Why Transactional Data Reporting Will Likely Cost Most GSA Schedule Holders More than the Price Reduction Clause
October 5, 2016
On June 23, 2016, the General Services Administration (GSA) released the final rule launching its highly anticipated – and controversial – Transactional Data Reporting (TDR) pilot program. The TDR pilot, coupled with the new Formatted Pricing Tool (FPT), aims to radically alter the way prices on GSA Schedule contracts are negotiated. Rather than rely on contractors’ disclosures regarding their commercial pricing practices, GSA will eliminate the Commercial Sales Practices (CSP) disclosuresaltogether. Further, contractors will no longer have to monitor a basis of award discount relationship for the purposes of price reductions.
You may wonder how GSA will negotiate and maintain fair and reasonable pricing on the schedules in the absence of commercial pricing data. This is where things get interesting…under TDR, contractors are required to report itemized prices paid information from their schedule orders to GSA monthly. In the beginning of the pilot, GSA will consolidate and analyze this transactional data. Once they have collected sufficient raw data, this information will be used to establish an acceptable range for pricing on the schedules. It will also be made available to federal category managers and ordering activities across the government.
According to GSA, the acceptable range will be based on a sliding scale in which the allowable variance between the lowest and highest price decreases as the unit price increases. The table below, taken from a GSA FAQ, illustrates this approach. For products priced at $5,000 or above, the variance is capped at only +10%. The FPT, which is built into the eOffer and eMod systems, will automatically flag proposed pricing that falls outside of this range. GSA has also indicated that it will monitor awarded pricing against the acceptable range on a quarterly basis.
Ultimately, I believe that this new pricing methodology will end up costing most schedule holders more than the Price Reduction Clause (PRC) did. Let me start, however, by recognizing that the elimination of the CSP and basis of award discount relationship is no small thing. In its final rule, GSA estimated the annual contractor burden associated with PRC compliance at $44M. I don’t doubt that industry experts would put that number much higher, especially if you included audit findings and settlements related to CSP and PRC compliance failures.
The trouble with GSA’s estimate is that it assumes most schedule contractors maintain an adequate compliance system for monitoring their basis of award and would thus benefit from the relief of that burden. In my experience, that is far from the case. Many contractors are ignorant of their responsibilities related to the CSP and the PRC, which even GSA classifies as complex. GSA also believes that the PRC has had limited success in driving contract prices down. In the final rule, GSA states “only about 3 percent of the total price reductions received under the price reduction clause were tied to the ‘tracking customer’ feature.” This is more a reflection on systemic compliance failures than the fundamental inadequacy of the PRC, as far as I’m concerned.
In most cases, the average schedule holder faces very little financial risk if it fails to comply with the price protection provisions in its contract. The Inspector General conducts about 50 pre-award audits every year, and those only affect schedule holders with significant sales. Even if all contractors had an equal chance of audit, that would put a company’s risk somewhere around 1 in 300. In contrast, every schedule holders’ pricing may be subject to renegotiation under TDR.
Here is a hypothetical to consider – on GSA Advantage!, 19 contractors currently sell the Samsung 23″ LED display with part number S23C200B.
One of those contractors is offering a sale price of $143.78. Based on GSA’s acceptable range model, the allowable variance in pricing would be approximately +29%, putting the upper price limit at $185.48. Using this example, which only considers the contract ceiling price and not actual prices paid, 10 (52.6%) of the current schedule holders selling this display are out of range and will likely have to reduce their pricing.
To this point, contractors could manage compliance spend based on their risk tolerance. Under transactional data, however, actions beyond your control can cause a profound erosion of profit. Every time your competitor gives an ordering agency a great deal, you could end up stuck with that discounted price for future sales. As GSA optimistically observes in the final rule, “the availability of transactional data will mean all federal buyers may be rewarded by the success of a single buyer.” Let that sink in for a moment.
As a taxpayer, I understand the government has a responsibility to buy smarter. What bothers me is how TDR is being presented as such a great deal for contractors. It truly may not be. For the sake of argument, let’s say that GSA achieves a net 1.0% reduction in schedule rates through TDR. This represents an annual decrease of approximately $330M in contractor revenue under the schedules, which is more than 10x higher than GSA’s estimated annual net change in compliance burden (-$32M). For this reason, there is only one thing I can say to contractors considering participating in the pilots for the Formatted Product Tool and Transactional Data Reporting – caveat emptor!
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