On January 18, 2011, President Obama issued Executive Order No. 13563, Improving Regulation and Regulatory Review. The executive order is an effort to improve the regulatory development process. It essentially establishes or reestablishes key considerations for agencies when developing and issuing regulations. These considerations include, but are not limited to, ensuring any new regulation imposes the least burden on society consistent with the regulation’s goals and maximizes the net benefits (economic, environmental, public health and safety, distributive impacts and equity). The benefits of any new regulation must justify its costs. Agencies also are to assess available alternatives to direct regulation, including providing economic incentives to encourage the desired behavior.

Significantly, the executive order also requires that agencies develop a plan for the periodic review of existing regulations to determine what rules may be outmoded, ineffective, insufficient or excessively burdensome, and to modify, streamline, expand or repeal them in accordance with what has been learned. This reminds me of the National Performance Review (NPR) conducted during the Clinton Administration. As part of the NPR, GSA conducted a top down review of its procurement policies and procedures and made significant improvements that benefited government, industry and the taxpayers. History could repeat itself.

In spirit of the President’s executive order, each week over the course of the next two months the Coalition Comment of the Week will focus on an existing policy, procedure or practice that should be modified, streamlined, expanded or repealed in order to improve the procurement process. This week the focus is on a current practice within GSA’s Multiple Award Schedule (MAS) program regarding the Price Reduction Clause (PRC) and the treatment of subcontracts under other federal prime contracts. In some instances, GSA has been taking the position that for purposes of the PRC, performance as a subcontractor for a federal government prime contractor is considered a “commercial” customer and not a federal customer. This approach to the PRC and “federal” subcontracts is a different matter than the submission of such subcontract information for purposes of negotiating a fair and reasonable MAS price. It sometimes may make sense to use such information as one data point in negotiating a MAS price. However, tying the PRC to “federal” subcontracts costs the government money overall, is inconsistent with the Department of Defense’s (DoD’s) efforts to improve the management of subcontractors under its prime contracts, and especially hurts medium and small businesses. Here’s why. 7

First, to the extent offering a lower subcontract price for performance under a federal prime contract triggers the PRC, MAS contractors likely will not propose a lower subcontract price since under the terms of the PRC that price will become the new MAS contract price. As a result, prime contractors under federal contracts likely will see reduced competition and static or higher pricing for subcontracts involving MAS contractors. Increased subcontract costs are passed on to the department or agency under the prime contract. Ultimately, the taxpayer loses since payment under the federal prime contract will include the prime contractor’s increased subcontract costs.

The MAS position essentially creates a pool of MAS contractors who are constrained from offering lower prices when competing for subcontracts under federal prime contracts. It harkens back to the early 1990’s when MAS policy provided that if a MAS contractor offered a lower price on a MAS order to a federal agency, the order price became the effective price on the MAS contract. The result of this policy was reduced competition for MAS orders and static pricing. GSA eliminated this rule in the mid 1990’s as part of the reform of the MAS program and in response to critics of the static, uncompetitive pricing structure. The elimination of this policy lead to more dynamic MAS pricing through increased price competition at the order level. It is surprising that the MAS program is essentially re-imposing this policy on subcontract transactions where the federal government ultimately pays the bill.

Second, the current treatment of “federal” subcontracts hurts medium and small businesses holding MAS contracts. To the extent a lower “federal” subcontract price triggers the PRC, small and medium sized MAS contractors will be hamstrung in competing for such requirements. They will be able to go only so far in offering competitive “federal” subcontract pricing while not triggering the PRC. Under such circumstances small and medium sized MAS contractors will be competing for “federal” subcontracts with one arm tied behind their backs. The impact could be significant as small and medium sized businesses generally rely heavily on subcontracting opportunities in the federal market place.

Consistent with the President’s executive order, the MAS’s current position should be reconsidered in order to foster increased competition and lower pricing for “federal” subcontracts government-wide. Reconsideration will also help small and medium size business competing in the federal market.