United States: Federal Supply Schedule Contract Price Reductions: Friend or Foe?

This is the third in a series of four articles on Federal Supply Schedule ("FSS") contracting. FSS contracts provide contractors access to millions of dollars in government commercial spending. However, as previously stated, FSS contracts must be entered into with an understanding of the complex disclosure and tracking requirements. One of the greatest areas of potential liability under an FSS contract is the Price Reduction Clause. This article will discuss compliance with the Price Reduction Clause and provide some suggestions on negotiating an FSS in a manner that is more easily administered.

Pursuant to the Price Reduction Clause, the contractor must, during the life of the contract, provide the government with any price reductions that result from:

• Changes to the price list on which award was based,

• Changes to terms and conditions in the commercial pricing documents on which award was based, or

• Changes to pricing offered to the tracking customer(s).

The contractor must ensure that the government’s price/discount remains in parity with the tracking customer. The tracking customer is also referred to as the customer of comparability or basis of award customer.

As part of contract negotiations, the parties will agree to a customer or category of customers to serve as the tracking customer. Generally, the tracking customer will be officially identified in the cover letter accompanying the executed contract.

The contractor should ensure that the relationship between the government and the tracking customer is clearly defined. For instance, if the tracking customer price is $10 and the government is being offered a price of $10, then the price ratio is 1:1. This can  also be expressed as a percentage. Note that the ratio should not include the industrial funding fee ("IFF"). For instance, the contractor may present the government’s offered pricing in a table identifying the price reduction relationship:

The contractor is required to notify the contracting officer of any changes in the pricing to the tracking customer within 15 calendar days after the effective date of the change. A failure to do so is a violation of the clause. Therefore, the primary consideration in selecting a tracking customer is whether the contractor is able to identify any lower pricing offered to the tracking customer in a timely manner. Every effort should be made to negotiate a single customer as the tracking customer. Although the Price Reduction Clause does permit a "category of customers" to form the basis of award, it provides a singular customer as the primary option. The larger the tracking customer group, the greater the risk that the Price Reduction Clause will be triggered when any of the customers in the category receives a reduction. It will also increase the amount of labor required to track whether reductions have occurred. By negotiating a single tracking customer, the contractor can reserve for itself the flexibility to offer competitive discounts to other commercial customers without triggering discounts to the government. Be aware that the government may seek as large a tracking customer group as possible. Take care to define the tracking customer as narrowly and as clearly as possible during negotiations.

The tracking customer does not have to be the customer receiving the lowest price. It is possible that a customer receiving a lower price can be an appropriate tracking customer.

Some other factors in selecting a tracking customer are:

• Price Stability. Select a customer whose pricing will remain fairly stable and, therefore, reduce price reductions.

• Size. Select a customer that is similar in buying patterns to the government.

• Easily Identifiable. Select a customer whose sales are all easily identified in the system. For instance, if you select a customer with a master agreement used by multiple divisions of the customer, ensure that all sales are properly coded back to the master agreement. If you select a group purchasing organization, address the applicability of sales to individual members.

Contractors employ a spectrum of mechanisms to track the tracking customer. They range from fully systematic processes to manual checks. Systematic processes are preferable. Many such systems lock out any attempts to offer pricing that constitutes a price reduction, and they even notify the FSS contract administrator if it is attempted. On the other end of the spectrum are manual checks where the FSS contract administrator reviews periodic sales data to identify any infractions. Even with a systematic approach, it is advisable to implement a proactive measure, whereby the FSS contract administrator communicates with the sales and marketing people to identify potential price reductions before they are even offered to the tracking customer. There are ways to structure reduced pricing to the tracking customer to either avoid a price reduction, or to increase government sales.

Enforcing any process is easier if the sales personnel, and others that may affect the price to the tracking customer, are aware of the consequences of failing to abide by these procedures. A one-time price reduction on a single item to a single commercial customer can potentially result in significant liability to the company under the Price Reduction Clause. If relevant personnel are trained to understand the requirements and potential liability, compliance can be increased.

The Price Reduction Clause is not triggered by the following events:

• Sales to commercial customers under firm, fixed-price, definite quantity contracts with specified delivery in excess of the maximum order threshold specified in the contract. To satisfy this exception, there must be a firm commitment at the beginning of the contract to purchase a total volume of items or sales in excess of the maximum order threshold. Indefinite quantity contracts are clearly outside the scope of this exception, even if they ultimately result in the customer purchasing a volume of items or sales in excess of the maximum order limitation;

• Sales to other federal agencies; and

• Discounts erroneously given to a tracking customer as a result of billing/quotation errors, as long as adequate documentation substantiates the error. Be sure to immediately identify these errors and explain them to the contracting officer with supporting documentation to avoid being subjected to a price reduction.

If a temporary price reduction is offered to the tracking customer, it must also be offered to the government under the same terms for the same time period. Such offer must be communicated to the contracting officer in writing.

Thoughtful negotiations, adequate processes, and trained personnel are required for compliance with the Price Reduction Clause. Add strategic thinking and proactive measures, and not only will compliance be increased, but administration will also be eased and sales will improve. 

This article is presented for informational purposes only and is not intended to constitute legal advice.