A controversial clause

Few provisions of the General Services Administration's multiple-award schedule contracts create as much confusion — and heartburn — as the price reductions clause.

The clause is designed to help officials at GSA, which administers the $27 billion schedule contract program, ensure that the government receives uniquely favorable pricing from its vendors. It imposes significant operational constraints and administrative burdens on companies, many of which are not accustomed to operating within the multiple-award schedule contracts arena.

The source of these constraints and burdens stems primarily from the fact that the clause is not a commercial one. Purely commercial contractors can sell their supplies and services at whatever price the market will bear. Schedule contracts vendors, however, have to abide by a different set of rules.

The rules require that schedule contractors establish and maintain a firm relationship between discounts they offer agencies and those they often, but not necessarily, offer to their most favored clients — referred to as the "basis of award" category. Except where an exception applies, a change in this relationship typically requires that a proportional price reduction be passed on to agencies.

Because the price reductions clause can be so broad — and its potential sting so painful — it is essential that contractors negotiate the terms of their contracts with their eyes wide open. The selection of the basis of award and the identification of the relationship between the basis and GSA will have a significant impact on companies' commercial sales flexibility during contract performance. Therefore, contractors typically will try to negotiate as narrow a basis of award as possible before contracts are awarded.

Because it is a negotiation, contractors may not be able to achieve this goal. But the possibility of failure should not stop the attempt.

Once the schedule contract is awarded, vendors can take additional steps to co-exist with the price reductions clause. For example, they can and should create a compliance infrastructure through which potential commercial discounts are easily identified and, consequently, assessed to determine whether they could trigger the clause.

Most contractors will want to go a step further and develop a thorough understanding of the clause — and especially its exceptions — so that they are ready to respond promptly to commercial opportunities in a manner that will not trigger the clause.

In the end, the clause's effect on a particular company is, in large measure, up to that company. But even the best negotiation and administration skills will not change the fact that, at some level, the award of a schedule contract still brings with it the loss of some sales flexibility. Contractors unwilling to accept this reality would be well advised to pass on the schedule contracts program entirely. n

Aronie is a partner in the government contracts group of Sheppard, Mullin, Richter & Hampton in Washington, D.C. He can be reached at jaronie@sheppard mullin.com.