People new to federal contracting get introduced to market research as a rather generic description of the government’s efforts to determine a fair and reasonable price range for a required item. Often, this means collecting three price quotes – whether from websites, catalogs, or actual quotations submitted by vendors. That is sufficient for an introductory understanding and fulfills requirements for simplified acquisition or commercial procurements. However, market research involves a lot more than simple price comparison and recently the US Government has provided more definition and stringent requirements for thorough market research during the pre-award phase of contracting.
First, the latest trends in government contracting place a greater emphasis on commerciality. This means that program managers and contracting officers are required to do more extensive market research in the requirements development phase to ensure that existing solutions are not already available. Additionally, traditional defense and other federal contractors are required to conduct and document their market research when asserting commerciality as a subcontractor or determining subcontractor commerciality as a prime contractor. And last, market research is a critical aspect of the mandatory price analysis that contracting officers must complete in determining the contractor’s proposed price as fair and reasonable prior to making contract award.
This last aspect is where market research gets more complicated and involved, as several aspects affect price, and many of these elements must be examined to provide as thorough an assessment as possible. Market research includes strategic considerations, like the overall industry, market sector and competing manufacturers and vendors. Tactical market research focuses on the specific provider, the specific product and similar products, and the past and current factors that help shape the proposed price. These factors include materials and labor costs, changes in demand, special packaging, shipping costs, the costs of regulatory compliance, special tooling or machining expenses, the opportunity cost of not producing other items, and so on. Critical to this research is a working knowledge of the proposed item, its purpose and function, its design and composition, key components and structural features, dimensions and technical specifications, and price build-ups that result from each of these characteristics.
Additional factors to examine include the vendor’s historical sales and prices, quantity or volume discounts, long-term pricing agreements, and so forth. When dealing with prime and subcontractors, thorough market research includes the subcontractor’s previous sales to this prime contractor as well as other buyers and includes the prime contractor’s past purchases of the proposed or similar items, from the proposed subcontractor as well as any other potential suppliers. When buying from prime contractors, government contracting professionals must also account for the prime contractor’s additional costs, such as General and Administrative (G&A), overhead, and other direct costs including non-recurring expenses related to final assembly and configuration.
In total, market research involves much more than simply collecting prices from cursory internet searches. Buyers, price analysts and cost estimators must understand all of these nuances, and be able to effectively collect, analyze and synthesize the various data points to arrive at a coherent price position.