Price Reasonableness Training: A Comprehensive Guide for Acquisition Management

1. OVERSIGHT & COMPLIANCE BRANCH (OCB) PRICE REASONABLENESS TRAINING January 20, 2010

2. Pricing Wisdom A cynic is a man who knows the price of everything and the value of nothing. Oscar Wilde

3. Table of Contents • Overview……………………………………………….4 • Objective……………………….………………………5 • Definitions……………………………………………..6 • Defining Price Reasonableness….…..…………..…….7 • How to Evaluate Price Reasonableness……………….8 • Types of Analysis Techniques……….…….............9-13 • Summary Table…..…………………….…….………14

4. Overview In FY 2010, OCB performed Acquisition Management Reviews (AMR) of NOAA’s Acquisition and Grants Office (AGO). To assist the Acquisition Divisions (AD), OCB has developed training to address findings from the AMRs. This training will cover contract price reasonableness techniques.

5. OBJECTIVE • This module presents the FAR and CAM sections related to price reasonableness: • definitions and concepts discussed in the regulations • direction and support for price reasonableness evaluations. • This module is set up to be used as a price reasonableness reference guide. • Provide a quick reference guide to determine price fair and reasonable.

6. Defining Price Reasonableness The FAR does not explicitly define the term “fair and reasonable.” The concept of a fair and reasonable price has been described as the price that a prudent business person would pay for an item or service under competitive market conditions, given a reasonable knowledge of the marketplace. Regardless of the precise definition, the FAR clearly establishes the need for determining a price to be fair and reasonable price before a Government contracting officer or ordering officer may award contracts or place orders.

7. Documenting Price Reasonableness After completion of negotiations the CO will carefully document the results of the negotiations and show why the agreed upon price is fair and reasonable in accordance with CAM 15-1. The FAR states A Price Negotiation Memorandum (PNM) or Business Case Memorandum (BCM) shall be accomplished for every contract action (FAR 15.406-3). The BCM/ PNM must contain a documented price reasonableness determination. In those cases where cost or pricing data was not obtained, documenting price reasonableness in the BCM/PNM requires more attention and the utilization of more than one price analysis technique to support the settlement price as being fair and reasonable. As many techniques as necessary to support price reasonableness should be utilized and documented.

8. How ToEvaluate Price Reasonableness • The FAR allows for multiple techniques to evaluate price reasonableness. Due to the type of acquisition within NOAA, the following three are more commonly used. • Price Analysis: A “price analysis” will be the usual procedure followed in a competitive situation and in situations where items are being procured which are sold in the commercial marketplace to the general public. A “price analysis” is an evaluation of the offeror’s price relative to the prices being offered by other vendors and being paid by the general public for the same or similar items. • Cost Analysis: A “cost analysis” will be required whenever a price analysis cannot be performed. A cost analysis entails the review and evaluation of the separate cost elements and the proposed profit of an offeror’s cost proposal. A cost analysis is conducted to perform an opinion on the degree to which the proposed cost, including profit, represents what the performance of the contract ‘should cost’, assuming reasonable economy and efficiency. • Technical Analysis: A “technical analysis” is based on consultation with individuals with specialized knowledge of the equipment or service being procured who at a minimum, examine the types and quantities of materials, labor requirements and cost.

9. Price Analysis Techniques-FAR 15.404-1(b)(2) 1. Comparison of proposed prices received in response to the solicitation. Normally, adequate price competition establishes price reasonableness. This is the most commonly used technique, as the majority of Government procurement actions attract two or more offers that are competing independently for award. 2. Comparison of previously proposed prices and previous Government and commercial contract prices with current proposed prices for like items. Both the validity of the comparison and the reasonableness of the previous price(s) must be established. 3. Use of parametric estimating methods/application of rough yardsticks to highlight significant inconsistencies that warrant additional pricing inquiry. Comparing the proposed price per square foot for a certain type of building construction against an established commercial standard is an example of this technique.

10. Price Reasonableness Techniques Techniques-FAR 15.404-1(b)(2) Continued 4. Comparison with competitive published price lists, published market prices of commodities, similar indexes, and discount or rebate arrangements. The Government may be able to seek discounts from published price lists based on volume buying. 5. Comparison of proposed prices with independent Government cost estimates. A contractor-developed cost estimate may not be used in lieu of a Government cost estimate. 6. Comparison of proposed prices with prices obtained through market research for the same or similar items. Trade journals, newspapers, and economic indexes can provide useful comparative information. 7. Analysis of pricing information provided by the offeror. This “catch-all” category includes information that does not fall into the other categories.

11. Cost Analysis Techniques-FAR 15.404-1(c)(2) 1. Verifying cost data or pricing data and evaluation of cost elements.– This may be accomplished through audits of all proposed cost, projection of cost trends, cost-estimate and audited or negotiated cost rates.2. Evaluating the effect of the offeror’s current practices on future costs. In conducting this evaluation, the contracting officer shall ensure that the effects of inefficient or uneconomical past practices are not projected into the future. In pricing production of recently developed complex equipment, the contracting officer should perform a trend analysis of basic labor and materials, even in periods of relative price stability. 3. Comparing the costs proposed by the offeror of the individual cost elements.– This is used when previous cost incurred and/or estimates are available for the same or similar items or services. The government estimate may also be used to compare the cost elements.

12. Cost Analysis Techniques-FAR 15.404-1(c)(2) Continued 4. Verification-- Ensurance the offeror’s cost submissions are in accordance with the contract cost principles and procedures in part 31 and, when applicable, the requirements and procedures in 48 CFR Chapter 99 (Appendix to the FAR loose-leaf edition), Cost Accounting Standards. 5. Review --Used determine whether any cost data or pricing data, necessary to make the offeror’s proposal suitable for negotiation, have not been either submitted or identified in writing by the offeror. If there are such data, the contracting officer shall attempt to obtain and use them in the negotiations or make satisfactory allowance for the incomplete data. 6. Analysis of the results of any make-or-buy program reviews, in evaluating subcontract costs (see FAR 15.407-2).

13. Technical Analysis Techniques-FAR 15.404-1(e) • Request specialized knowledge: The contracting officer should request that personnel having specialized knowledge, skills, experience, or capability in engineering, science, or management perform a technical analysis of the proposed types and quantities of materials, labor, processes, special tooling, equipment or real property, the reasonableness of scrap and spoilage, and other associated factors set forth in the proposal(s) in order to determine the need for and reasonableness of the proposed resources, assuming reasonable economy and efficiency. • At a minimum: The technical analysis should examine the types and quantities of material proposed and the need for the types and quantities of labor hours and the labor mix. Any other data that may be pertinent to an assessment of the offeror’s ability to accomplish the technical requirements or to the cost or price analysis of the service or product being proposed should also be included in the analysis. • The contracting officer should: Request technical assistance in evaluating pricing related to items that are “similar to” items being purchased, or commercial items that are “of a type” or requiring minor modification, to ascertain the magnitude of changes required and to assist in pricing the required changes.

14. Summary of Applicable FAR Proposal Analysis Techniques The recommended techniques and their application to NOAA contracting are summarized below.

15. QUESTIONS