Tips for Price Reductions Clause Compliance

You may not love them as a federal contract holder, but regulations are an important part of federal government contracting. If you are not familiar with the Price Reductions Clause, now is the time to get educated if you want to avoid potentially costly consequences down the line. GSA Schedule holders can be divided into two categories, those who fall under Transactional Data Reporting (TDR) and those who are required to submit Commercial Sales Practice (CSP) information. If you need help figuring out which category you fall under, determine whether you report your GSA sales monthly or quarterly.

If you report monthly, you are under Transactional Data Reporting, and the Price Reductions Clause does not apply. If you report GSA sales quarterly, the Price Reductions Clause does apply and can cost your company significantly if you do not comply with it.

The Price Reductions Clause

I would first like to provide you an overview of the Price Reductions Clause. Specifically, the Price Reductions Clause is clause 552.238-81 of the General Services Acquisition Manual (GSAM). Per this clause, non-TDR Schedule holders disclose a Basis of Award (BOA) customer, or class of customers, as part of their offer for a GSA Schedule. This is part of Commercial Sales Practice disclosure requirements.

This BOA customer is generally the commercial customer that receives the greatest discount for the offerings on their GSA Schedule, known as the Most Favored Customer (MFC), since GSA expects to receive a contractor’s best pricing under most circumstances. However, there are some exceptions where the MFC is not the BOA Customer. Regardless, before a Schedule can be awarded, non-TDR contractors and their Contracting Officers are required to agree on a BOA customer, upon whom the contractor’s GSA discounting relationship is based.

The Price Reductions Clause states that any disturbance to the discount relationship between BOA and GSA results in a “Price Reduction,” and the contractor is required to take steps to address this price reduction.

As an example, say you offer your BOA customer a 10% discount and GSA a 15% discount. This means that there is a 5% difference between BOA and GSA pricing. If this relationship is disturbed, that would, under most circumstances, trigger the Price Reductions Clause. An example of this would be if you started giving the BOA customer a 12%, rather than 10% discount. GSA requires an equivalent price reduction to GSA as the BOA, meaning you would be required to increase the discount to GSA by 2%, just as you increased the discount to the BOA by 2%. This means the GSA discount would need to go from 15% to 17% in order to maintain the 5% discount relationship.

If you do not submit a modification to do so, and a GSA customer makes a purchase at the old 15% discount, GSA will consider that to be an overcharge and could assess penalties for that. I will get a little more into the weeds on what specifically triggers the Price Reductions Clause in a moment, but first I wanted to note that the Price Reductions Clause also states that contractors may voluntarily offer a price reduction to government customers. Basically, this just means that you can submit a modification to lower GSA pricing at any point you decide, not just when it is required. Usually this would be to make your pricing more competitive if it is higher than other Schedule holders for the same or similar offerings.

Price Reductions Clause Triggers

The Price Reductions Clause is specifically triggered under the following circumstances:

1. Updating your commercial catalog, pricelist, or other such document in a way that reduces BOA pricing.
2. Providing more favorable discounts or terms and conditions than those contained in the commercial catalog, pricelist, or other documents that you offer to your BOA.
3. Granting special discounts to the BOA that were not previously disclosed.

Any action that falls under the categories listed above violates the Price Reductions Clause and requires contractors to inform their Contracting Officer as soon as possible. Any price reduction must be offered to GSA with the same effective date, and for the same time period in the case of temporary price reductions, as to the commercial customer.

However, there are some exceptions that will not trigger the Price Reductions Clause. The clause specifically exempts sales, which would otherwise classify as price reductions, that are:

1. To commercial customers under firm, fixed-price definite quantity contracts with specified delivery and over the maximum order threshold for the relevant Special Item Number (SIN).
2. To federal agencies.
3. To Eligible Ordering Activities identified in GSAR Clause 552.238-113 when the order is placed under the Schedule.
4. Reflective of an error in quotation or billing.

How to Stay on Top of Price Reductions

As you can imagine, compliance with the Price Reductions Clause can prove quite a headache, especially for contractors who don’t teach relevant employees about it and its potential consequences. As such, I would like to provide some tips for ensuring you can keep up compliance, identify any price reductions, and take the necessary actions to report and address any price reductions that do occur.

1. Educate all relevant employees, e.g. sales, accounting, and contracts personnel about the Price Reductions Clause. You never want to trigger the Price Reductions Clause by accident because you did not have policies and procedures in place that define the discounts that employees can offer to commercial customers.
2. Provide any employee involved in quoting or pricing the latest BOA pricing information whenever it is updated, including after modifications.
3. If a potential price reduction is under consideration for a commercial customer, ensure that it either does not affect BOA pricing or that providing the same price reduction to GSA customers is feasible.
4. Always remain proactive when dealing with price reductions. When a price reduction occurs, contractors are required to inform the Contracting Officer as soon as possible, but no later than 15 days after the price reduction goes into effect.
5. Submit modifications to update your Commercial Sales Practices (CSP-1) document to reflect current BOA pricing information, if necessary. If the change to BOA pricing negatively impacts the discount relationship with GSA pricing, you will need to submit revised pricing to offer GSA the same price reduction. Instructions for submitting such modifications can be found in the MAS Modification Guide.
6. Regularly review your sales data to ensure that you are not missing any price reductions. If you do not do this, it can cause problems for your company during an Annual or End of Term Assessment, during which time your Industrial Operations Analyst is trained to identify price reductions. If price reductions are discovered by GSA, and the proper procedure to offer the Price Reduction to GSA wasn’t followed, you can be assessed penalties, including refunding the government for the price reduction from the date the price reduction occurred.

Need Help with GSA Schedule Compliance?

As you can tell from the above, the Price Reductions Clause is definitely a hassle, but if your team remains informed, you can avoid unforeseen consequences and stay in GSA’s good graces. After reviewing this information, if you have any questions about Price Reductions Clause compliance, identifying price reductions, or reporting them to GSA, please feel free to reach out to Winvale. Our team of seasoned GSA contracting experts will be able to walk you through the process of how to deal with price reductions.