Determining Fair Proposed Contract Prices
By: Susan Moser, Partner, John Ford, Senior Consultant and Curt Smith, Manager
In September, Cherry Bekaert presented a webinar on techniques used by the government to achieve its objective of awarding contracts at fair and reasonable prices. The webinar is available for on-demand listening on our website. This article provides a summary of the information discussed in the webinar.
Pricing Objective in Government Procurement
The government’s overall pricing objective is to obtain a price that is fair and reasonable to both parties, not necessarily the lowest one. Toward this objective, Federal Acquisition Regulation (“FAR”) 15.405 states, “The contracting officer’s objective is to negotiate a contract of a type and with a price providing the contractor the greatest incentive for efficient and economical performance.”
Various sections of the FAR provide guidance on how contracting officers (“COs”) are to determine if an offered price is fair and reasonable.
For purchases that do not exceed the micro-purchase threshold (generally $3,500), FAR 13.203 states “Micro-purchases may be awarded without soliciting competitive quotations if the contracting officer considers the price to be reasonable.” It goes on to describe the circumstances requiring verification of price reasonableness.
For acquisitions above the micro-purchase threshold but below the Simplified Acquisition Threshold (“SAT” – generally $150,000), FAR 13.106-3 directs COs to base price reasonableness on competitive quotations or offers. If only one response is received, the CO must include a statement of price reasonableness in the contract file. The CO may base the statement on:
- Market research;
- Comparison of the proposed price with prices found reasonable on previous purchases;
- Current price lists, catalogs, or advertisements;
- A comparison with similar items in a related industry;
- The CO’s personal knowledge of the item being purchased;
- Comparison to an independent government estimate; or
- Any other reasonable basis.
Contracts awarded using sealed bidding procedures described in FAR Part 14 are not subject to the Cost Accounting Standards (“CAS”), the cost principles in FAR Part 31, or the requirement to submit certified cost or pricing data. Only firm fixed price or Fixed Price-Economic Price Adjustment (“FP-EPA”) contracts can be awarded when using sealed bid procedures. Sealed bid contracts are to be awarded to the lowest priced responsible responsive bidder and negotiations are not permitted.
FAR Part 15 provides guidance on contracting by negotiation. Such procedures are to be used when one or more of the factors for use of sealed bidding are not present. Part 15 identifies two techniques for evaluating a proposed price – price analysis and cost analysis.
The purpose of performing cost or price analysis is to develop a negotiation position that provides the parties an opportunity to reach agreement on a fair and reasonable price. Such a price does not require agreement on every element of cost nor that the agreed price be within the CO’s initial negotiation position. The CO’s primary concern is the overall price the government will actually pay. (FAR 15.405)
Price analysis is the process of evaluating a proposed price without evaluating its separate cost elements and proposed profit. It is to be used when certified cost or pricing data are not required to be submitted. The government may not require the submission of certified cost or pricing data:
- When using sealed bidding;
- Generally on contracts with an anticipated value of less than $2M, but in no case where the contract value does not exceed the SAT;
- When prices are based on adequate price competition;
- On contracts for the acquisition of commercial items;
- When prices are set by law or regulation; or,
- When a waiver has been granted by the head of the contracting activity.
FAR 15-404-1 lists seven techniques that can be used to conduct price analysis, including comparison of proposed prices:
- To other prices received in response to the solicitation. Normally, adequate price competition establishes a fair and reasonable price.
- To historical prices paid, whether by the government or other than the government, for the same or similar items.
- With independent government cost estimates (“IGEs”).
The first two techniques are the preferred techniques; however, contracting officers frequently use the IGE as the default comparative tool.
Cost analysis shall be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data are required.
- Contractors are only required to submit certified cost or pricing data if required to do so by the CO.
- Contractors are only required to disclose certified cost or pricing data. They are not required to analyze the data for the government or to use the data in preparing their proposal.
- Generally, contractors are required to submit certified cost or pricing data in the format specified in Table 15-2 found in FAR 15.408.
Cost analysis may also be used to evaluate proposals for price reasonableness when data other than certified cost or pricing data are required to be submitted.
The FAR lists six techniques for conducting cost analysis. One of those techniques is to verify that the proposal is “in accordance” with the cost principles and CAS.
- FAR 31.103 states: “the cost principles and procedures shall be used in pricing negotiated contracts and contract modifications whenever cost analysis is performed.”
- Similarly, FAR 31.102 states: “The applicable subparts of Part 31 shall be used in the pricing of fixed-price contracts, whenever cost analysis is performed.” However, application of cost principles to fixed-price contracts is not a requirement to negotiate agreement on individual cost elements in agreeing on the price.
Table 15.2 requires contractors to state whether their proposals are consistent with FAR Part 31, and if not, to provide an explanation.
Cost realism analysis is the judgmental process of evaluating specific elements of an offeror’s proposed cost to determine whether those costs:
- Are realistic for the work to be performed;
- Reflect a clear understanding of the requirements; and
- Are consistent with the unique methods of performance and materials described in the offeror’s technical proposal.
Cost realism analyses shall be performed on proposals for cost-reimbursement contracts to determine the probable cost of performance. The probable cost may differ from the proposed cost and should reflect the government’s best estimate of the cost that is most likely to result from the offeror’s proposal. The probable cost shall be used to determine the best value.
Profit analysis is only performed when cost analysis is used. COs are prohibited from requiring contractors to submit supporting rationale for their profit or fee objective.
The FAR lists the following profit evaluation factors:
- Contractor effort
- Contract cost risk
- Federal socioeconomic programs
- Capital investments
- Cost-control and other past accomplishments
- Independent development
If you have questions concerning contract pricing, do not hesitate to contact Cherry Bekaert’s Government Contractor Services for advice and assistance.