GSA Price Reduction Clause

When GSA negotiates its 'multiple award schedule' (MAS) contracts, it relies on discounts, terms, and conditions that contractors offer to other customers. This is commonly referred to 'most favored customer' pricing.

However, the negotiated prices stated in a MAS contract are not necessarily fixed for the entire term of the contract. Most MAS contracts (perhaps all MAS contracts) contain a Price Reduction Clause (GSAR 552.238-81) which imposes a duty to report certain changes in its commercial pricing terms. In some cases, the Price Reduction Clause will require contractors to adjust their fixed prices downward.

The Price Reduction Clause specifies two events that will require contractors to reduce their prices. If the contractor later reduces the list price or otherwise revised the price list or offers more favorable pricing, discounts, or terms to another customer, the contractor must also offer the same deal to the Government. The other requires that the discount percentage offered to the Government must be maintained. If the contractor offers the Government a 15 percent discount off of list price, but later lowers its list price, the contractor must offer the Government the 15 percent discount off of the new list price, even if the old Government price is still most favored.

UPS (United Parcel Service) found about this clause the hard way. The Justice Department just announced a settlement with UPS for $8.4 million to resolve allegations that it overcharged Federal agencies for package delivery services under its GSA contract. From 2007 to 2014, UPS failed to follow the Price Reduction Clause of its GSA contract.

MAS contractors need to establish internal mechanisms to ensure that it maintains pricing integrity on its contracts. Without such internal controls, it is too easy to forget about contractually require duties and obligations like the Price Reduction Clause.

Contractors Repay $75 Million for Overcharging the Government

Here's something for contractors with GSA Multiple Award Contracts to consider. Every company that has ever received a GSA contract knows full-well that the prices offered the Government must be the best prices offered any commercial contractor. That requirement is well entrenched into the process. If you want to sell to the Government, fine, just don't try to gouge the Government because it has deep pockets, because you can get away with it, because the oversight is lax, or just because you can.

Under the Multiple Award Schedule (MAS) Program, prospective vendors agree to disclose commercial pricing policies and practices to the GSA in exchange for the opportunity to gain access to the broad federal marketplace and the ease of administration that comes from selling to any government purchaser under one central contract.  GSA regulations require that, during contract negotiations with GSA, prospective vendors seeking an MAS contract make “current, accurate and complete” disclosures of the standard and non-standard discounts they offer to commercial customers.  The GSA relies on the accuracy of these disclosures in order to negotiate fair pricing for government purchasers.  Additionally, after the MAS contract is awarded, regulations require that MAS Program vendors disclose to the GSA changes in their commercial pricing practices, including improved discounts that are offered to commercial customers, after the MAS contract is in place.

The Department of Justice recently announced a settlement with two MAS contractors who agreed to pay back a staggering $75 million to resolve allegations that they violated the (Civil) False Claims Act by misrepresenting their commercial pricing practices thereby overcharging the Government (it would be interesting to see how the companies footnote these events in their audited financial statements).

The settlement resolves allegations that the two companies made false statements to the government in connection with the sale of their products and services under MAS contracts.  These false statements allegedly concealed the companies’ commercial pricing practices and enabled the companies to overcharge the government from 2007 through 2013. 

The civil settlement resolves a lawsuit filed under the whistleblower provision of the False Claims Act, which permits private parties to file suit on behalf of the United States for false claims and obtain a portion of the government’s recovery.  Looks like a very good payday for the whistleblower (a former president of one of the companies). Although the Justice's press release did not disclose how much of the $75 million will go to the whistleblower, it will be sizable.

The claims resolved by the settlement are allegations only; there has been no determination of liability.

You can read the full press release here.

GSA Schedule Contracts - Audits

Yesterday we discussed GSA rights to access a contractor's or prospective contractor's books and records for the purpose of performing post-award audits; that is audits for over-billings and compliance with the price reduction and industrial funding fee clauses. These are loosely termed under the heading of post-award audits. The probability that GSA will perform a post-award audit on a particular contract however, is not high. Some contracts are selected at random while others are selected based on some form of audit lead or perhaps a phone call through GSA's fraud hotline. Far more likely is the chance that contractors will undergo "pre-award" audits.

Contractors that submit proposals in response to a GSA solicitation give GSA the right to poke around their books and record even if there is no contract. One of the standard solicitation clauses states:

By submission of an offer in response to this solicitation, the Offeror grants the contracting Officer or an authorized representative the right to examine, at any time before initial award, books, records, documents, papers, and other directly pertinent records to verify the pricing, sales and other data related to the supplies or services proposed in order to determine the reasonableness of prices(s). 

The "authorized representative" in this case is usually GSA's Office of Inspector General however, DCAA (Defense Contract Audit Agency) has been called upon from time to time to perform these pre-award audits, particularly if that Agency is already in resident at a particular contractor location.

Any data submitted in response to a solicitation is fair game for a pre-award audit. The audit will focus on the propriety of contractor representations: commercial customers and prices charged,, discounts, quantity/volume, FOB terms, concessions, deviations, and sales data. Validation of those key elements will be the auditor's primary focus.

Some experts believe that pre-award audits are not necessarily bad events. Any findings during a pre-award audit that can be corrected, may prevent the Government from being harmed after contract award. Over billings carry their own set of problems and contractors definitely want to avoid those.

GSA Schedule Contracts - Access to Records

We're going to keep with our major theme of the past few weeks - GSA Schedule Contracts (or MAS Contracts) by discussing GSA's access to contractor books and records. Its nice to get a GSA contract, sit back and watch the orders start flowing in (okay, it would be nice but it doesn't happen that quite that easily). What a lot of companies don't realize when they get into the GSA program is the degree to which they must open up their books and records to the GSA contract auditors and the length of time for which they must be maintained and made available.

The basic access to records clause is found in GSAR (GSA FAR Supplement) 552.215-71 included in every GSA contract. That clause states:

The Contractor agrees that the Administrator of General Services or any duly authorized representative shall have access to and the right to examine any books, documents, papers and records of the Contractor involving transactions related to this contract for over billings, billing errors, compliance with the Price Reduction clause and compliance with the Industrial Funding Fee clause of this contract. This authority shall expire  three years after final payment. The basic contract and each option shall be treated as separate contracts for purposes of applying this clause.

The GSA auditors have interpreted this clause very broadly and believe that it gives them the authority to ask for any documents related to the contract, not just those enumerated in the clause. This causes friction when contractors start objecting to or questioning auditors' requests for documents that do not specifically relate to billing and compliance issues. But, because of the fear that auditors will dig deeper into contractors that dig in their heals, the auditors probably get more leeway in the documents they are able to solicit.

Failure to provide relevant information during contract negotiations can lead to charges of overbilling. In that regard, Contractors must ensure that they have properly classified sales to the proper category of customers. Otherwise, GSA may try to make a case that all sales are considered related to the contract.

Note also the clause allows GSA to come in and perform their audits for a period of three years after final payment. Sometimes "final payment" does not occur until long after the period of performance which serves to extend the length of time during which the Government can come back and perform their audits.

What are Industrial Funding Fees (IFF)?

Contractors offering products or services to the Government through GSA's (General Services Administration) MAS (Multiple Award Schedule) program must pay to GSA an Industrial Funding Fee (IFF). The IFF is added to the cost of the product or service and therefore paid by the customer. Contractor's in turn, must remit the IFF back to GSA on a quarterly basis. The IFF is a fee to cover GSA's cost of operating the Federal Supply Schedules program (e.g. MAS) but can also be used to cover other expenses of the Administration. The fee is 0.75 percent of sales and is included in the price that Government agencies pay the GSA contractor when they purchase items from a MAS contract.

Government agencies who buy goods and services have the option of buying off the GSA schedule or they can also buy directly. Buying off the GSA schedule is usually more cost-effective because the agency then does not need to incur the cost (i.e. labor costs) of soliciting, awarding, and administering separate contract actions. To help offset the cost of administering the MAS program, GSA adds the IFF to the negotiated price of the goods and services and the MAS contractors must, in turn, remit the money back to GSA. Using this mechanism, the various agencies are in effect, reimbursing GSA for the cost to administer the MAS program, using contractors as middle-men in the transaction.

Its not that uncommon to find contractors overpaying their IFF obligations. Primarily, this is a result of poor bookkeeping where contractors include Government sales that were not made off their GSA schedule but via other contracting actions.GSA has a robust audit function to ensure that contractors are remitting the correct amount of IFF. These audits have disclosed numerous instances where contractors have overpaid these fees (as well as underpaid them).

There are a number of compliance issues related to the IFF. First and foremost, once a contractor is on the MAS schedule, it must report quarterly sales, even if there were no sales for the quarter. Many contractors assume that if there were no sales, then a report is not required. That's not the case. Zero dollar reports are required.

If you have any questions concerning IFF compliance and reporting, don't expect much help from GSA. They are not staffed to render such assistance and they will recommend that you consult with MAS contracting professionals.

MAS Contracts - Failure to Comply with Reporting Requirements

For the past two days, we have been discussing the price reduction clause that is included in every MAS (Multiple Award Schedule) contract. Essentially, this clause requires that the Government be given most favored treatment when it comes to pricing and if the price for commercial customers drop during the course of the contract, the price to the Government must also drop.

There are a few exceptions to the price reduction clause - events that will not necessarily trigger the clause. These include:

1. Orders outside the basis of award. Vendors can grant whatever discounts they want to customers outside its Basis of Award, so long as such discounts are consistent with the vendor's disclosed commercial practices. This had better be well documented as the Government will naturally be very suspicious of some customer that suddenly falls outside the basis of award.
2. Sales to authorized Schedule purchasers. If a purchaser is authorized to buy under the MAS contract but the contractor offers to sell at a lower price, that sale will not trigger the price reduction clause. The logic here is that the discount will accrue to the Government anyway.
3. Orders above the maximum order threshold. 
4. Charitable donations
5. No-charge items. For example, a contractor might offer a freebie to apologize for a late delivery or something along those lines.

If any of these events occur, it is always advisable to notify the contracting officer of the event and why you are not adjusting the prices as a result.

We should also address the consequences for failing to comply with the price reduction clause. Most likely, the penalties will be administrative in nature but could be more severe depending on how egregious the violation.

Administrative actions might include:

• a price adjustment (most likely event)
• a breach of contract claim by the Government against the vendor
• termination for default

Other penalties available to the Government include violations of

• the civil or criminal False Claims Act
• the criminal False Statements Act
• other criminal statutes

If there is a violation and the Government overpaid as a result of that violation, the Government will want its money back. That's why a price adjustment would be the most desirable outcome. Anything other than that, i.e. breach of contract or termination for default, will end your days as a Government vendor.

MAS Contracts - The Price Reduction Clause and Reporting Requirements

Yesterday as we were reporting on the GSA Inspector Generals critical audit of the MAS program (Multiple Award Schedule), we noted that one of the IG's findings was that one of the significant findings was that half of all contractors had inadequate sales monitoring and billing systems to ensure proper administration of the price reduction and billing provisions of their MAS contracts.

After publication, we had a couple of inquiries for more information concerning the price reduction clause and in particular, the obligations of a MAS contractor.

The essential requirement is that contractors need to develop an internal tracking and reporting system so that whenever the price list for the bench-marked customer (or group of customers), drops, the MAS contract prices drop as well. It is not sufficient to assume that once you have a MAS contract, you're good to go for the next three years, or however long the period of performance. Note also that it is an active requirement. You need to set up the monitoring system and report changes to the benchmark.

The Price Reduction clause is found in the GSA Acquisition Manual (one of the various FAR Supplements) at 552.238-75. It reads, in part;

Before award of a contract, the Contracting Officer and the Offeror will agree upon (1) the customer (or category of customers) which will be the basis of award, and (2) the Government's price or discount relationship to the identified customer (or category of customers). This relationship shall be maintained throughout the contract period. Any change in the Contractor's commercial pricing or discount arrangement applicable to the identified customer (or category of customers) which disturbs this relationship shall constitute a price reduction.

During the contract period. the Contractor shall report to the Contracting Officer all price reductions to the customer (or category of customers) that was the basis of award. The Contractor's report shall include an explanation of the conditions under which the reductions were made.

A price reduction shall apply to purchases under this contract if, after the date negotiations conclude, the Contractor (i) revises the commercial catalog, price list, schedule or other document upon which contract award was predicated to reduce prices, (ii) grants more favorable discounts to the customer (or category of customers) that formed the basis of award, and the change disturbs the price/discount relationship of the Government to the customer (or category of customers) that was the basis of award.

Then, the Contractor shall offer the price reduction to the Government with the same effective date, and for the same time period, as extended to the commercial customer (or category of customers).

The point of the IG audit was that more than half of the MAS contractors have no such system so they have no way of complying with the contract's "most favored price" requirement.

GSA Inspector General Identifies Recurring Problems in the MAS Program

Yesterday, the Inspector General's Office for GSA issued an audit report that identified several deficiencies in GSA's Multiple Award Schedule (MAS) program. Most Government contractors are familiar with the MAS program. That's where many Government contractors get their start. It has become the Government's commercial item marketplace and through it, Federal agencies spend $38 billion each year from 16,000 contractors offering 10 million different products and services. Most contractors who survive the rigors of "getting on" the GSA schedule, tend to do well - at least sufficiently well enough that they want to stay on the schedule.

When you think about the $38 billion spent by Federal agencies each year, you can assume that there is also some fraud, waste, and abuse going on within the program. That's why oversight agencies, like the Inspector General's office, spend a lot of their own time and resources monitoring and reviewing the program.

One of the underlying features of the MAS program is that the prices afforded the Government are the most favored. In other words, the Government shouldn't pay more than a contractor's most favored customer. The latest IG (Inspector General) report calls into question whether the Government is achieving most favored status. There are two findings in the report that will no doubt require contractors to do more work.

1. Nearly half of the contractors audited had inadequate sales monitoring and billing systems to ensure proper administration of the price reduction and billing provisions of their MAS contracts. The price reduction clause requires that vendors track and report any discounts, concessions, or changes in terms and conditions that disturb the Basis of Award relationship. In other words, if prices drop to the class of customers that supported the price, the Government's prices should also drop.

2. Contractors continue to provide commercial sales practices disclosures that are not current, accurate, and/or complete to support proposed prices. The IG noted that contractors sometimes like to "pick and choose" the data to support whatever price they want to charge the Government. That's not the way it works for the MAS program. The Government wants to see all of the data to ensure that it is current, accurate, and complete. If contractors desire to exclude any history from its support, there had better be a defensible reason for doing so.

The recommended corrective actions for these deficiencies will entail more oversight of GSA contractors.

There is much more to this IG report. If you want to read further, follow this link.

Multiple Award Schedules - Pricing Expectations

The GSA Multiple Award Schedule (MAS) program provides companies the opportunity to sell their products to Government customers. It has been a very successful program for both the Government and companies seeking to sell goods and services. It streamlines the entire procurement process, saving significant resources from the proposal prep and negotiation phases of contracting. Contractors, for their part, must agree to provide the Government the prices afforded their most favored customers, no exceptions.

The Department of Justice just announced a $70 million settlement after GSA auditors found that a company failed to disclose "most favored" prices during the negotiation of an MAS contract and as a result, the Government paid more than it should have for the products it purchased. Like many settlements, the contractor did not admit to guilt but, bottom line, it had to pay the Government the $70 million.

The $70 million settlement resolved issues discovered during a GSA post-award audit. The audit disclosed that the MAS contractor failed to meet its contractual obligations to provide the GSA with current, complete, and accurate information about its commercial sales practices, including discounts afforded to non-Governmental customers. As a result, Government customers who purchased items under the MAS contract paid higher prices than they should have.

Companies pursuing MAS contracts are expected to disclose all sales information to the Government. Omitting sales information because it is considered outdated or not pertinent, opens the door for the Government to later charge defective pricing. It is better to provide the information to the Government during negotiations and then explain it's non-relevance than to withhold it and risk subsequent allegations.

You can read DoJ's press release on this settlement here.