One of the requirements for a Contracting Officer to fulfill his duties is to determine that the price to be paid is fair and reasonable. Various parts of the Federal Acquisition Regulation (FAR) cite this requirement and departments and agencies have a variety of ways of making this determination. For instance, it could be a separate document such as a Determination and Findings (D&F), or a pre-formatted memorandum, or a checklist that establishes fair and reasonable pricing. But the point is, the CO must assert that the price to be paid is fair and reasonable as an assurance that the government is not being swindled by overpaying for the required goods and services.
The interesting part is that fair and reasonable is not defined in the FAR and is entirely subjective and depends on the given situation. For example, when multiple offers are received in a simple procurement, fair and reasonable can be established by the range of prices shown by the competing offers. Based on that competitive range, and incorporating whatever evaluation criteria described in the solicitation, the CO can select the winning offer and determine the price to be fair and reasonable.
Or the price of a good or service may be substantially higher if delivery must take place in extreme locations or under difficult circumstances. My former life as a contingency contracting officer in Afghanistan supporting the US and coalition forces lends itself to this point. Some outposts were situated in enemy-controlled territory, or on mountaintops, so delivery of goods or performance of services involved an extra level of risk or effort, and prices would rise accordingly. A sheet of plywood might cost $10 in the city, but to get it to a remote combat outpost might increase the price to $20 or $30. If the CO could show evidence that that cost was the best possible negotiated price, then that means that price is fair and reasonable, in that situation and in those circumstances.
This point highlights the significance of the CO’s judgment and the critical role it plays. The CO must be able to judge the validity of a price by examining all relevant factors, and then must be confident to award that contract and justify the decision. Other elements of this determination typically involve price analysis, cost analysis that may involve certified cost and pricing data from the contractor, and market research that demonstrates competitive pricing and market availability. Obviously, if the CO can determine that there is only one available source, or only limited quantities of goods from all available sources, then this scarce availability influences the ultimate determination on fair and reasonable prices. The CO must consider all these elements, along with historical trends and recent developments. Interesting contrasts arise from these elements, as prices tend to rise over time because of inflation and economic growth and expansion, whereas electronics and computer technology prices tend to decrease over time as innovative technology becomes mainstream and commonplace. To be thorough in completing the fair and reasonable price determination, the CO must consider these various elements and arrive at the final position.
The importance of this to contractors is that they need to understand the CO’s challenge in determining the proposed (or negotiated) prices to be fair and reasonable. The contractor can facilitate this task by being forthcoming with requested information and helping show how the proposed price is reasonable considering all the factors mentioned above. While contractors are not required to disclose all this information (for contracts below the thresholds established in the FAR and the Truth in Negotiations Act), it may nevertheless be advisable to be as helpful as possible in order to assist the CO establish fair and reasonable pricing. Of course, proprietary information must be protected, and business decisions cannot be taken lightly. But when circumstances permit, it is better for everyone for the contractor to work with the CO to help justify the proposed price and facilitate the fair and reasonable determination.