Use of Escalation Clauses in GSA Leases

PLRD-83-8: Published: Nov 1, 1982. Publicly Released: Nov 1, 1982.

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GAO reviewed the use of escalation clauses in General Services Administration (GSA) leases and the use of the Consumer Price Index (CPI) as a basis for making annual adjustments to rent payments to cover increases in lessors' operating costs.

Since 1978, there has been a dramatic increase in the use of escalation clauses. Operating cost subject to escalation based on changes in the CPI is about $62 million. GSA has decided to eliminate the mandatory requirement for the CPI clause, because it believes that it would be more cost beneficial to the Government to use another approach. Since the GSA decision to eliminate the mandatory requirement for using a CPI escalation clause is relatively recent, GAO could not determine whether the new approach would be more cost effective and result in fewer CPI escalation clauses. However, a limited survey at two GSA regions indicated that most offers still include the CPI escalation clauses. GAO believes that a lessor has no incentive to eliminate the CPI escalation clause, which GSA previously institutionalized, and will be reluctant to do so when adequate competition does not exist. GAO also found that there is no assurance that the operating cost base established in leases for future rent adjustment is reasonable and is based on actual costs. In addition, GAO found that, except for the lessors' operating cost statements, the files did not contain detailed cost and price data indicating how the projected base was determined. The GSA leasing handbook does not contain the Federal Procurement Regulation provision relating to the submission of cost and pricing data.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: On March 16, 1984, GSA issued instructions to its regional offices requiring contracting officers to ensure that CPI cost base lease clauses are reasonable. The instructions, if followed, comply fully with the recommendation.

    Recommendation: The Administrator of General Services should require contracting officers to ensure that the operating cost bases that are subject to CPI escalation are reasonable when leases are negotiated on a sole-source basis.

    Agency Affected: General Services Administration

 

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