Out of the Frying Pan, Into the Fire – GSA Proposes to Reduce Price Reductions Clause Burdens, While Substantially Increasing Sales Reporting Burdens

by K&L Gates LLP
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In what is arguably its most significant proposed regulatory change affecting commercial item contracting in decades, the General Services Administration (“GSA”) earlier this week proposed amendments to the General Services Acquisition Regulation (“GSAR”) to eliminate one of the most cumbersome GSA contract administration requirements—the Price Reductions Clause (the “PRC”)—in exchange for a different cumbersome requirement—transactional data reporting. [1] The transactional data reporting requirements would apply to all GSA contractors—both Federal Supply Schedule (“FSS”) holders (at least on a pilot basis) and those holding other GSA Government-wide Acquisition Contracts (“GWACs”) and Government-wide Indefinite-Delivery, Indefinite-Quantity (“IDIQ”) contracts—and would require contractors to provide GSA with line-item transactional data for all direct federal sales made under contracts that include these requirements.

GSA proposes to make the new transactional data reporting requirements immediately applicable to all GSA non-FSS contract vehicles where transactional data is not already collected through other methods (i.e., certain GSA contract vehicles such as the Alliant GWACs, 8(a) Streamlined Technology Acquisition Resources for Services (STARS) II, Veterans Technology Services (VETS) GWACs, Connections II, Custom SATCOM Solutions (CS2), Custom SATCOM Solutions—Small Business (CS2–SB), Office Supply Third Generation (OS3), and One Acquisition Solution for Integrated Services (OASIS) currently contain a contract term requiring some type of transactional data reporting). GSA will make the new requirements applicable to certain types of FSS contracts through a pilot program that will focus on “commercial-off-the-shelf and related commercial products and commoditized services that experience high volume of repetitive purchasing under identical or substantially similar terms and conditions.” [2] For those contractors holding GSA FSS contracts included in GSA’s proposed pilot program, the new transactional data reporting requirements will be mandatory. Those contractors, however, will be relieved of their current burdens under the PRC. Interestingly, GSA has proposed that the transactional data requirement will not apply to VA FSS contracts, at least not initially.

Significantly, GSA recognizes in the proposed rule that the PRC has become less significant and outdated in today’s digital world, in which pricing is more transparent and driven by market forces. In fact, GSA acknowledges in the preamble to the proposed rule that most price reductions presently offered to the government under GSA contracts result from competition in the marketplace and not from the PRC when it states: “prices are reduced under the voluntary provisions of the price reduction clause as a result of market rate pricing changes, not under the mandatory tracking customer provisions.” [3] However, GSA’s proposed alternative to the PRC—the transactional data reporting requirements—does little to alleviate the contract administration burden of GSA contracts and, for most companies, will require significant changes to information technology (“IT”) systems to capture and report the line-item transactional detail that GSA seeks to obtain.

This proposed rule is driven in part by the Office of Management and Budget’s (“OMB”) efforts to simplify federal procurement to improve performance, drive innovation, and increase savings, most recently reflected in the December 4, 2014 memorandum from OMB Administrator Anne E. Rung. [4] In addition, GSA deemed successful a recent GSA pilot program involving the Office Supplies 2 (OS2) contract in which it collected certain transactional data.  GSA intends to use data collected under the transactional data reporting requirements to enhance visibility regarding prices paid by federal end users throughout the government. Armed with this data, GSA theoretically will be able to negotiate more favorable government-wide pricing. This assumes, of course, that the data provided by contractors allows the government to identify and compare items purchased by the government on an apples-to-apples basis. Furthermore, GSA does not suggest how it can use the data collected to compare competing products in the marketplace (as opposed to making comparisons among competing resellers offering identical products). GSA suggests in the proposed rule that it will manage and analyze the data it receives from contractors through its new category management approach, under which certain categories of purchases (e.g., IT, office supplies, hardware store items, etc.) will be “managed by experts with in-depth market expertise who understand buying trends, industry cost drivers, new innovations on the horizon and emerging companies.” [5]

The proposed rule modifies GSAR 552.238–74, Industrial Funding Fee, to add an Alternate I applicable to FSS contract holders, and introduces a new proposed clause, GSAR 552.216-75, Transactional Data Reporting, applicable to non-FSS GSA contract holders. According to the implementing regulations, the applicable clause must be included in all GWACs, multi-agency contracts, and FSS contracts (those selected for the pilot program initially), and may (at the discretion of the contracting officer) be included in all other GSA IDIQ contracts. [6] Proposed GSAR 552.216-75 will allow for standardization of transactional data reporting requirements currently included in various contract provisions in a variety of GSA’s GWACs and IDIQ contracts. For FSS contracts, if GSA determines that its proposed pilot program is effective, it would expand the transactional data reporting requirements to additional FSS contracts.  If GSA finds that the pilot program is not effective, the contracts in the pilot program will revert to their prior pricing model, including use of the PRC. It is important to note, however, that the proposed regulation that relieves contractors from their current PRC monitoring duties during the pilot program (or beyond), also states: “[t]he Government may request from the contractor a price reduction at any time during the contract period.” [7]

Under the proposed transactional data reporting requirements, contractors would be required to report prices paid for all products and services delivered to the government during contract performance, including both direct orders and those placed under blanket purchase agreements. Required data fields include: contract number, order number, item description, manufacturer name, manufacturer part number, unit measure, quantity of item sold, universal product code (if applicable), prices paid per unit, and total price. This data will be reported to GSA “through a user-friendly, online reporting system.” [8] For most contractors, these reporting requirements will require changes—in some cases, significant changes—to existing data systems.

Importantly, although the proposed rule exempts FSS contractors who are required to report transactional data from the requirements of the PRC, it does not exempt them from the requirement that they submit Commercial Sales Practices (“CSP”) disclosures throughout the life of the contract. In fact, the proposed rule would allow GSA to require CSP disclosures at any time during contract performance. This actually may increase contractor data review and reporting burdens, as typically GSA regulations now require CSPs for major modifications to add products or services, or for five-year contract extensions, but not at other times during contract performance. GSA states that it intends to use CSP disclosures “where commercial benchmarks or other available data on commercial pricing is insufficient to establish price reasonableness.” [9] Accordingly, in situations in which GSA is able to make a determination that pricing is fair and reasonable based on commercial benchmarks or other data, such as the data disclosed under the transactional data report requirements, GSA should not need CSP data. However, it maintains a right to request such data from contractors.

The proposed rule includes an estimate of the time required for GSA contractors to comply with the transactional data reporting requirements. First, GSA estimates that, on average, contractors will spend six hours to initially set up IT systems to report transactional data to GSA. This estimate, likely grossly underestimated under all scenarios, has to assume that contractors’ current IT systems already capture all data fields required by GSA. This estimated six hours also includes “training, compliance systems, negotiations, and audit preparation the new clause may require.” [10] Second, GSA estimates that contractors can report required transactional data on a monthly basis in an average of approximately .52 of an hour or 31 minutes.  GSA calculates this average based on a range “between 2 minutes (for contractors with $0 in sales) and 4 hours (for contractors with greater than $50 million in sales).” [11] This estimate also is grossly underestimated. Finally, these estimates do not consider any additional costs that would be incurred by contractors should GSA decide to modify the transactional data required, as it would be entitled to do upon 60 days’ notice under the proposed rule. GSA modifications could require contractors to modify their systems yet again to capture the type of data required by GSA and in the format requested. 

GSA is holding a public meeting on Friday, April 17, 2015 at 9:00 a.m. EDT for those interested in learning more about this proposed rule. Participants can attend in person or virtually through GSA’s Internet meeting platform. Pre-registration is required.  Written comments on the proposed rule are due by May 4, 2015.
We will provide a more detailed analysis of the proposed rule in a future Alert.

Notes:
[1] 80 Fed. Reg. 11619 (March 4, 2015).

[2] Id. at 11624.  GSA will provide additional details regarding the pilot program through an open dialog on GSA’s Interact platform at interact.gsa.gov.  See id. at 11621.

[3] Id. at 11622.

[4] “Transforming the Marketplace:  Simplifying Procurement to Improve Performance, Drive Innovation and Increase Savings,” December 4, 2014.

[5] 80 Fed. Reg. at 11620.

[6] Id. at 11627.

[7] Id. at 11628.

[8] Id. at 11621.

[9] Id.

[10] Id. at 11625.

[11] Id.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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