Procurement panel slams price reduction clause for services

The General Services Administration needs to stop using the Price Reduction Clause on the services and solutions the government buys through the Schedules program, according to a group of procurement experts.

The Multiple Award Schedule Advisory Panel has been working for two years on improving procurement at GSA. The pricing recommendation is one of 20 the panel today offered to GSA Administrator Martha Johnson. The pricing clause is a mechanism GSA uses to ensure the government is getting at least as good a price as a contractor’s private-sector clients.

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However, “the value of the Price Reduction Clause as an appropriate tool for the MAS program is questionable,” the panel's report states. During discussions panelists disagreed on that finding, but ended up agreeing that the clause didn’t work when agencies purchased services.  The experts said services vary considerably, unlike commodities and products. In recent years, agencies have shifted dramatically to buying services instead of products. The government buys $38 billion worth of products and services through the Schedules program.

The panel found that "at the Schedule contract level, it is more difficult to determine fair and reasonable prices for services than for products [and] meaningful competition occurs at the order level."

The panel recommends that the GSA administrator eliminate the Price Reduction Clause from MAS program services contracts and adopt an “803-like” approach for holding competitions among companies for agencies’ orders.

The 803 approach is based on Section 803 of the fiscal 2002 National Defense Authorization Act. When the Defense Department gathers bids on all task and delivery orders worth more than $100,000, the law requires DOD to both solicit all contractors with MAS contracts that sell such services or products and get bids from at least three of the qualified contractors. Otherwise the contracting officer has to explain why the order didn’t meet the two standards. This requirement currently applies only to DOD’s use of the MAS program, and not to civilian agencies.

The panel found that Section 803 brought about an average of five quotes per order, according to the report.

The panel also recommends that GSA no longer apply the Price Reduction Clause to solutions. Solutions are a combination of products and services purchased in one order.

“By their nature, they cannot be priced at the MAS contract level,” the panel wrote in the report.

Regarding pricing, the panel recommends that:

The administrator clarify for GSA contracting officials the policy and methodology for obtaining a “fair and reasonable price” for Schedule contracts.

GSA explain to authorized agencies ordering off Schedule contracts how GSA determined the fair and reasonable price. With the explanation, the contracting officer placing the order can independently judge how aggressively to seek a reduced price under the Schedule contract, according to report.

GSA develop a system to collect information from individual agencies’ orders. GSA could then use the information in negotiations for Schedule contracts.

GSA instruct its contracting officers to use both the basis of award customer while also comparing prices in the marketplace as they determine whether a price is reasonable. The basis of award customer is a category of companies that offer the same product or service to the private sector. GSA and the contractor negotiate their prices based on those companies’ prices.

In all, the panel recommends that GSA phase out the Price Reduction Clause as it establishes the process for gathering data on competitions and prices on a company's initial Schedule contract and various individual orders, the panel wrote.

Elliott Branch, the panel’s chairman and executive director of contracts for Naval Sea Systems Command, said the panel offers a thorough and thoughtful report for the GSA administrator.

“Leadership across the federal acquisition community is working hard to change the way we do business to reflect today’s fiscal realities and the values of accountability and transparency that the administration and the Congress expects of us,” Branch said. “I’m sure the administrator will consider our findings as she, in conjunction with her leadership team, determines GSA’s future direction.”

Lurita Doan, GSA’s administrator during part of the George W. Bush administration, chartered the panel in March 2008 to find ways to improve the Schedule program’s pricing and overall policies.