the government market. Aronie says, though the agency has gotten better at explaining the schedule, it can still be confusing.

"Previously, they've touted the GSA schedule as no different from a commercial contract, and that has had the unwitting effect of duping some companies into thinking that it doesn't have these unique obligations; whereas, this is is a unique obligation and companies need to go in with their eyes open."

As for the argument that small companies are disadvantaged, too, when it comes to monitoring the GSA schedule, Aronie says he doesn't agree that's always the case.

"A small company might have less infrastructure, but they typically have fewer sales, as well. A larger company might have more infrastructure, but millions of transactions might be running through the company. I think you've got to say it's a burden to big and small -- and mid-sized. It takes a lot of work. It requires attention [and] it costs money."

The axiom that one must spend money to make money is certainly true from the contractor's point of view. The GSA, however, doesn't necessarily acknowledge that it costs businesses a lot to run schedule compliance programs, "it is an expensive process, but GSA doesn't, at least publicly, buy off on that."

So, does the GSA schedule get the taxpayer the best bang for his or her buck? Aronie says there are a lot of different viewpoints on this, but he thinks that the GSA schedule does foster competition.

"If a government customer wants to buy widget 'x', it goes online to GSA's website. It sees 100 companies offering widget x, it picks the lowest one -- how can you say that's not fair and reasonable? But nonetheless, the Office of the Inspector General is very firm and vocal on the position that, without [pre- and post-award] audits, then companies are defrauding the government left and right."

Those pre-award audits are quite possibly the most controversial of the entire process. Contracting officers are supposed to team up with the OIG to try and get the best prices for the government. The IG examines the submission from the company and issues a report based on its accuracy. The contracting officer is supposed to use that report to negotiate better pricing.