Last week’s comment focused on the new FAR 8.4 competitive ordering procedures and called on GSA to modify Federal Supply Schedule (FSS) contracts to lower the Maximum Order Threshold (MOT) to $150,000. As noted in last week’s comment, the current MOTs typically far exceed $150,000 ranging from $500,000 to $1 million. Jonathan Aronie of Sheppard Mullin Richter & Hampton LLP has developed a timely and useful chart outlining the new competition requirements for orders and Blanket Purchase Agreements (BPAs). I recommend it to our members.
Now back to the subject at hand. The enhanced competition requirements for orders exceeding the Simplified Acquisition Threshold (SAT) of $150,000, including the requirement that ordering activities seek price reductions, make reform of the Price Reduction Clause (PRC) a matter of maintaining contract balance in the FSS program. Indeed, it is a matter of fundamental fairness that as a first step in reforming FSS contracts, the current MOTs should be lowered to $150,000. Here’s why.
The FAR 8.4 ordering procedures govern the placement of orders from FSS contractors. As such, through the years FAR 8.4 and the FSS contract clauses have been crafted to ensure a sound, comprehensive and uniform approach to placement of orders and the compliance requirements of the PRC. In particular, over the last 15 or so years, the FAR 8.4 ordering procedures have, at a minimum, directed contracting officers to conduct additional market research/review of contracts and seek price reductions for orders exceeding the MOT. Correspondingly, the PRC has specifically provided that there shall be no price reductions for sales “[t]o commercial customers under firm, fixed price definite quantity contracts with specified delivery in excess of the maximum order threshold specified in this contract. . . “ See GSAR 552.238-75(d)(1). The PRC includes the “exception” for commercial contracts exceeding the MOT precisely because the FAR 8.4 ordering procedures, until now, required government contracting activities to seek price reductions and take additional competitive steps for FSS orders exceeding the MOT.
The old FAR 8.4 ordering procedures and the PRC reflected the balance between competition and price reductions above the MOT versus compliance with the PRC. The PRC recognized that the PRC remedies were not necessary above the MOT, where competition and requests for price reductions were required by the old FAR 8.4. The new FAR 8.4 ordering procedures have replaced the MOT with the SAT. There should be a corresponding change in the contracts.
In addition to achieving consistency, this change would foster fairness and reduce costs. Contractors across the FSS program negotiated pricing based in part on the critical balance between the MOT and the PRC. At the same time, FSS contractors across the program spend millions of dollars in compliance costs associated with the PRC. In particular, these compliance infrastructure costs have a significant impact on small business FSS contractors.
The balance between the MOT and PRC is gone because the SAT has replaced the MOT under FAR 8.4. The new FAR 8.4 procedures mean that pricing under the FSS program is clearly driven by competition and price reductions for orders exceeding $150,000 rather than the PRC. As such, the additional compliance burdens and costs for tracking orders below the MOT (to the extent it is higher than the SAT) do not add value for government and industry. Here is an opportunity to make a statement in favor of competition. Consistent with the Administration’s commitment to reducing burdensome and unnecessary regulations, GSA should reform the PRC to reflect the new competition requirements. A good first step would be that where the MOT is higher, immediately modify the FSS contracts to change the MOTs to the SAT of $150,000.