Pricing Government Contracts: Fair and Reasonable or Most Favored Customer?

1. Pricing Government Contracts: Fair and Reasonable or Most Favored Customer? Presented By: William A. Shook, Esq. June 15, 2006

2. Statutory/Regulatory Standard • FAR 15.402 “Contracting officers must—(a) Purchase supplies and services from responsible sources at fair and reasonable prices.” • GSAR 538.270 (a) The Government will seek to obtain the offeror's best price (the best price given to the most favored customer). However, the Government recognizes that the terms and conditions of commercial sales vary and there may be legitimate reasons why the best price is not achieved.

3. Fair and Reasonable – Methods To Establish • Cost or Pricing Data • Truth in Negotiations Act (TINA) • 10 USC 2306a and 41 USC 254b • Certified as Current, Accurate, and Complete • Definition – FAR 2.101 • Information Other Than Cost or Pricing Data • Accurate only • Definition – FAR 2.101

4. Exceptions to Cost or Pricing Data • Contracts under Simplified Acquisition Threshold ($100,000) • Adequate Price Competition • Commercial Items (Products and Services) • Prices Set By Law or Regulation • Waivers

5. Adequate Price Competition • FAR 15.403-1(c) • Two or more independent, responsible offers • Price a “substantial” factor in best value award • No finding of price unreasonableness • Approved at level of contracting officer • Only one offer received • Offer submitted with expectation of competition • Approved at level of contracting officer • Price Analysis demonstrates price is fair and reasonable

6. Commercial Item • Definition – FAR 2.101 • Products • Of a type customarily used by general public for non-governmental purposes and offered for sale, lease or license • Minor modifications • Newly developed products • Services • Installation, maintenance, repair, training and other services that support commercial products and offered under similar terms • Of a type offered and sold competitively in substantial quantities in the commercial marketplace at catalog or market prices • Contracting Officer discretion and determination

7. Price AnalysisInformation Other Than Cost Or Pricing Data • No certification, but accurate • Not required with adequate price competition or statutory prices • Any Information necessary to determine price reasonableness or cost realism • Examples • Previous federal contract prices • Previous commercial contract prices • Catalogs/Price Lists • Prices for similar products/services • Component “costs” • Market pricing • Audit Rights – Preaward – 52.215-20

8. Price Analysis - Waterfall • 15.402(a) • No additional information if adequate price competition • Pricing information within the government • Other contracts for same or similar products/services • GSA MAS schedule pricing – Advantage! • Other Government Wide Acquisition Contracts (GWACs) • Government estimates • Pricing information outside the government • Market price information • Public catalog pricing • Pricing information from the offeror • Previous pricing for same or similar items/services

9. Price Analysis Techniques • FAR 15.404-1(b) • Does not include review of separate cost elements or profit • Comparison of competitive prices • Previous prices • Parametric measures – price per pound, dollars per person hour • Published price lists • Published market prices • Independent government estimates • Pricing information provided by offeror • See Contract Pricing Reference Guide 5 Volumes • http://www.acq.osd.mil/dpap/contractpricing/

10. Cost or Pricing Data - Required • No exceptions apply • No price competition, i.e., sole source • Acquisition of non-commercial item • No waiver • No statutory price • Negotiated contract over $550,000 • Subcontracts over $550,000 where higher tier provided cost or pricing data unless exception applies • Contract modifications over $550,000 unless exception applies

11. Cost or Pricing Data – Definition – FAR 2.101 • All facts that, as of the date of price agreement or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price, prudent buyers and sellers would reasonably expect to affect price negotiations significantly. • Are factual, not judgmental; and are verifiable. • All the facts that can be reasonably expected to contribute to the soundness of estimates of future costs and to the validity of determinations of costs already incurred. • Vendor quotations; • Nonrecurring costs; • Information on changes in production methods and in production or purchasing volume; • Data supporting projections of business prospects and objectives and related operations costs; • Unit-cost trends such as those associated with labor efficiency; • Make-or-buy decisions; • Estimated resources to attain business goals; and • Information on management decisions that could have a significant bearing on costs.

12. Cost or Pricing Data - Certification • Current • Accurate • Complete • Penalties • Defective pricing claims • Criminal false statements • Civil false claims

13. Cost or Pricing Data – Cost Categories • Materials and Services • Direct Labor • Indirect Costs • Other costs • Special tooling • Travel • IT services • Rework • Royalties • Facilities Capital Cost of Money

14. Cost Principles • FAR Part 31 • Reasonable • Allocable • Allowable • 52 Principles • Advertising costs • Cost of money • Employee morale • Professional and consultant services • Alcoholic beverages

15. Audit Rights • Adequate Price Competition-Fixed Price Contracts • No contractual audit right • Information other than cost or pricing data • Pre-award accuracy of data – no cost or profit data for catalog or market pricing – 52.215-20 • Adequate Price Competition-Time and Material Contracts • Direct and indirect costs – 52.215-2 • Cost or pricing data • All data – 52.215-2 • Comptroller General • Inspector General – Subpoena – Waste, Fraud and Abuse

16. General Services Administration Multiple Award Schedules • Commercial Sales Practices • GSA’s device for seeking “Most Favored Customer” pricing • Contractor discloses in substantial detail its discounts and other concessions granted to all customers • Significant “tug of war” on pricing in most GSA MAS Contract negotiations

17. Key CSP Terms - Customer • “Customer” = all purchasers except Federal Government: • OEMs • VARs • State and Local Government agencies • Distributors • Educational Institutions • National Accounts • Consumers • Dealers • GSA often requests details on Federal customer sales • Resist disclosing direct and indirect sales to Federal customers

18. Key CSP Terms - Discount • “Discount” = any reduction to published or unpublished catalog prices • Discounts include (but are not limited to): • Rebates • Quantity discounts • Purchase option credits • Any other terms or conditions which reduce the end user’s overall acquisition cost for the product or service

19. Key CSP Terms - Concessions • “Concession” = any benefit, enhancement or privilege (other than a “discount”), which reduces overall acquisition costs or encourages the customer to consummate a purchase • Concessions include (but are not limited to): • Freight allowances • Extended warranties • Extended price guarantees • Free installation, and • Bonus goods

20. Completing The CSP Form • Submit CSP for all Special Item Numbers (SINs) • CSP Chart lists five columns: • Column 1—Customer (by category) • Column 2—Discount • Column 3—Quantity/Volume • Column 4—FOB Term • Column 5—Concessions

21. GSA – Pricing • Most Favored Customer Goal • Manufacturer – Type of Customer • Reseller – Percent mark-up • Supplier – CSP chart requested • Certification • Current, Accurate, and Complete

22. Partners • Teaming Agreements • Executed prior to proposal submission • Agreement to Negotiate in Good Faith; • Agreement to Agree; or • Absolute Duty to Place Subcontract • After award, only prime contractor has privity with agency

23. Teaming Agreements - Pricing • Exclusive • Multiple Partners • Similar pricing for similar terms • Different pricing for different terms

24. Pricing Strategies – Market Research • Government Databases of Contract Awards • Fedbizopps – www.fedbizopps.gov • Federal Procurement Data System – www.fpds.gov • GSA Advantage! – www.gsaadvantage.gov • Freedom of Information Act • Contract prices • Line item prices • Issue of competitive prejudice

25. Questions? If we were unable to answer your question during the webcast, we will respond to you via email. Thank you for participating! Please contact us anytime with additional questions. William A. Shook, Esqbillsh@prestongates.com (202) 628-1700