- GSA Acts To Expand Price Reduction Duty For “Schedule” Contract Service Providers
- January 9, 2014
- Law Firm: Holland Hart LLP - Denver Office
In mid-December of 2013, the General Services Administration ("GSA") began issuing mass modifications1 (the "Mass Mod") to remove from all MAS contracts a standard clause that MAS contractors have cited as a basis for not passing on commercial price reductions to MAS contract ordering agencies. This Mass Mod followed a GSA Office of Inspector General ("OIG") Report issued on April 26, 2013 (the "OIG Report")2, which identified a MAS contractor practice of not applying certain (purportedly) required price reduction discounts in reliance upon MAS contract clause I-FSS-125. The OIG Report states that this practice has resulted in MAS contract ordering agencies missing out on over $100 million in discounts from just the small sample of MAS contracts (29) that OIG reviewed. As detailed below, the Mass Mod is intended to address price reductions by MAS contract service providers and does not appear to change existing price reduction rules for MAS contract product providers.
Understanding the Mass Modification
To properly understand the scope of the change effected by the Mass Mod, it is necessary to understand the following MAS contract clauses and concepts:
• Maximum Order ("MO"). A MO amount is assigned to each Special Item Number ("SIN") contained in a MAS contract award. The Solicitation-specified SIN MO is often $500,000, but can be higher or lower depending upon the SIN.3
• Price Reductions Clause ("PRC"). At the time of award, GSA and the MAS contractor agree to a basis of award ("BOA") customer(s) or customer type upon which GSA's pricing relationship is based. The BOA is generally comprised of commercial customers, but can also be non-commercial customer(s) (e.g., State & Local or Federal Systems Integrators). If the MAS contractor increases discount percentages or decreases prices to the BOA customer(s), the PRC is "triggered" in most circumstances and GSA is then entitled to proportionately lower prices. The PRC exempts from its coverage sales to:
commercial customers under firm, fixed-price definite quantity contracts with specified delivery in excess of the maximum order...
• I-FSS-125. GSA incorporated this clause into MAS contracts beginning in 1995, to provide guidance to ordering agencies and contractors with respect to the placement of orders above the MO. GSA cancelled I-FSS-125 in December 2004 but, according to the OIG Report, GSA has continued to include the clause in MAS Solicitation refreshes and contract extensions. I-FSS-125 provides, in relevant part:
the Price Reduction clause is not applicable to orders placed over the maximum order..
So, while the exemption specified in the PRC extends only to firm, fixed-price definite quantity contracts with specified delivery in excess of the MO, some of the MAS contractors reviewed in connection with the OIG Report asserted that the "plain text" of I-FSS-125 exempts all orders in excess of the MO. The GSA and GSA OIG- citing to the regulatory history underlying I-FSS-125 - assert that the "plain text" interpretation of I-FSS-125 is incorrect and that I-FSS-125 does not expand upon the exemption for orders in excess of the MO as specified in the PRC.
The OIG Report's Recommendations and GSA's Response
The OIG Report expressly declines to identify how many MAS contractors have been relying on I-FSS-125 to avoid passing on price reductions. As noted, the OIG Report identifies over $100 million in missed price reductions from just a small MAS contract sample (29), which suggests that the elimination of this practice may be significant, at least for some contractors (even accounting for the fact that the GSA OIG's damages estimates are often based upon extrapolations from small data sets with which the contractor disagrees).
The OIG Report recommended that GSA take steps to remove I-FSS-125 from all MAS contracts. GSA agreed and, on September 16, 2013, GSA issued FAS Instructional Letter 2013 detailing its plan to implement the recommendations of the OIG Report by issuing a Mass Mod deleting I-FSS-125 (as it began doing in mid-December 2013).4 While recognizing the PRC's specified exemption for firm, fixed-price definite quantity contracts with specified delivery in excess of the MO, this Instructional Letter confirms GSA's interpretation that this PRC exemption does not extend to:
non-firm fixed price, definite quantity contracts, such as Time & Material (T&M) and Labor Hour (LH) type contracts.
Impact to MAS Contractors
The Mass Mod should not impact MAS contractors selling products at fixed-prices - the existing PRC exemption for sales in excess of the MO is not changed. However, MAS contractors that sell their MAS contract services commercially (or to non-commercial BOA customers) should carefully assess the possible impact of the Mass Mod in their specific circumstances. They should review existing procedures for identifying and passing on price reductions triggered by commercial T&M and LH contracts to ensure that such procedures are no longer predicated on the "plain text" interpretation of I-FSS-125 described above. In addition, commercial sector services are often purchased on a fixed-price basis with a specified project delivery date. A commercial services order with a fixed delivery date and a fixed price in excess of the MO reasonably qualifies for the PRC's specified exemption identified above. However, in light of the OIG Report and the Mass Mod, it would be prudent for MAS services contractors relying upon such an interpretation to avoid passing on price reductions to now disclose such interpretation to their GSA Contracting Officer and, if possible, have this disclosure incorporated into a modification to their MAS contract.
1GSA periodically issues Mass Modifications to all contract holders under a particular MAS Solicitation(s) to implement changes to the applicable clauses, terms and conditions in a standardized manner.
3Historically, the Federal Acquisition Regulation ("FAR") required the ordering agency to seek additional discounts for MAS contract orders in excess of the MO. Effective May 16, 2011, the FAR was revised to require the ordering agency to seek additional price reductions for MAS contract orders above the Simplified Acquisition Threshold (currently $150,000) rather than the MO.