Contractors receive about $50 billion a year through GSA multiple award schedule contracts. With that level of spending, it is easy to see why GSA has adopted policies and procedures that allow it to secure the best possible pricing for each one of its schedule contracts.

Initially, GSA uses discounts, terms, and conditions that contractors offer to other customers to negotiate “most favored customer” pricing.

But negotiated prices stated in a schedule contract are not necessarily fixed for the entire term of the contract. The contractor remains subject to the Price Reductions Clause (GSAR 552.238-81; formerly GSAR 552.238-75), which imposes a duty to report certain changes in its commercial pricing terms. Under some circumstances, the PRC allows a downward adjustment in the contractor’s fixed prices.

Two triggers for adjustments under the PRC

Two types of events will trigger the Price Reduction Clause. The first is relatively straightforward: GSA and the contractor base the federal supply schedule pricing on a commercial price list, catalog, schedule, or similar document. The contractor later reduces the list price or otherwise revises the price list or offers more favorable pricing, discounts, or terms to another customer.  When that occurs, the contractor must offer the same reduced price, discount, or better terms to the government.

The second situation is a bit trickier. The PRC is triggered when the contractor makes a pricing change that disturbs the relationship between the government’s pricing and the pricing offered to the customer or customers whose pricing terms are established as the “basis of award.”

Here is an example to demonstrate how this works.  At the time of award, a contractor sells widgets in its commercial catalog for $100/unit. During that same period, the contractor sells widgets to ABC Co. for a discounted price of $80/unit. In negotiating its GSA contract, the contractor offers widgets to the government at $70/unit. GSA agrees and selects ABC Co. as the BOA customer. In this example, the relevant discount ratio is 0.875 ($70 GSA price divided by $80 BOA customer price).

Once the price/discount relationship is established, it is the contractor’s responsibility to maintain it. The relationship is disturbed when the contractor offers the BOA customer a reduced price, typically a special discount. One isolated discount offered to the BOA customer will trigger an adjustment under the PRC. If the contractor offered widgets to ABC Co. at a one-time discounted price of $60, GSA’s price would be reduced to $52.50 ($60 customer price multiplied by 0.875 discount ratio).

Exceptions to the PRC

There are exceptions to the application of the price reduction clause. No price reduction is required for the following types of sales:

  1. Sales to commercial customers under firm, fixed-price definite quantity contracts with specified delivery in excess of the maximum order threshold;
  2. Sales to other federal agencies;
  3. Sales to state or local government entities purchasing under the schedule contract and the entity is the agreed upon BOA customer;
  4. Sales that are the result of an error in quotation or billing.

Implementing a price reduction

If the PRC is triggered, the contractor has 15 days to notify the GSA of the discounted pricing. The GSA would then modify the schedule contract to reflect any appropriate price reduction, which would be applied retroactively to the date that the reduced pricing was offered to the BOA customer. The contractor is required to refund any overcharges to the government.

Identifying and reporting a relevant price change and the time lag that follows in accordance with the PRC can be a potential trap for schedule contractors. Although in a commercial context, failing to report a discount or delaying such a report would be a violation of the contract, the risks of noncompliance in the performance of a government contract are much higher. Knowing violations could lead to suspension or debarment and to claims for penalties or treble damages available under the False Claims Act.