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Contracting Officer Podcast Slides

Explore the importance and nuances of price reasonableness in government contracting through various zones and evaluation criteria. Understand cost analysis and factors affecting reasonable pricing.

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Contracting Officer Podcast Slides

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  1. Contracting Officer PodcastSlides Knowledge & Insights From Contracting Officers

  2. Episode 071 What is Price Reasonableness? Original Air Date: 20 March 2016 Hosts: Kevin Jans & Paul Schauer

  3. Formatting notes • Hyperlinks: Blue font indicates hyperlinks – presentation must be in ‘Slide Show’ mode to activate the link • Red bold font indicates a point of emphasis • Green bold font indicates CO’s personal comment or perspective

  4. Introduction • The purpose of this podcast is to explain Price Reasonableness • Price always matters • Whether awarding through competition or sole source, price matters • There are three ways price is assessed in RFPs. Is it: 1. Reasonable? 2. Realistic? 3. Complete?

  5. When does Price Reasonableness happen? • Acquisition Time Zones (from Podcast Episode 003) • Requirements Zone • Market Research Zone • RFP Zone • Source Selection Zone (or sole source) • Execution Zones: Kick Off, Transition (Ramp Up), Performance, Re-compete

  6. Why is Price Reasonableness important? • Price matters. Always. • What is the ”right” price? • Is this too much, too little? • Depends on whom you ask • This can be contentious: • Government says: “We don’t think this is reasonable.” • Industry says: “How do you know?” • The fight is on!

  7. What is ‘cost or price analysis?’ • FAR 4 - Administrative Matters, requires it in the contract file: 4.803(a)(19) • FAR 16 - Contract Types, says it is a factor in choosing contract type: 16.104(b) and (c) • FAR 15 - Contract by Negotiations, says it may (or shall) be used to determine to determine reasonable price: 15.402 • However, it is not clearly defined (at least not in FAR Part 2) • It is not black and white (ironically, since numbers are so finite) • It is more art than science: ”I’ll know it when I see it”

  8. What is ‘cost or price analysis?’ • The goal is to determine the ‘right’ price • Yes, that is subjective • “Every decision divides,” so no matter what, someone thinks they paid too much or they sold for too little… • If you get to a deal, both sides can “live with” the price as “fair” • The good news: • There are lots of ways to do it. • The goal is to make sure the price is ‘right’

  9. FAR 31.201-3: Determining “reasonableness” • (a) A cost is reasonable if, • in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. • No presumption of reasonableness shall be attached to the incurrence of costs by a contractor (ouch!) • If an initial review of the facts results in a challenge of a specific cost by the CO or COR, the burden of proof shall be upon the contractor to establish that such cost is reasonable

  10. FAR 31.201-3: Determining “reasonableness” • (b) What is reasonable depends upon a variety of considerations and circumstances, including - (1) the type of cost generally recognized as ordinary and necessary for the company or performance (desks, offices, employees, materials, whatever) (2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations (health insurance, overhead, quality control, proposal costs) • There are more, but let’s keep it tight.

  11. Where else does this apply? • Proposal Evaluation: • FAR 8 (GSA) mentions it • FAR 13 (SAP) mentions it (See Podcast Episode 051 on SAP) • FAR 15 (Contract by Negotiations) mentions it • Bottom line: If it’s competed, it’s 99% reasonable

  12. Where else does this apply? FAR 15.305 -- Proposal Evaluation (1) Cost or price evaluation. • Normally, competition establishes price reasonableness. Therefore… comparison of the proposed prices will usually satisfy the requirement to perform a price analysis (and a cost analysis is not needed) • However, in limited situations, a cost analysis may be appropriate to establish reasonableness of the otherwise successful offeror’s price. • For example, when using cost-reimbursement, cost “realism” kicks in

  13. Where else does this apply? • Proposed costs are realistic … • Based on the offeror’s understanding of the work, AND • The offeror’s ability to perform the contract.

  14. Why Should Government Care? • Price matters. Always. • Reasonableness is a fuzzy term. Don’t hide behind it. • Your judgement is what makes it reasonable. • Make the case • Hint: you can BORROW the knowledge from others (in fact, you should) • Reasonableness is in the eye of the beholder: • Don't forget market forces, this is capitalism after all. • The law of Supply and Demand is real, and impacts price.

  15. Why Should Government Care? • If you're buying something that is in high demand, or limited supply, or of unique capability or quality, EXPECT TO PAY A PREMIUM PRICE • You can say "that's not reasonable so I'm not paying it", but vendors don't have to sell it to you if the price isn't reasonable to them too • Patriotism only goes so far... • The war for talent is a real thing • There is a cap on the price and quality

  16. Why Should Industry Care? • Price matters. Profit matters. • “Cash is like oxygen, without it, you die.” (Barry Shevlin) • Reasonableness is something you need to explain • If it’s not reasonable to them, it’s on you to make it so. • Sorry, but those are the facts • That is the "price" you pay for access to the largest market

  17. Why Should Industry Care? • Be clear. Be explicit. Tell the story of why it’s reasonable. • Go to Apple’s website and you immediately see they don’t offer the lowest end Intel processor. • They are telling you their story • It’s not a price objection, it’s a belief objection. They don’t believe it’s reasonable. • Help them believe

  18. Summary • REASONABLENESS IS IN THE EYE OF THE BEHOLDER • What if the price is "too low?” • This is where "realistic" comes into play • Ever heard of the term "loss leader?” • A company may make a conscious decision to lose money on a sale for strategic reasons. • This gets us into much deeper issues...

  19. Summary • Government • Find ways to determine the price reasonable through the examples we gave • Use your judgement and ask for specific examples • You’ll learn much more (and teach your customers and proposal writers what you expect to see) • “I’ll know it when I see it” is a waste of their time (and yours)

  20. Summary • Industry • Don’t be offended. • Objections are a sign of interest…if they don’t ask for justification it means they don’t want to give you the contract. • “Objections are the gateway to the sale” (Gittomer) • Tell your story. That’s why the Pricing Volume often has no page limit. • Don’t give them numbers they don’t understand • They need ‘context’ to determine the price is reasonable • Give them ‘content’

  21. Contact us • We are on LinkedIn, Twitter and Facebook • We also started the Government Contracting Network Group on Facebook. Join us there! • Send your topics to paul@Contractingofficerpodcast.com • For Community support, contact Shelley Hall at shelley.hall@skywayacquisition.com

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