Previously we discussed Deletion and Administrative modifications. Now we'll cover Price Reduction and Economic Price Adjustment mods.
Price Reductions. Price Reductions are like children: some are planned and some are accidental. While we love them all no matter how conceived (children, that is), price reductions mods are best when planned events. We'll leave the messier topic of unplanned price reductions to another article.
In general, a price reduction is triggered when a contractor's reduction of its commercial price for a product disturbs the government's price or discount relationship with the identified customer or category of customers which served as the basis for negotiation and award. In other words, if GSA awarded your contract on the basis of a maximum 10 percent discount that you often give to your national account end users, then a sale to a national account end user at a 15 percent discount might trigger a price reduction. Other bases for a price reduction include a revision to the commercial price list on which GSA based its contract award to you, or your granting more favorable discounts or terms to the identified customer (or category of customer) than you disclosed to GSA during negotiations.
To prepare a Price Reduction mod, you need to submit a mod package listing the products whose prices are being reduced and the new lower GSA Schedule prices. If the price reduction was initiated by a decrease in your commercial price list, then you'll need to submit a dated copy of that price list. If the price reduction was caused by a change in your sales or discount practices, then you'll need to provide documentation relating to your new practices. This is all that is required by the standard form GSA Schedule contract mod clause.
To be safer, a contractor can provide GSA with a chart showing its former and current commercial pricing, current and proposed GSA Schedule pricing showing the effect of the price reduction, a column showing the percentage decrease from the old to new commercial pricing, and a column showing the percentage decrease from the current to proposed GSA Schedule pricing. Of course, the Industrial Funding Fee must be included in the proposed GSA Schedule price. With all of this information, it will be harder for GSA to later complain that it didn't understand how you calculated the proposed, lower GSA Schedule pricing and try to squeeze a price reduction penalty out of you.
The price reduction modification is officially effective upon the Contracting Officer's approval of the mod proposal. According to the Price Reduction clause, however, the actual price reduction takes effect at the same time that the commercial price reduction took effect.
With a planned price reduction, the effective date will be in the future. With an unplanned one, it probably took place in the recent past. The reduced price applies to delivery orders received by the contractor on or after the date the commercial reduction occurred.
Economic Price Adjustment. An Economic Price Adjustment (EPA) mod is the opposite of a price reduction mod. With respect to products, the EPA is usually based on an increase in the commercial price list that was used as the basis of award of the Schedule contract. For services, GSA's recent trend has been to either pre-negotiate a set percentage increase for each of the five years of the original contract period or base future increases on an agreed market indicator such as the Department of Labor's Employment Cost Index.
An EPA mod is governed by the EPA clause in the Schedule contract. Under the EPA clause, a contractor generally may not request a price increase during the first contract year or during the last 60 days of the contract term. Also, a contractor may not request an EPA increase more than three times per year, and must wait at least 30 days between EPA increase requests. Finally, the EPA clause restricts increases greater than 10 percent per year, in the absence of special circumstances or unless otherwise negotiated.
Unless the price increase has been pre-negotiated, to submit an EPA mod, a contractor should provide GSA with a copy of the dated commercial price list showing the price increase or the market indicator showing the applicable increase. In addition, a contractor must certify that its commercial sales practices have not changed either since the award of the contract or since the most recent EPA or Addition mod.
In the alternative, if a contractor's commercial sales practices have changed since its last submission, then the contractor must submit a new Commercial Sales Practices chart. Last, according to the EPA clause, the contractor should submit documentation supporting the reasonableness of the price increase, although GSA, as a practical matter, doesn't usually insist on this.
In response to an EPA mod proposal, GSA may accept the contractor's price increases as requested, or negotiate more favorable discounts from the new commercial prices when the total increase requested is not supported, or remove the products from the contract involved pursuant to the Cancellation Clause of the contract when the increase requested isn't supported and the parties can't agree on a new price.
The contract modification incorporating the EPA is effective upon approval of the EPA mod request by the Contracting Officer, or on the effective date of the commercial price list, whichever is later. The increased price applies to delivery orders received by the contractor on or after the effective date of the EPA modification.
The only major mod left is the Addition mod, which can be the most difficult for a contractor and GSA to negotiate and approve. We'll tackle that one in the near future.
Realizing the increasingly important place that both mods and the mod approval process is taking in this era of long-term Schedules, GSA is working on improving and streamlining the mod process. GSA is investigating the electronic filing and approval of certain mods, and a modification status program to allow contractors to check on the progress of mods previously submitted.
For now, the ease of modding your contract depends on how well you prepare your mod proposal, how well your contracting specialist understands your Schedule contract, and how busy he or she is with mods and contract proposals already in queue. Good luck!
