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Set Contract Discounts versus Set Contract Prices

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For a number of reasons I would like to have a contract (not a BPA) that has its unit product prices specified in terms of a discount from the product?s list price as opposed to specifying the discrete discounted price of the individual product(s). For example: I have a product that has a list price of $100, I would like to propose its price in terms of a discount, say 20% instead of discretely specifying its price of $80. As the list price may change over time, the discount would remain constant, the net contract price however would change as the list price changes. I believe that the NASA SEWP IDIQ contracts work in this way.

My question:

What specific issues, rules or regulations need to be addressed at time of contract award, or afterward, to ensure that this approach is acceptable?

It would alleviate a lot of contract administration overhead.

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.

well, for one thing, don't try to characterize that as a "fixed price" instrument.

.

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My question:

What specific issues, rules or regulations need to be addressed at time of contract award, or afterward, to ensure that this approach is acceptable?

There are no special "rules" or "regulations" to be addressed. As with any contract, be clear in your definition of the requirement (e.g. "This contract covers all medical items listed in catalog # 123 dated February 29, 2008 issued by Dr Quack's Virtual Surgery Warehouse LLC") and the pricing mechanism (e.g. the unit prices for the catalog items shall be the catalog price less 27%).

Make sure that the invoice certifier has a copy of the catalog prices.

As you can determine the fixed contract prices by application of the discount to fixed catalog prices, the contract prices are fixed.

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For a number of reasons I would like to have a contract (not a BPA) that has its unit product prices specified in terms of a discount from the product?s list price as opposed to specifying the discrete discounted price of the individual product(s). For example: I have a product that has a list price of $100, I would like to propose its price in terms of a discount, say 20% instead of discretely specifying its price of $80. As the list price may change over time, the discount would remain constant, the net contract price however would change as the list price changes. I believe that the NASA SEWP IDIQ contracts work in this way.

My question:

What specific issues, rules or regulations need to be addressed at time of contract award, or afterward, to ensure that this approach is acceptable?

It would alleviate a lot of contract administration overhead.

How would the government ensure that it does not commit an Anti-Deficiency Act violation in this scenario?

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I am not sure I understand the relationship of unit prices to the anti-deficiency act - however does a contract that adjusts its prices based upon some index (CPI) essentially cause the same issue for you.

Keep in mind that the ordering activity will see the current price at time of order and can decide then if they want to order the item at that price or not - not a requirments contract.

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Guest Vern Edwards

What type of contract would that be? The price would be set at the sole discretion of the contractor, whenever it sees fit. It would not be any type of contract described in FAR. It would not be any type of fixed-price, cost-reimbursement, time-and-materials, or labor hour arrangement. FAR 16.102(B) forbids the use of any type of contract not described in FAR.

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What type of contract would that be? The price would be set at the sole discretion of the contractor, whenever it sees fit. It would not be any type of contract described in FAR. It would not be any type of fixed-price, cost-reimbursement, time-and-materials, or labor hour arrangement. FAR 16.102(B) forbids the use of any type of contract not described in FAR.

An indefinite delivery type contract with firm-fixed price task orders. The pricing is as shown in the catalog less the discount.

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An indefinite delivery type contract with firm-fixed price task orders. The pricing is as shown in the catalog less the discount.

Unless I'm missing something, the type of contract you propose has no controls over the catalog list pricing. Is this an existing catalog and is the contract fixed to the existing catalog? The Army's Job Order Contracting (JOC) program used multipliers to price various catalogs that the Government supplied, which were really estimating books These are ID/IQ contracts.

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Unless I'm missing something, the type of contract you propose has no controls over the catalog list pricing. Is this an existing catalog and is the contract fixed to the existing catalog? The Army's Job Order Contracting (JOC) program used multipliers to price various catalogs that the Government supplied, which were really estimating books These are ID/IQ contracts.

Why are there no controls? Did not / does not the contracting officer / contractor / COR or ordering officer review the catalog before writing and while administering the contract?

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Guest Vern Edwards

How would you evaluate price during source selection? Based on what? Based on the catalog prices then current, which are subject to change at any time and at the sole discretion of the contractor? What if the catalog prices change during proposal evaluation, so that they are different at the time of award than they were at the time of proposal submission? What would the government have to pay for the minimum? Would the underlying catalog prices have to be fixed for the minimum at the time of contract award?

Could the CO consider any options under the contract to be priced for purposes of FAR 17.207(f)? (In that regard, see the recent Magnum Opus Technologies, Inc. and The Healing Staff, Inc. v. U.S., COFC 10-106C, May 28, 2010.)

Is this supposed to be okay because the contract is IDIQ? If so, an adjustment factor without an underlying base amount is not the same as hourly rates. Again, see Magnum Opus.

Why bother with such a "contract"? In what way would such an arrangement be truly contractual? Why not use a Basic Ordering Agreement? Is the idea that if you award a "contract" you can say that you got full and open competition for a contract award, and so don't have to get full and open competition for each order?

Why do this? What's the goal, other than to garner criticism from an IG or the GAO when they discover what you've done a year or two after contract award? This strikes me as one of those "innovations" that make COs look like jackasses and ultimately bring us all sorts of newly restrictive statutes, regulations, and policies. Haven't we made enough of a mess of government contracting since 1994? But maybe I'm missing the advantages. Someone enlighten me.

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How would you evaluate price during source selection? Based on what? Based on the catalog prices then current, which are subject to change at any time and at the sole discretion of the contractor? What if the catalog prices change during proposal evaluation, so that they are different at the time of award than they were at the time of proposal submission? What would the government have to pay for the minimum? Would the underlying catalog prices have to be fixed for the minimum at the time of contract award?

Could the CO consider any options under the contract to be priced for purposes of FAR 17.207(f)? (In that regard, see the recent Magnum Opus Technologies, Inc. and The Healing Staff, Inc. v. U.S., COFC 10-106C, May 28, 2010.)

Is this supposed to be okay because the contract is IDIQ? If so, an adjustment factor without an underlying base amount is not the same as hourly rates. Again, see Magnum Opus.

Why bother with such a "contract"? In what way would such an arrangement be truly contractual? Why not use a Basic Ordering Agreement? Is the idea that if you award a "contract" you can say that you got full and open competition for a contract award, and so don't have to get full and open competition for each order?

Why do this? What's the goal, other than to garner criticism from an IG or the GAO when they discover what you've done a year or two after contract award? This strikes me as one of those "innovations" that make COs look like jackasses and ultimately bring us all sorts of newly restrictive statutes, regulations, and policies. Haven't we made enough of a mess of government contracting since 1994? But maybe I'm missing the advantages. Someone enlighten me.

Let's try this scenario.

You have aircraft carriers making visits to ports in your AOR. Some of the key carrier requirements are tug services, CHT removal and potable water. These supplies and services are furnished by contractors working for the local port authority. The prices for activities within the port are set by the port captain for all port users and are published in a Port Tariff reissued periodically.

Contracts are priced for port tariff items as discounts against the port tariff. As tariffs change, the contractor provides copies to the contracting officer and ship supply officer. We reserve the right to terminate the supply or service.

What are the legal, regulatory or practical objections to this approach?

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Guest Vern Edwards

That sounds like a perfect set-up for a sole source basic ordering agreement. Why write a contract? In what sense would the arrangement be contractual. What would be binding? When you need the service, issue an order against the BOA, which, when accepted, incorporates the appropriate contract clauses.

We have a device for the purpose. It's a BOA. Why not use that? You can update a BOA more easily than you can a contract. Help me understand the advantage of a "contract."

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one online catalog

You'll have to somehow evaluate "cost or price to the Government." I don't think that evaluating proposed discounts off a catalog price that the contractor can unilaterally change after performance will pass at the GAO. However, that seems to be the way that NASA SEWP works. There is some price control in that the SEWP contractors cannot have catalog prices that exceed their GSA prices. I don't know how NASA evaluated cost or price to the Government when they made their initial award of the SEWP contracts. Whatever they did, nobody complained. Probably not going to get many complaints when you award 38 contracts.

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You'll have to somehow evaluate "cost or price to the Government." I don't think that evaluating proposed discounts off a catalog price that the contractor can unilaterally change after performance will pass at the GAO. However, that seems to be the way that NASA SEWP works. There is some price control in that the SEWP contractors cannot have catalog prices that exceed their GSA prices. I don't know how NASA evaluated cost or price to the Government when they made their initial award of the SEWP contracts. Whatever they did, nobody complained. Probably not going to get many complaints when you award 38 contracts.

NASA evaluated initial pricing two ways - discounts offered from a commercial pricelist and comaprison of the same or similar items between various companies. I believe NASA thought that prices for existing items will drop over time and that's one reason contractors were allowed to change catalog pricing. The other is to add new items on a continual basis. In both cases, the catalog prices could not exceed their GSA Schedule prices as you said.

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Guest Vern Edwards

1. If you state the discount in the contract, make the catalog a part of the contract, and bind the contractor to the catalog prices throughout the ordering period, then you have a firm-fixed-price contract. (But if you do not bind the contractor to the catalog prices during the option periods, then you have unpriced options, which cannot be exercised in compliance with FAR 17.207(f).)

2. If you state the discount in the contract, make the catalog a part of the contract, but allow the contractor to change the catalog prices at will during the ordering period, then you do not have a firm-fixed-price contract.

3. If you state the discount in the contract, make the catalog a part of the contract, but allow the contractor to propose price changes subject to government approval and let the government or the contractor opt out if the government does not approve the price changes, then you do not have a firm-fixed-price contract until and unless the government approves the new prices.

4. If you state the discount in the contract, but do not make the catalog a part of the contract, then you do not have a firm-fixed-price contract.

You cannot award a contract type that is not described in FAR.

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NASA SEWP is really interesting and this got me curious on how they do it. I went to their website and see that the contracts are firm fixed price with economic price adjustment.

This is what they say about pricing:

Are SEWP prices "fair and reasonable"?

The SEWP contracts are FAR Part 12 Commercial Contracts, and additional price analysis was done in accordance with the following: The price design for SEWP is a proposed discount off the offerer's commercial list price. Price analysis was conducted in accordance with FAR 15.305(a)(1), to ensure that a "fair and reasonable" price is paid by the Government.

Reasonableness of proposed prices was established in accordance with 15.403-1?(1)(i)(B) which provides that a price is based on adequate price competition if two or more responsible offerers, competing independently submit priced offers that satisfy the Government's expressed requirement and there is not any finding that the price of an otherwise successful offer is unreasonable. To verify price reasonableness, offerers were instructed to submit their published price catalog or published schedule of list prices in a form regularly maintained by the manufacturer or offerers, such as a catalog, price list, schedule, or other verifiable and established record. Additionally, each contractor proposed a discount off of product categories (such as input-output device) of IT equipment.

These discounts remain for the life of the contract. Therefore, when new technology is added or list prices change due to market fluctuations, the SEWP price remains fair and reasonable.

So I guess that contractors may increase prices as long as they are in accordance with the economic price adjustment clause in the contract, can decrease prices without restrictions such as with falling hardware prices, and add new products pursuant to the technolofy refresh clause, which I noted NASA has a practice of approving within four hours. The government approves the addition of new products, the contract provides for a means to increase prices, and contractors can voluntary reduce prices.

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Are we OK with the NASA SEWP approach?

Is the not to exceed the GSA price a critical element of the NASA approach, and if this element were eliminated would the over-all approach fail?

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From your original question, the NASA SEWP won't get you there.

I'm not 100% certain and don't want to take the time to reserach it further but I think NASA SEWP is a lot like GSA Schedule cobtracts. Offerors submit a commercial pricelist with their initial proposal and provide a set discount off their pricelist. If the proposal is accepted, a condition is that discount applies to the life of the contract. The contract type is firm fixed price with economic price adjustment and the contractor can annually adjust their prices upwards consistent with the price adjustment clause (most likely tied into some economic factor) as long as the prices don't exceed their GSA Schedule contract prices. Furthermore the contractor can voluntarily reduce their praices at any time. Finally the contractor can submit requests to add new items as technology refreshments as long as they are part of the contractors current commercial pricelist.

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