No More FSS Tracking Customer Compliance, What’s the Catch?

March 12, 2015

GSA issues a proposed rule aiming to lower pricing under GSA contracts and impose new data reporting obligations on contractors.

On March 4, the U.S. General Services Administration (GSA) issued a proposed rule that amends the General Services Administration Acquisition Regulation with the stated intent of simultaneously reducing contractor compliance obligations and driving down prices paid by government agencies for items on GSA schedules (80 FR 11619). This proposed rule is extremely controversial and has already come under fierce attack by industry groups because it seeks to drive down prices using data relating to prices previously paid by other government buyers and would impose burdensome new data-gathering and reporting requirements on contractors to support this goal.

The proposed rule will likely increase contractor compliance risk, increase (not decrease) the costs of contractor compliance, and erode fundamental tenets that underlie government procurements—that full and open competition, not price controls, produce fair and reasonable prices to the government as it does in commercial markets, and that, in the GSA Schedule program, fair and reasonable prices in the first instance are derived from prices paid in commercial, not government, markets. That said, the facial appeal of the proposed rule to contractors is the fact that the entire substance of the current Price Reductions Clause would no longer be mandatory in all GSA Schedule contracts. Written comments on the proposed rule are due by May 4, and GSA will conduct a public meeting regarding the proposed rule on April 17 at 9:00 a.m. eastern time.

Scope of Rule

Although this analysis focuses primarily on Federal Supply Schedule (FSS) contractors, the proposed ruled would cover GSA-awarded governmentwide acquisition contracts, multiagency contracts, and all GSA-awarded indefinite delivery/indefinite quantity contracts, including GSA-awarded FSS contracts. Significantly, the proposed rulemaking does not cover FSS contracts awarded by the Department of Veterans Affairs (VA), and, according to GSA, the VA is strongly opposed to provisions in the rule that eliminate mandatory price reduction requirements of the Price Reductions Clause.

Price Reductions Clause and CSP Issues

FSS contracts impose unique price-related reporting obligations in the form of a preaward requirement to submit Commercial Sales Practice (CSP) data and the postaward requirements of the Price Reductions Clause (48 C.F.R. 552.238-75). The Price Reductions Clause, which is mandatory in FSS contracts, requires that contractors monitor certain aspects of their commercial pricing for the life of the contract, beginning with the conclusion of negotiations, and offer mandatory price reductions to the government when the specified commercial prices fall. Developed at a time when the government based its negotiations on the price charged to a comparable customer instead of market pricing, the clause was originally intended to ensure that the government retains the benefit of its bargain and pays fair and reasonable prices through the life of the contract. Charging the government prices in excess of those required by the clause can give rise to False Claims Act liability, and contractors spend significant amounts of money developing and administering automated systems to detect and report changes in applicable commercial prices and offer requisite price reductions to the government. The clause specifically states that prices to individual federal agencies under government contracts do not trigger Price Reductions Clause reductions in FSS price, in large part because of the chilling effect such a provision would have on the offering of lower “spot prices” to individual agencies to meet competition or lower prices for volume purchases.

The Price Reductions Clause, as currently drafted, requires that, before award, the contracting officer and contractor agree to a single commercial customer or category of customers that will be monitored during the life of the contract. A contractor must offer a price reduction on its FSS contract if the contractor does any of the following:

  • Revises the commercial catalog, price list, schedule, or other document upon which the contract award was predicated to reduce prices
  • Grants more favorable discounts or terms and conditions than those contained in the commercial catalog, price list, schedule, or other documents upon which the contract award was predicated
  • Grants special discounts to the customer (or category of customers) that formed the basis of the 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

Compliance with these provisions has been challenging because they are difficult to understand and apply in practice and have had a chilling effect on prices that could trigger a price reduction, including subcontract prices offered to government prime contractors. Under the proposed rule, for contractors that agree to report federal sale transactional data, virtually the entire clause would be omitted and replaced with two simple propositions: (a) the government may request from the contractor a price reduction at any time during the contract period and (b) the contractor may offer the contracting officer a voluntary governmentwide price reduction at any time during the contract period (80 FR 11628).

The FSS contract solicitation also currently requires that contractors submit current, accurate, and complete CSP data prior to the conclusion of contract negotiations to permit the contracting office a basis on which to negotiate fair and reasonable prices. This provision essentially requires that a contractor compute net price at the product/transaction level and identify terms and conditions for every sale to every commercial customer whose price is lower than the FSS price that the contractor is offering the government. Contractors may spend months preparing compliant disclosures. For many contractors, preparing CSPs consumes more time and presents greater risk than complying with the Price Reductions Clause, which focuses, postaward, on a single customer or category of customers. Failure to disclose current, accurate, and complete CSP data can give rise to defective pricing and False Claims Act liability. However, under current FSS contracts, contracting officers have no authority to require submission of CSP data after award of the contract or the award of modifications that add products or services to the contract.

According to GSA, its intent under the proposed rule is that “GSA would maintain the right throughout the life of the FSS contract to ask a vendor for updates to the disclosures on its commercial sales format . . . where commercial benchmarks or other available data on commercial pricing is insufficient to establish price reasonableness.” GSA’s preamble to the proposed rule does not identify any authority under which a contracting officer currently can compel submission of CSPs after an award, and the proposed regulation proposes no such authority.

However, the looming specter of GSA eliminating the Price Reductions Clause in its current form and replacing it with a contracting officer’s right to require repeated and unlimited postaward CSP disclosures is one that should give every FSS contractor pause; contractors  may want to ensure that this issue is clearly addressed and that the additional reporting obligation is eliminated or severely restricted. Further, if the proposed rule were adopted, and agencies ceased to receive automatic price reductions, it is unclear whether the contracting officer could leverage a request for a price reduction except by threatening to cancel an item or the entire FSS contract.

Transactional Data Reporting Issues

At the heart of the proposed rule is an effort to “increase government saving” by ensuring that government buyers have the prices previously paid by other government buyers for a similar product or service under similar terms and conditions to use in determining fair and reasonable prices. Although the government already possesses all transaction data relative to its purchases, the proposed rule would impose on contractors the requirement to collect and report these data directly to GSA. Specifically, the rule would require monthly reporting of the following data elements within 15 calendar days from the end of the month:

  • Contract or Blanket Purchase Agreement (BPA) number
  • Order number/Procurement Instrument Identifier
  • Nonfederal entity, if applicable
  • Description of deliverable
  • Manufacturer name
  • Manufacturer part number
  • Unit measure (each, hour, case, lot)
  • Quantity of item sold
  • Universal Product Code, if applicable
  • Price paid per unit
  • Total price

These data contain no information regarding the commercial circumstances that underlie any individual transaction or group of transactions between the contractor and the government. Such information would be much more difficult to provide than the 11 data elements required under the current proposed rule.

The rule would be introduced through a pilot program “chosen from FSS product offerings and commoditized services where obtaining such data has the greatest potential impact to reduce price variability and help agencies secure better value for the taxpayer through category management.” GSA indicates that details regarding the pilot will be provided by separate notice. Contractor participation in the pilot program will be mandatory. As expressly stated by GSA, “[u]nder the pilot, FSS customers would take advantage of prices paid information and the more rigorous order level competition it generates to establish pricing.” However, the data requested is not likely to be useable to determine a fair and reasonable FSS price because it does not indicate the reason for a transaction price, which is not necessarily tied to order quantity and could be the result of a temporary price reduction, a competed BPA, specific terms, different configurations of a single base product offered on the contract, the bundle of products or services being procured through a specific order, or market conditions, including competition existing at the time of the order.

Negotiated FSS catalog prices applicable to the purchase of a single unit of a product or service, which establish the ceiling price agencies can be charged for a period of time, should not be predicated on the lowest price paid in an individual order placed by a single agency under terms that, in commercial markets, would rationally result in very different (and potentially lower) prices. Moreover, GSA acknowledges that the FSS ordering entities already receive prices below the FSS price as the result of market forces, including intense competition and contractors’ desire to maintain market share. Dismissing the intended and appropriate effects of competition and seeking to drive all government prices to the lowest government price is simply an attempt at price controls that are inappropriate for a schedule program expressly established to emulate commercial markets.

A key purpose of the FSS Schedules program is to encourage commercial item contractors’ participation by reducing barriers to contracting imposed in government contracts for noncommercial items. Here, at the ordering-entity level, contracting officers with no better place to start will essentially be forced to ask for the lowest government price and then for the next lowest government price, requiring contractors on an order-by-order basis to explain and differentiate different price points just as they currently are compelled to do only once every five years in the lengthy process of negotiating fair and reasonable prices in the award of the underlying FSS contract. Similarly, at the level of the GSA contracting officers who will be able to “request from the contractor a price reduction at any time,” the proposed rule raises the prospect of contracting officers continually seeking to reengage in the preaward process and continually invoking the destabilizing threat of contract cancellation to coerce a lower price. Such a process would be protracted, subject to frequent repetition and an inefficient use of contracting personnel for both the government and contractors.

Finally, the transactional data reporting requirements in the proposed rule impose significant administrative and compliance burdens on contractors. GSA estimates that the public reporting burden for contractors to set up transactional data reporting systems will average a one-time initial setup burden of six hours, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information, as well as for training, compliance systems, negotiations, and audit preparation required by the transaction data reporting clause. Thereafter, GSA estimates the monthly burden estimate to report data is approximately .52 of an hour, or 31 minutes. However, GSA’s estimates include huge numbers of FSS contractors that have no sales, i.e., that do not use their schedule contracts (37% of FSS contracts, not including a separate GSA category of contracts with virtually no sales beginning at $1.00).

The estimates also appear to underestimate the time necessary to develop and test new information systems data because many companies currently lack the systems necessary to access the requisite data. Accordingly, the proposed rule would have a financial impact not recognized by the drafters. Rather than helping small businesses, the proposed rule may be burdensome for many small businesses, given the costs of establishing information systems relative to their volume of sales. In addition, the data reports will presumably require certification, thereby exposing contractors to additional potential liability for not reporting accurate data.

The data reporting requirement and additional CSP submissions are not consistent with commercial practices and the intent of the Federal Acquisition Streamlining Act of 1994 (FASA) to facilitate the acquisition of commercial items. Where contracts for commercial items are subject to FAR Part 12, FASA precludes “the inclusion of any additional terms or conditions in a solicitation or contract for commercial items in a manner that is inconsistent with customary commercial practice for the item being acquired unless a waiver is approved in accordance with agency procedures” (48 CFR 12.302(c)). As the Federal Circuit recently determined, this preclusion applies to commercial item acquisitions under the FSS program, CGI Federal, Inc. v. United States, No. 2014-5143 (Fed. Cir. slip op. Mar. 10, 2015). Should GSA pursue a waiver, it must rationally explain why these burdensome requirements are reasonable and necessary to achieve permissible objectives.

This article was originally published by Bingham McCutchen LLP.