Top Five Failures in GSA Office of Inspector General (OIG) Audits #1, The Price Reductions Clause

At a Glance:

• Main Takeaway: The Price Reductions Clause (PRC) is the cornerstone for pricing compliance on many GSA Multiple Award Schedule (MAS) contracts. Despite this, the PRC is poorly understood and frequently misinterpreted, creating significant risk.
• Business Impact: Violations of the PRC can have far-reaching effects on the bottom line by limiting pricing flexibility on commercial transactions, triggering retroactive decreases to government rates, and exposing the contractor to financial and legal liability.
• Next Steps: If your MAS contract is subject to the PRC, it is critical to understand your Basis of Award (BOA), create a robust framework to preserve the BOA discount relationship and ensure all stakeholders are educated on their role in maintaining compliance.

The Full Story:

The first in a series of articles dedicated to compliance failures identified in GSA OIG audits focuses on the dreaded Price Reductions Clause (GSAR 552.238-81). You know a provision is unpopular when even GSA calls it burdensome. The PRC has been around for decades, but since GSA launched the Transactional Data Reporting (TDR) pilot, it no longer applies to all MAS contracts. Companies not eligible for TDR – primarily professional services providers – are considerably more likely to be selected for audit.

How the Price Reductions Clause Works

A unique element of the PRC is that it ties pricing on a government contract (and orders thereunder) to pricing offered in the commercial market. Contractors disclose their commercial pricing practices in GSA’s Commercial Sales Practices (CSP) format, which is the subject of a later article in this series. GSA uses the CSP to establish a benchmark commercial customer for PRC purposes, known as the Basis of Award (BOA).

GSA negotiates its discount relative to the discount offered to the BOA. The difference between the BOA and GSA discount is known as the discount relationship, which must be maintained for the life of the contract. In simplistic terms, the PRC mandates that when the BOA’s price goes down, the contractor must also reduce the GSA price to reestablish the negotiated discount relationship.

GSA admits that “[n]avigating PRC requirements is complex because it requires companies to track their GSA pricing relative to all of their commercial customers, and monitor and control all of their commercial sale transactions (Federal Register 2016-14728, pg. 96).” Also remember GSA considers sub-to-prime work to be commercial transactions for purposes of the PRC. For an example of how the PRC can be triggered, consider the following:

	Labor Category	List Price	BOA Discount	BOA Price	GSA Discount	GSA Price (w/o IFF)	Discount Relationship
Original BOA	Project Manager	$100.00	5.0%	$95.00	10.00%	$90.00	5.0%
Price Reduction	Project Manager	$100.00	9.0%	$91.00	10.00%	$90.00	2.0%
New GSA Price	Project Manager	$100.00	9.0%	$91.00	14.00%	$86.00	5.0%

This demonstrates the most critical concept contractors get wrong about the PRC. The PRC does not simply mean you must charge commercial customers the GSA price or more. You must maintain the relationship between the BOA and GSA discounts. Here, the BOA customer was charged more than the GSA rate, but the PRC was still triggered because the discount relationship was disturbed. Once a price reduction is triggered, the contractor has 15 days to reduce its GSA rates to reestablish the discount relationship.

Calculating Damages for Price Reductions

Due to the interplay between commercial and government sales, it is possible to trigger a price reduction without incurring any liability. Two things must happen for a price reduction to result in an overcharge. First, the contractor must have billed a commercial rate that disturbs the discount relationship. Secondly, once the reduction is applied, they must also be billing the category on a MAS order at a higher price than the new GSA ceiling rate.

Because contractors often extend additional discounts at the order level, the impact of a price reduction may vary across orders. Here is an example of how a price reduction impacts different orders using the example from the previous section:

Task Order	Labor Category	Order Rate	New GSA Rate	Hourly Impact
Agency #1	Project Manager	$78.00	$86.00	NONE
Agency #2	Project Manager	$90.00	$86.00	($4.00)
Agency #3	Project Manager	$87.50	$86.00	($1.50)

In this example, the contractor would owe Agency #1 nothing but owe Agency #2 a refund of $4.00 for every Project Manager hour charged from the date of the price reduction. This can add up fast.

Price Reductions Impacts Outside of Audits

Most contractors are never selected for OIG audit. That doesn’t mean they shouldn’t worry about the PRC. All MAS contractors are subject to End-of-Term Contractor Assessments once each five-year contract period. During the assessment, GSA samples transactions with BOA customers to ensure you maintain your discount relationship. If they identify concerns, they may direct you to perform an internal review or refer you to the OIG.

Another common point at which PRC skeletons are uncovered is during a merger or acquisition. Companies with significant MAS sales volume may be subject to expanded due diligence because of the potential for PRC liability. Depending on the results of the diligence, the buyer may reduce the purchase price, subject the target to post-close audits, or even walk away from the transaction.

The Bottom Line:

The PRC is one of the most complex GSA regulations. It affects pricing on the MAS contract and the pricing a company can offer its commercial customers (including federal primes). Failure to understand and manage the PRC exposes a contractor to risk, whether subject to an OIG audit or not. Price Reductions Clause (PRC) compliance errors can result in significant penalties. Risk increases as MAS contract sales increase. Aprio’s GSA team has the experience to identify and mitigate PRC issues while helping to ensure ongoing compliance. Contact us today to learn more about our GSA consulting services.

Related Resources:

3 GSA Trends in the Office of Inspector General Audits and Investigations

An Introduction to Multiple Award Schedule (MAS) OIG Audits

The Ten Commandments of GSA Schedule Compliance