When the Government Wants Discount Pricing

Written by: Micheal Weaver

Every buyer wants the best price, and the US government is no exception. When you calculate costs and resultant pricing in response to a request for proposal (RFP) or request for quote (RFQ), your offer should be reasonable yet still allow you to make some semblance of profit. Yet you may need to discount further.

This article will help you learn why and when the government controls the price of a product or service open for bid, examples of government price control through discounts and how discounts work in General Service Administration (GSA) contracts.

In this Article:

• What is Government Discount Pricing?
• Pricing Discount Advantages and Disadvantages
• Do Most Agencies Have a Discount Pricing Strategy?
• The 3 Most Popular Contract Discount Pricing Methods

Discount pricing is a strategy government agencies employ, often encouraging vendors to offer lower prices in exchange for faster payment. This arrangement is known as a discount term. Vendors can frequently propose a lower price than their initial offer if the government agrees to pay their invoice within a specified timeframe.

According to Federal Acquisition Regulation (FAR) 52.213-2, the government typically doesn't accept a contractor's invoice until services are rendered or products are delivered. Once the invoice is submitted, it's usually paid within the standard 30-day period from invoice acceptance. This practice can result in vendors floating payroll or product costs for over a month, depending on the contract terms.

To expedite payment, discount terms allow vendors to propose a different calendar-day limit—often 15 days—for invoice payment. While discount terms cannot be used in the evaluation process of a contract, they can be applied to individual invoices once a contract is awarded and the offeror begins billing, as stipulated in FAR 52.232-8.

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Government discount pricing presents both opportunities and challenges for contractors. Let's examine some of the most prominent:

Advantages of Discount Pricing:

• Fair and reasonable pricing: Government pricing policies are designed to prevent excessive charges, ensuring a level playing field for all contractors.
• Faster payment: Contractors can improve their cash flow by proposing a lower price in exchange for quicker compensation.
• Economic price adjustments: Contractors can maintain competitive prices as market conditions fluctuate. A cost decrease in either materials or labor can result in a higher profit margin, even with discount pricing in place.

Disadvantages of Discount Pricing:

• Limited evaluation impact: Contracting officers (COs) cannot use discount offers to evaluate contractors or place them in a competitive range during the initial selection process.
• Compliance requirements: Contractors must adhere to specific pricing rules, such as reporting commercial sales practices, which may steepen the agency discount if the best commercial price is low.
• Project risk: Government contracts can be risky if unexpected costs or delays arise during project execution.

Most U.S. government agencies, particularly those utilizing the General Services Administration (GSA) Schedule system, actively pursue discount pricing with contractors. Their goal? Secure the best possible value for goods and services through competitive bidding and price reduction clauses within contracts, ensuring taxpayers receive optimal value for their money spent on government programs.

Key aspects include:

• Competitive Bidding: Though this is pre-award, the government encourages competition among contractors by soliciting bids and comparing prices, incentivizing vendors to offer initial pricing that is highly competitive in the marketplace. Prices can be even lower post-award.
• GSA Schedule: This system provides government agencies access to a wide range of vendors who offer pre-negotiated pricing, often including potential discounts based on volume or other factors.
• Price Reduction Clauses (PRC): Many government contracts incorporate PRCs that require contractors to extend any price reductions offered to other customers to the government agency as well.

What follows are the three most common government discount pricing scenarios—also called price control examples—and how contractors can find the upside in each for their contracting firms:

1. ‘Most Favored Customer’ Discount Pricing

If a contractor is fortunate enough to be on the shortlist for a contract award, an agency contract specialist will likely contact them to schedule a time to negotiate pricing. The agency’s goal? To gain terms as good as those the contractor grants customers to whom they give their absolute best price. Usually, an MFC is a required disclosure in the contractor’s current contract negotiations.

An MFC clause is a standard component in agency and other commercial contract negotiations. It is designed to ensure that a contractor grants their best price to other customers—not just their most favored. Since the award of federal contracts has exploded recently, the MFC clause has become integral to nearly all proposal negotiations.

MFC fulfillment is also increasingly subject to audit scrutiny. Should the Defense Contract Audit Agency (DCAA) decide to study one of a contractor’s winning proposals, an egregious finding can result in litigation for breach of contract, exposing that contractor to a potential False Claims Act prosecution. During this, a contractor can be liable for lawyer fees on both sides if they lose—not to mention the automatic loss of the contract. It’s imperative to always be transparent regarding the MFC clause.

How contractors can win: With this type of government discount pricing, contractors can get paid faster. If the government agrees to pay their invoice within a certain number of calendar days in exchange, the contractor can propose an even lower price than the MFC requirement through invoice discounting. As mentioned, an agency can’t use invoice discounts in a contract’s initial evaluation process, which is used to place a contractor in a competitive range or contractor shortlist.

2. The Price Reduction Clause in GSA Federal Contracts

As in non-GSA transactions, best-price offers are critical to General Services Administration (GSA) Schedule contracts. It’s no secret that agencies often buy from a GSA-Schedule vendor because they can get goods at a minimum cost. A contractor operating within the GSA must follow specific pricing rules and requirements, such as reporting all contract offers—whether involving contracts similar or dissimilar to the contract at hand.

Often, a contracting firm must follow an agency’s Price Reduction Clause (PRC) throughout a contract's life, similar to honoring an MFC discount in a non-GSA scenario. Accommodating this clause is one of the most crucial aspects of maintaining compliance with a contractor’s GSA Schedule. The clause guarantees a fixed relationship between the contractor's discount through GSA and the discounts they offer their “Basis of Award (BOA) customer,” the customer to whom a contractor awards the very best pricing.

A BOA is typically the best commercial customer to whom a contractor offers the most attractive concessions. In a non-GSA context, they’re often the same as an MFC customer.

When is a PRC Triggered Post-Award?

If a contractor:

• Revises their commercial price list after winning a contract award, reducing the prices of future commercial projects.
• Grants more favorable discounts or terms to a business or agency than those in the firm’s commercial price list.
• Approves special discounts to a BOA customer that are lower than their pricing relationship with the agency.

How Much Are the Discounts?

In the following scenarios, a contractor has agreed that the government will always pay 1 - 5% less than their BOA. The difference between the two percentages is called a “Discount Relationship.”

When Even Further Discounts Apply

At this point, the agency can ask for even lower prices through the PRC. Should the BOA discount relationship shift after the contract award (e.g., the contractor further reduces a price or increases a discount), the PRC mandates further price reductions to the agency.

If a contractor decides to lower their prices for their BOA, they must maintain that discount on their GSA-Schedule contracts to avoid violating the Price Reduction Clause. The Price Reduction Clause can trigger at any point during the life of a contracting firm’s GSA Schedule. However, there are some exceptions to distinguishing between standard and non-standard discounts.

Standard Discounts in Commercial Sales

When developing standard commercial discounts, a contractor should focus on the discount offered during their last closed fiscal year. If the discount falls under one of the categories listed below, they are standard discounts:

• Discounts exclusive to educational institutions, nonprofits, state and local governments and national/corporate accounts.
• Discounts on volume purchases.
• Discounts for favorable payment terms.
• Reduced shipping terms.
• Concessions such as rebates or extended warranties.

How contractors can win: Chances are a contracting firm offers non-standard discounts under certain circumstances. Some examples include:

• Discounts on discontinued products.
• Donations of products/services.
• Discounts that mitigate a customer service dispute.

It’s important to distinguish between standard and non-standard discounts because non-standard discounts will not trigger the Price Reductions Clause in a GSA-contract situation, so long as a contractor sufficiently communicates the use of the discount to their agency.

In addition to non-standard discounts, there are a few more instances where contractors can provide discounts and not trigger the Price Reduction Clause:

1. A commercial sale that exceeds the maximum order limit for the Special Item Number (SIN).
2. Additional discounts are offered to eligible customers (per OGP 4800.2I) who are not part of the federal government but purchase from the contractor’s GSA Schedule.
3. Participation in the Transactional Data Reporting (TDR) pilot program doesn’t require communication of commercial sales practices.

3. Discount GSA MAS-schedule Proposals

Before including a proposal or direct-buy item on a GSA Multiple Award Schedule (MAS), the government requires that a contractor list their items at or below the lowest available price to an identified category of commercial customers.

This scenario is similar to the PRC example in #2. Before a contractor is awarded an MAS contract, the firm and their agency will agree upon (1) the customer category the government will use as the BAO and (2) the government’s price or discount relationship relative to the identified customer category.

Pro Tip: A government agency will attempt to broaden the commercial customer base while a contractor will seek to minimize it. The latter can state that certain classes of customers are not comparable to the agency customer.

How contractors can win: Noncompliance can be expensive, but compliance won’t cost anything. The Department of Justice (DoJ) recently announced a $6.5 million settlement with Fastenal. The national hardware store distributor allegedly provided better discounts to a non-government customer category than to its GSA MAS customers. Similarly, the DoJ received a $128 million settlement from NetApp, where an employee stated it had knowingly failed to provide the GSA with complete, accurate information about its commercial discount practices. These and other highly publicized cases incentivize the DoJ to aggressively go after other alleged violators in the MAS contract space. So, it’s best for contractors to comply and thrive.

One way contractors can smooth their path when submitting discount submissions is to render files in the same digital format most government agencies prefer. Using modern pricing tools they can prepare any proposal submission up to five times faster than with Microsoft® Excel®.

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