Last month, the General Services Administration (GSA) published a proposed rule that, if finalized, would do away with one of the most burdensome compliance requirements posed by Federal Supply Schedule (FSS) contracts.1 Specifically, through the proposed rule, the GSA seeks to modify the Price Reductions Clause (PRC) 2 to exempt from its application certain contracts, and those contracts would instead include a new monthly commercial sales reporting requirement. While the proposed relief from the PRC is certainly welcome news to most FSS contract holders, the proposed reporting provisions pose a new set of compliance challenges for holders of GSA-administered FSS and other GSA government-wide contracts.

Comments on the rule are due May 4, 2015. Additionally, the GSA will convene a public meeting on April 17, 2015, to gather input from industry.

Background

The PRC was designed to allow the government to maintain favorable pricing for the duration of FSS contracts, which can extend for up to 20 years, depending on the schedule. The clause requires FSS contract holders to monitor sales to an identified commercial category or group of customers—commonly referred to as “tracking customers”. The parties, through the pre-award negotiation process, select a tracking customer on which both the government and the contract holder agree. With limited exceptions, the PRC requires contractors to report price reductions granted to tracking customers and offer commensurate reductions in FSS pricing. PRC compliance is burdensome as it typically requires contractors to implement government-unique controls and processes to detect “triggering” sales to tracking customers on a real-time basis. Moreover, applicability of the PRC often is not clear given the text of the current version of the PRC.  

The proposed rule can be traced in part to a 2010 report issued by the Multiple Award Schedule Blue Ribbon Advisory Panel, which included representatives from the largest government purchasing agencies and industry.3 The panel was critical of the PRC and concluded that the clause was administratively burdensome to contractors, but not effective in providing price protection to the government. The Advisory Panel recommended that the GSA remove the PRC from FSS contracts in phases and instead rely upon “competition and price transparency” at the contract and order level.4  

More recently, the GSA itself has questioned the PRC’s effectiveness. Specifically, the GSA found that for the period October 1, 2013, through August 4, 2014, only three percent of all reported price reductions across nine schedule programs related to the “tracking customer” feature of the PRC. Additionally, in a recent report the GSA Office of Inspector General concluded that a large percentage of contractors lack adequate sales monitoring systems and billing systems to ensure proper administration of the PRC.5

Another development that influenced the proposed rule is the White House’s Office of Federal Procurement Policy’s (OFPP’s) new initiative focused on “category management.”6 Through this initiative, the OFPP has instructed federal agencies to shift their focus from managing purchases individually across procurements to managing entire categories of common purchases across the government as a whole. A key component of the initiative involves utilizing transactional information across and within agencies with respect to prices paid for goods and services. The OFPP believes this approach to purchasing would enable the government to collect information and compare prices paid for similar products and services under similar circumstances.7

Contents of Proposed Rule

Application of new reporting requirements: The proposed rule would impose a new monthly reporting requirement on GSA-awarded FSS and government-wide contracts, while relieving GSA FSS contractors of the requirement to monitor and report price reductions pursuant to the PRC. GSA plans to implement the new requirements in phases. The new reporting requirement would be imposed first on GSA’s government-wide (non-FSS) contracts where transactional data is not already collected through other methods. For FSS contracts, GSA intends to introduce the requirement, via a new contract clause, in phases, beginning with a pilot program covering “select products and commoditized services.”8 Those products and services that are subject to the new data reporting requirements will be exempt from the monitoring and reporting requirements of the PRC. Department of Veterans Affairs (VA) FSS contracts and other agency-awarded government-wide contracts are not directly impacted by the proposed rule, though there is certainly potential for expansion to these other contracts—especially if the roll-out of the new requirements on the “in scope” contracts is viewed as a success.

The monthly reporting requirements would be imposed via a new standard contract clause.9 The clause, as currently drafted, requires the contract holder to submit electronically, on a monthly basis, a report of transactional data for sales completed under the contract during the prior month. The transactional data will include unit pricing, quantity, total pricing, and certain other data elements. The reporting requirement would be burdensome to administer for most contract holders, while posing additional risks relating to the potential for defective reports.

The proposed rule is based on the presumption that the collection and use of this transactional data will be a more efficient and effective way for driving price reductions on FSS purchases than through use of the PRC’s tracking customer mechanism. The GSA intends to use this data to compare pricing horizontally to commercial benchmarks and pricing data for similar products and services. GSA intends that such comparisons will lead to more frequent government requests for voluntary price reductions and demands for updated Commercial Sales Practice (CSP) disclosures.

The transactional data would be made available to the GSA’s “Common Acquisition Platform” that the GSA and other government buyers may use for price comparison purposes. The GSA believes that the initiative will provide a disincentive to other agencies to maintain contract programs that compete with those of the GSA, resulting in administrative savings for the government.

Another key aspect of the GSA’s proposal is that the FSS contractors that are subject to the transactional reporting requirements would be exempt from PRC monitoring and reporting requirements. While the PRC is burdensome from both an administrative expense and compliance perspective, at least some of that benefit may be offset, or even more than offset, by a requirement to submit CSP disclosures more frequently. As indicated above, the GSA intends to compare the transactional data from the new monthly reports to commercial benchmarks, available commercial data, and government pricing data previously collected. The proposed rule anticipates that GSA contracting officers will demand updated CSP disclosures when commercial benchmarks or other available data calls into question the reasonableness of the contractor’s FSS pricing.

More CSP submissions: The potential for increased CSP submissions should not be taken lightly. The process of completing CSP disclosures in a compliant manner is difficult for most companies. The process entails disclosing the company’s commercial selling practices—including its “standard” practices and “deviations” from those practices—across customer categories. Data and system limitations, as well as a general lack of awareness of the government’s strict interpretation of the CSP preparation instructions, make compliance with CSP requirements time-consuming, difficult, and risky. In fact, in a recent report the GSA Office of Inspector General found that 84% of audited FSS contract holders in FY 2012 provided CSP disclosures that were inaccurate, incomplete, and/or not current.10 Moreover, in recent years allegations of defective pricing based on defective CSP disclosures has netted the government hundreds of millions of dollars under the False Claims Act.

Conclusion

The proposed rule may be perceived by some contractors as a step in the right direction insofar as it may well bring the death knell of the PRC and its burdensome requirements. However, the new reporting requirements and the GSA’s perceived unfettered ability to seek updated CSP disclosures will pose new compliance challenges for contractors. And, although the rule in its current form does not apply to VA FSS contracts for drugs and medical devices/supplies or other agency government-wide contract vehicles, it may be a sign of what is to come government-wide. As a result, holders of FSS and GSA government-wide contracts are well-advised to consider this proposed rule seriously.