What is stepped pricing?

In this column, I'd like to address the following points: What is stepped pricing? How new is it? How does it work?

Recently, the concept of "tier pricing" methodologies in government contracts has been discussed in Federal Computer Week. Such methods have been around for a long time. Indeed, a significant and interesting body of case law has developed around these techniques.

These sorts of pricing methodologies go by various names. Most commonly, they are called "stepladder," "stepped" or "step" pricing. Less frequently, these methods may be called "tier" or "incremental" pricing. Fundamentally, all these terms refer to the same thing: specifically, allowing an offeror to propose different unit prices for various quantities of an item. By using these techniques, the government reserves its ability to order small quantities while trying to secure more favorable prices for larger quantities in the event that it elects to buy more.

The Armed Services Board of Contract Appeals described such pricing methods as "standard," noting that they have been in use for many years. (See Ver-Val Enterprises Inc., ASBCA No. 43766, 95-1 BCA : 27,334.) In fact, these pricing methods have been around for at least 35 years. (See Comptroller General No. B-152831, Jan. 8, 1964.)

Many times, an agency will structure a solicitation specifically to invite stepped pricing. Of course, even when a separate contract line-item number (CLIN) or subline-item number (SLIN) is provided for different quantities of an item, an offeror generally may propose the same unit price for each quantity if it so chooses.

Indeed, while the government clearly hopes that lower prices will be proposed for the larger quantities, it is not uncommon to see higher prices for at least some of the larger quantities.

Unless the solicitation explicitly forbids higher prices for the larger quantities, or unless proposing in that way creates a materially unbalanced proposal, nothing prohibits it.

More interesting is the issue of whether an offeror may propose stepped pricing in response to a solicitation that does not specifically invite it. In a number of cases, the General Accounting Office has found that an offer of stepped pricing in response to a solicitation that did not specifically invite such pricing was not improper. (See, for example, Knoxville Glove Co., B-251598, April 21, 1993, 93-1 CPD : 339, in which it was ruled, "The stepladder pricing was not solicited or prohibited by the RFP." See also Champion-Alliance Inc., B-249504, Dec. 1, 1992, 92-2 CPD : 386, in which it was ruled that the solicitation "does not prohibit the use of stepped pricing or expressly require a single price for the lease.")

However, this is not always the result. In Tri-State Government Services Inc. (B-277315.2, Oct. 15, 1997, 97-2 CPD : 143), GAO overruled an agency's decision to accept a proposal in which the offeror split its proposed price for each line item with different prices for incremental quantities. According to GAO, "Although the RFP contained no separate, specific instructions stating that only single unit prices could be submitted for each CLIN, it is clear from the structure of the price schedule, which provides a single space for a unit price next to the estimated quantity, that a single price is called for."

In Sperry Univac (B-202813, March 22, 1982, 82-1 CPD : 264), GAO allowed Sperry's unsolicited offer of stepped pricing for computer terminals. However, GAO found that Sperry had violated the solicitation's requirements for firm, fixed prices for maintenance by offering a similar stepped approach for maintenance services.

Even when a solicitation clearly contemplates stepped pricing, ambiguities in the application of the pricing rules are common. The most frequent issue is whether to price an order for a large quantity using the prices proposed for each incremental quantity up to the maximum ordered or instead to use the single unit price applicable to the highest quantity for all units ordered. In Engineered Air Systems Inc. (B-232237, Nov. 9, 1988, 88-2 CPD : 463), GAO found both alternatives to be plausible interpretations of the same solicitation.

In International Transducer Corp. v. United States [30 Fed.Cl. 522 (1994)], the solicitation expressly requested stepped pricing and included a separate SLIN for various quantities of each CLIN. After the contract award, the agency ordered an even smaller quantity than that provided by any of the SLINs. In doing so, the government relied on a contract clause providing that it could "require the contractor to furnish all or part of" each CLIN. The contractor acknowledged that the clause allowed the agency to buy less than the maximum for each CLIN, but the contractor argued that the agency could do so only by ordering one of the lower-quantity SLINs. The Court of Federal Claims sided with the government. There are numerous other cases interpreting these sorts of solicitations.

Apparently, "everything old is new again." However, it is worth remembering that an idea does not have to be new to be valuable. Special pricing techniques such as those discussed here can be of great benefit to the government and to its contractors.

Those who want to secure such benefits are most likely to do so by familiarizing themselves with the large volume of precedents in this area.

--Peckinpaugh is a member of the government contracts section of the law firm Winston & Strawn, Washington, D.C.