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Was That Sale Commercial or Federal? How the Feds View Subcontractor Sales

Written on October 21, 2019

Many companies conduct the bulk of their federal business as subcontractors.  Most smaller businesses are better off acting as a subcontractor as they may lack the resources to take on the tracking and compliance issues that come from being a prime contractor.  When a subcontractor seeks to obtain a GSA Schedule contract, it becomes critically important to understand how the government views sales where the end-customer may be a federal agency, but the sub sells to a prime contractor.  Such sales are almost always considered to be commercial sales by federal contracting officers and the federal contract compliance community.  For Schedule purposes, that means classifying such sales as commercial transactions when filling out the Commercial Sales Practice Format sheets.  It is also important to understand how giving a lower price to a prime contractor after a company is awarded its own Schedule contract could cause a compliance issue.  If the prime you sell to is within your Schedule Basis of Award customer class, a lower price or higher discount could trigger the Price Reductions Clause.  It does not matter if the final customer is a federal agency.  To the feds, your company is selling at a lower price to a company that is within your Basis of Award customer class.  Unless an exception applies, you must give the government fair opportunity to buy from your Schedule contract at a proportionally lower price to compensate.  More than one small Schedule contractor has been tripped up by this and has had to pay thousands in fines to the government.  Make sure your company knows that when it comes to federal sales, what matters is who you invoice.

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