A restraint by any other name would be as onerous

Although the government cannot be sued under the Sherman Act for its actions that restrain trade, that doesn't mitigate the harm caused, as in the case of the P...

This column was originally published on Roger Waldron’s blog at The Coalition for Government Procurement and was republished here with permission from the author.

When reflecting on the concept of “restraint of trade,” one might recall an economics, history, or law course in which they studied the Sherman Antitrust Act. That act prohibits restraints of trade, like agreements, combinations, and other acts, that might cause monopolies to arise, and, by so doing, it protects markets, and ultimately the public, from the deleterious effects of reduced market competition.

Although, generally, the government cannot be sued under the Sherman Act for its actions that, in effect, restrain trade, that fact does not mitigate the harm caused by them.  Such is the case with the Price Reduction Clause (PRC).

This summer, the Coalition for Government Procurement submitted comments on the General Services Administration’s Federal Register Notice, Information Collection 3090-0235, Federal Supply Schedule Pricing Disclosures and Sales Reporting.  GSA’s notice sought feedback on whether the PRC was necessary and had practical utility.  In response, the Coalition highlighted, among other things, PRC’s role as a “restraint of trade” limiting the ability of Schedule contractors to compete in the private sector and noting that “[p]erpetuating the PRC as a condition of doing business with the government, will continue to negatively impact commercial opportunities for [multiple award schedules] contractors thereby reducing investment and job opportunities across the commercial market.”

The PRC represents a significant compliance burden for contractors. It is incorporated into approximately 14,000 MAS contracts, with nearly 12,000 contractors, and this incorporation translates into an obligation for contractors to establish effective systems and designate responsible personnel to maintain compliance with the PRC throughout the life of the contract. It occurs in addition to other activities, like offer and negotiation over the mechanics for triggering price reductions; oversight and review activities during performance to validate compliance; and training employees and senior executives responsible for contract compliance on the key compliance and reporting requirements of the PRC.

These administrative compliance activities may have made sense when they were developed almost 40 years ago, but they do not now. In the past, schedules were mandatory and closed, and competition was not required at the order lever. Thus, some mechanism was needed to assure that the government was receiving fair and reasonable prices. The market, however, has changed. The schedules program resembles an actual marketplace, and fair and reasonable pricing and best value are being driven by competition at the order level, not by a PRC dissociated from the specific requirements of the government at the transaction level. To this point, it is significant to note that, according to a GSA analysis of the PRC, only 3% of price reductions are a result of the tracking customer feature of the PRC, with the majority of price reductions the result of market forces.

This reality brings us back to the issue raised at the beginning of this blog, specifically, activities that, in effect, manifest themselves as restraints on trade. By relying on a bureaucratic, process-intensive pricing oversight clause, rather than the forces of competition associated with the requirements of a given task/delivery order, the government is influencing how contractors approach business in the commercial market. Faced with an ever-present risk of triggering a price reduction, contractors alter their behavior in the commercial market, delaying or avoiding innovative business deals. Likewise, they alter their behavior in the government market, delaying the introduction of new offerings due to concerns that they will not align with the PRC and CSP. This fact was borne out in another recent IG report, wherein it was found that GSA used the NASA Solutions for Enterprise-Wide Procurement contract for orders because the subject items were not available through the schedules or could not be provided in time to meet the customer’s needs. It would be helpful to understand why the sampled products were unavailable or could not be provided within the customer’s requested timeframe.

In a rapidly changing technology environment, GSA should be praised for investing in and updating its systems and taking steps to align with market practices that make sense. On this point, eliminating the PRC offers the government the opportunity to explore focusing on innovations like e-invoicing and solutions-based schedule purchases, which align with the current effort to consolidate the schedules. It allows the government to focus resources where they would be most effective: At the task order competition level. So too, it allows the government to free-up contracting resources to align with other complex procurement work.

As this blog has mentioned in the past, GSA’s Federal Marketplace Initiative and its associated activities, like schedules consolidation, implementing unpriced service schedules, and the review of various reporting requirements, represent a logical point to reflect on the utility of contracting compliance mechanisms, like the PRC, developed for a different time and market. In light of the deleterious market effects that arise from the PRC, GSA should seize the opportunity to remove this relic of the past, rely on the forces of the market, and widen a channel for agency buyers to access innovation and value.

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