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One more time:  Cloud Services and the Price Reduction Clause (PRC)

As GSA’s Federal Acquisition Service (FAS) continues to explore creating a separate “cloud” special item number (SIN) on its IT Schedule 70 contracts, it has issued a working draft cloud terms and conditions for review and comment by industry.  The comments on the draft are due on January 15th.  FAS’s engagement with industry and issuance of a draft set of terms and conditions for cloud is a positive step towards creating a comprehensive, innovative procurement channel for cloud services government-wide.  The draft terms and conditions can be found here.

Significantly, the draft terms and conditions include pricing language that makes clear that the PRC is an inappropriate, counter-productive pricing mechanism for cloud services.  The draft terms and conditions state in part that:

“As commercial cloud computing services have various pricing models with limited standardization across industry, the primary requirement for cloud computing services is alignment with NIST essential characteristics.  All pricing models must have core capability to meet the NIST Essential Cloud Characteristics, particularly with respect to on-demand self-service, while allowing alternate variations at the task order level at agency discretion, pursuant to the guidance on NIST Essential Characteristics.” [Emphasis added.]

This statement reflects reality in the commercial cloud services market.  There is great variability in commercial pricing models, standardization along with the need to tailor or customize solutions to meet unique customer requirements.  It is a commercial market and service delivery model that is fundamentally inconsistent with the application of the PRC.

As this blog has observed many times, the PRC ignores the unique quality of service solutions in the commercial and federal market places.  These variations mean that mechanical, apples-to-apples comparisons for the PRC are difficult, if not impossible, for both the government and industry.  There is just too much gray in service solution delivery based on customer unique requirements.  This uncertainty will result in unnecessary compliance costs for both government and industry—costs and risks that will limit flexibility, innovation and best value cloud solutions via IT Schedule 70. These costs are unnecessary because as the pricing note above makes clear—pricing varies by solutions and by allowing alternative variations at the task order level at agency discretion—pricing will be driven by task order competition for agency specific requirements!

There is a solution within the context of IT Schedule 70.  There is clear regulatory flexibility to address the anti-competitive, anti-innovation application of the PRC. Under General Services Regulation (GASR) 501.404(a)(2), the FAS Commissioner can submit a class deviation for the GSAR’s PRC to the Senior Procurement Executive for approval.  The deviation could waive applicability of the PRC to the cloud services SIN thus reducing overhead and compliance costs while increasing access to the latest commercial cloud services. Competition at the task order stage will assure that agencies receive fair and reasonable pricing.  As observed in this blog previously, there is precedent for waiver of applicability of the PRC.  In 2013, FAS waived applicability of the clause to certain transactions to allow MAS furniture contractors to compete for a series of open market Air Force furniture procurements.  A copy of that waiver can be found here.

Finally, the deviation makes sense as GSA explores alternative pricing initiatives to the PRC.  As Administrator Tangherlini noted in his December 12th response to the Coalition’s “quick fixes” recommendation that the Maximum Order Threshold (MOT) to the Simplified Acquisition Threshold:

“GSA acknowledges industry’s concerns regarding the MOT as it relates to compliance costs and liability under the Price Reductions clause.  GSA has several pricing initiatives underway that will include an opportunity for public comment regarding this clause in coming months.  GSA looks forward to further discussion with industry on these issues as GSA’s pricing initiatives move forward.”

The Administrator’s complete response can be found here.

Roger Waldron


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