Most Favored Customer And Price Reductions Clause

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The most favored customer (MFC) and price reductions clause (PRC) operate jointly - seldom will you see the MFC clause without the PRC, and the PRC has no meaning without the MFC clause. There simply does not exist a legal basis for these clauses to exist. The FAR standard at 15.4 is "fair and reasonable". Their inclusion in an IFB or RFP is clearly not proper. It is currently in the FTS 2001 RFP improperly.

GSA has imposed these clauses in the schedule program for decades without legal basis. But no one has taken GSA to court. So, the bluff wins. The MFC clause is based on the premise that the government deserves similar or better discounts than the best discount you offer to a particular customer category. When you apply for a GSA schedule, you are required to identify the best discounts you have granted the following customer categories: Dealers/retailers; distributors/wholesalers; educational institutions; state, county, city and local governments; OEMs; and others (national accounts, end users.) Based upon the information you provide, the government will identify the customer that you have granted the largest discount to as your most favored customer, such as the OEM category. It is up to you to negotiate with the government in identifying the category that is most similar to the government customer. This will usually be the end user customer category, which ordinarily receives a lesser discount than offered to other customer categories and is most similar to the government in the way it buys. It is important when you are negotiating any contracts that include the MFC/PRC that your most favored customer is identified, for the PRC is contingent upon the discounts offered the MFC.

Once the MFC category is identified, the government will generally negotiate a discount that is equal to, or better than, the discount given the MFC. The PRC states that if you violate the contractually agreed upon pricing/discount relationship by offering a (better) discount to your MFC, you have invoked the PRC. This means from the date that the violation took place, you will owe the government a discount proportionately equal to that given the MFC. Further, should you be audited and the government finds that the data they have relied upon to negotiate a price with you is inaccurate, you will be subject to civil and possibly criminal penalties, such as large fines and jail sentences. How can you avoid the MFC clause or PRC violations? Read the solicitation provisions included in the GSA schedule solicitation document. It specifically provides that:

Sales outside the scope of the contract are not subject to MFC/PRC. This means sales exceeding the contract's maximum order.

Direct sales to the federal government, or primes on behalf of the government, are not subject to MFC/PRC. The government is always interested in obtaining the best price possible. You are not required to account for discounts offered to the government, and discounts to the government that differ from the GSA schedule price do not violate the PRC.

Extra discounts offered your MFC will not violate the PRC if you offer the government a likewise discount. This can be done on a temporary basis, minimally thirty days, and does not violate the MFC/PRC.

Extra discounts offered to customer categories other than your MFC do not violate the PRC.

We would like to make the case that GSA does not deserve any special price consideration from vendors in schedule negotiations. The rules clearly require procurement from lowest price vendors or justification of higher prices. GSA should be content to let market forces determine price. If Vendor A gives GSA 3% and Vendor B offers 8% for a comparable product, Vendor B will get the business. If this does not occur, this means that the entire schedule program is not workable and should be abandoned. If GSA and GAO cannot enforce this simple concept then we can only conclude that the higher priced product is worth more.

Further, government money is not better than commercial money. The government is very slow pay and always pays in arrears. In the commercial world, the price is based on the vendors commercial contract terms, often payment in advance, always payment in advance for rentals and numerous other terms that are not present in government contracts. Then we have vast differences in contract performance terms, liquidated damages, termination for convenience, default and inability to commit to multi-year prices. All of these differences serve to illustrate that getting a schedule is not a hot deal for most firms. There is nothing in the regulations or legal background that gives GSA the right to demand a most favored customer price

Further, this GSA policy is inflationary for the commercial, state, and local government market. We have seen many instances in which vendors would have offered other customers a better price except for the price reductions clause. Thus, GSA causes a higher price for other government units and the commercial sector.

Then we have a monumental blind spot in GSA dealing with prices offered distributors, dealers and OEMs. GSA does not grasp or chooses not to grasp that the discount given these firms is simply the cost to do business. GSA often has a 10% overhead and markup on items sold in GSA stores but they quickly forget this in schedule negotiations. They forget about damages, business losses, theft, advertising, hiring, training, and the dozens of other expenses, including insurance, which a business must suffer.

So we have the massive problem of getting GSA to grasp that the government does not deserve a most favored customer price as the price of admission to the game. GAO has ruled in decision B-183942, dated July 12, 1976 at CPD 76-2:31, that the government has no inherent right to any price other than what competition produces is a competitive bid. GSA ignores this legal case.

Now you have a schedule award and immediately fall under the price reductions clause. The clause is ambiguous in meaning and especially in what events trigger the clause. But most importantly, numerous reasons exist why GSA should not get a price reduction just because someone in the commercial world does. For example, consider the following examples and ask yourself if the government deserves, under any reasoning, the commercial price:

My commercial contract calls for 2% ten day PPD. Government rules call for a 20-day PPD.

My commercial contract calls for rental payments on the first of the month. My schedule says I can bill at the end of the month.

My commercial contract only says that purchase orders must be accompanied by a check for 25% of the purchase price. My schedule says that I can bill after a 30-day acceptance test.

I offer a commercial firm a 30% discount on product A because they buy ten of product B. Product A is on schedule and B is not.

I continue a 20% discount contract with a customer of five years standing who is 10% of my business, yet GSA wants 25%, guarantees to buy nothing and does not even guarantee any business next year, nor even that I will have a schedule next year.

I give a national firm a 20% discount. This firm immediately sends a letter to all offices that we have entered into this relationship and the firm's field offices should give strong consideration to our product in filling their needs. GSA does nothing for me once I have the schedule.

I give a national firm a 30% discount and the firm names me as the official company supplier for product A to be given preference over all other suppliers. This is similar to a GSA requirements contract. GSA does nothing re the schedule.

I give a firm a 20% rental discount in return for a three-year, no-out contract. GSA wants 20% with a 30-day out and a fiscal year out.

Readers, what we essentially have here is a long standing problem where GSA has taken each vendor, individually, into a closed room each year for the last "X" number of years and beaten the living daylights out of each one. They have been able to do this because each vendor thinks the end is near if you have no GSA schedule. Simply not true. When will you reach a point of no return? Several major firms, in recent years, have been unable to reach agreement on a schedule with GSA and have survived nicely without a schedule for a year or two.

All readers have a large stake in this problem. Government agency customers may well not be able to procure many products from schedules if these matters are not resolved. The trade groups have been mostly silent and ignorant. And vendors, most of all, need to pressure GSA directly and also through their respective trade groups.

Good luck!

Written by Terry Miller. Published by Organizational Communications, Inc. Republished with permission.

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