Besides achieving a low price in your pricing strategy, you also want to ensure your price is fair and reasonable. If the price is too low, it may be considered unreasonable or unrealistic. If your price is too high, you may appear to lack understanding of the requirement. The Contracting Officer (CO) has an inherent responsibility, based on policy, to conduct a price reasonableness test prior to making contract award. It is used for evaluating responses to requests for quotations (RFQs), requests for proposals (RFPs) and invitations for bids (IFBs). The determination is documented as part of the source selection decision and plays a major role in determining the apparently successful offeror and ultimate winner.
A fair and reasonable price is commonly described as the price a prudent person would pay for an item or service under competitive market conditions, given a reasonable knowledge of the marketplace. Contracting Officers have several techniques available in making their reasonableness determination. The Federal Acquisition Regulation (FAR) outlines three techniques available to the CO: Price Analysis Techniques, Cost Analysis Techniques, and Technical Analysis Techniques. We will focus on elements of the price analysis technique.
The guidance at FAR 15.404-1, Proposal Analysis Techniques, allows the Contracting Officer multiple ways to evaluate price reasonableness. The most common technique used is Price Analysis Techniques (FAR 15.404-1(b)(2)). Price analysis and comparison of proposed prices received in response to the solicitation is the most commonly used technique. Contracting Officers typically group offerors with fair and reasonable pricing in the competitive range. All other prices that are deemed too low or too high are not included in the competitive range and have no chance to receive award. The competitive range is the range of proposals identified to be highly rated among a group of proposals. The highly rated proposals will continue through source selection. Offerors should ensure that all aspects of their price proposal are reasonable to help them advance in the source selection process. Ultimately, the company receiving contract award will be selected from the competitive range.
Another common method is comparing the proposed prices with previously proposed prices and previous government contract prices for similar products or services. Offerors can and should follow the same process in finalizing their price proposal and ensuring their prices are reasonable. Websites such as www.USASpending.gov, www.fpds.gov, and www.FBO.gov are excellent sources for previous contract prices and other data. The government also uses comparison with published price lists such as the General Services Administration (GSA) Multiple Award Schedules (MAS). This is another example of how offerors can similarly conduct a reasonableness test on their pricing prior to submitting to the government; by reviewing pricing on similar GSA schedule contracts and comparing to their own.
Keep these concepts in mind when developing pricing strategies and proposals. Take steps to review your costs; walk them backwards and ensure they generally make sense. You’ll strengthen your price proposal and increase your competitiveness and chance to win.