(Editor’s Note. Going after various multiple award contract vehicles can provide lucrative results. The Most Favored Customer clause is by far the most important clause affecting multiple contracting vehicles awarded by the government. The fact there is now increased audit scrutiny as well as recent Department of Justice actions has made an understanding of the rules quite essential. In our desire to address new developments affecting the clause we have used an article written by Caitlin Coonan of Arnold and Porter LLC and Peter McDonald in the Feb 14 2012 issue of the Federal Contracts Report as well as our own experience with these types of contracts.)
The Most Favored Customer (MFC) clause is a common arrangement in many commercial contracts intended to ensure the customer receives the best price the company provides to its other customers. This clause has taken on increased importance in federal solicitations as the award of federal supply contracts has exploded in recent times. The MFC clause has become increasingly subject to government audit scrutiny and litigation for breach of contract in the commercial world exposing government contractors to False Claims Act prosecution and commercial businesses to litigation for breach of contract where significant litigation expenses and loss of business are common. Since its inception in 1949, the General Services Administration’s multiple award program (MAS) has enabled government agencies to buy an array of products and services under federal supply contracts. The MAS program has grown to be the largest interagency government contracting program and represents a significant part of the annual government budget. The GSA manages the MAS programs where it provides federal agencies with a simplified process for obtaining primarily commercial supplies and services at prices associated with volume buying.
MAS implementation for the government is governed by FAR Part 8.4, Federal Supply Schedule that authorizes government buyers to place orders directly with GSA MAS contractors and pay for items using commercial purchase cards. MAS program purchases are designed to mirror commercial buying practices that do not require use of FAR based competitive evaluations found in FAR Parts 13, 14 and 15. The GSA’s stated goal is to obtain the best price a contractor offers its most favored customer for any particular schedule item.
Pre-Award MAS Negotiations
Before accepting an item for inclusion on GSA MSA, the government requires contractors to list their items at or below the lowest available price to an identified category of customers. The government then compares the price or discounts that a company offers with the price or discount it offers to commercial customers. Thus, before awarded a MAS contract the CO and the Offeror will agree upon (1) the customer (or category of customers) the government will use as the “basis for award” and (2) the government’s price or discount relationship to the identified customer or category of customer. The customers that are the “basis for award” need not include all customers or categories of customers a contractor may deal with nor even a majority of its customers where the determination of which customers are included is often a result of negotiation between the government and contractor. The government may attempt to broaden the customer base while the contractor will seek to minimize it asserting certain classes of customers are not comparable to the government customer.
The GSA contract negotiation process requires contractors to disclose their commercial pricing and discounting practices provided to all of its customers. The scope of this disclosure can be vast including every discount ever granted to any customer. This can be quite challenging where there may not be procedures in place to track every commercial transaction let alone unique discounts and terms for every sale. This area provides fertile grounds for noncompliance allegations.
After reviewing the contractors’ disclosures and related supporting information, the GSA’s discount and schedule pricing are negotiated by the agency contracting officer. Though the stated goal is to obtain a price at least equal to the best price applicable to the contractor’s most favored customer, government buyers may seek even further discounts.
Post-Award Considerations
After the lowest price for commercial items have been negotiated, the government may obtain still lower prices through the contract’s price reduction clause (PRC). The PRC first requires the CO and contractor to agree upon the “basis of award” for GSA’s price or discount relationship to the identified category of customers. Should this discount relationship be disturbed after
contract award (e.g. the contractor further reduces the price or increases the discount) the PRC mandates price reductions. The price reductions are triggered because contractors are required to report any such discounts within 15 days of their effective date. Basically, contractors are not allowed to lower their prices without informing the GSA. So, for example, when a contractor offers a one time 50% discount to a commercial customer, the contractor must apply the same discount to all subsequent government orders for the same items. Whereas contractors normally do not have expertise about the PRC, government auditors have developed an expertise in this area. But contractors need to realize that application of the PRC is highly dependent on the facts of individual transactions where not every discount will trigger an PRC action nor will price reductions applicable under the PRC be the same as that asserted by auditors.
There are significant perils of not complying with the MFC and PRC where questions of compliance or qui tam actions can result in government claims, prosecution under the False Claims Act (FCA), terminations for cause and suspensions and debarments to name a few. For example, if the government believes a contractor knowingly failed to comply with the PRC or submitted false information it may launch an investigations. If there is sufficient proof the company offered a single discount outside the contract’s PRC the government may seek damages under the FCA. The FCA allows the government to recover up to three times the damages incurred plus penalties up to $12,000 per claim. Even suspicions of suspected noncompliance can generate significant costs either for defending against government claims or for settlement costs.
Recent cases show how high the costs of real or perceived noncompliance with MFC can be. The Department of Justice (DOJ) announced a $6.5 million settlement with Fastenal where an investigation alleged Fastenal, a national hardware store distributor, had provided better discounts to its identified nongovernment customer than it had in its GSA MAS customers in violation of the PRC. EMC paid the government $87.5 million to settle allegations that during its negotiations the IT firm would conduct a price comparison to ensure the government would receive the lowest price where the government asserted EMC had no such capabilities to compare prices and hence its assertions during negotiations were false. Similarly, DOJ received a $128 million settlement with NetApp where an employee stated it had knowingly failed to provide the GSA with current, complete and accurate information about its commercial sales and discount practices. These and other highly publicized cases provide incentives for the DOJ to aggressively go after alleged violators of the MFC and PRC.
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