A big part of making an award decision by the contracting officer is determining price reasonableness. Depending on the complexity of the procurement this can entail a very simple analysis or hours and hours (or days!) of work. The federal government in its quest to make sure that the taxpayer’s money is protected goes to great lengths to assure that all awarded contracts include a fair and reasonable price.
When I first started out working for DoD I worked for the Defense Logistics Agency, literally buying nut and bolts. Very small parts used on very large machines. Since many of these parts were for aviation they were not the garden variety nuts and bolts you see at the local home improvement store. However, they were manufactured in many instances to government specifications that allowed any machine shop to produce them, so we always had plenty of suppliers offering pricing under a Request for Quote (RFQ). I would say we used competitive pricing 90% of the time to make our price reasonableness determination. If we didn’t have enough offerers we would resort to using prior price history and some simple inflation factors to get an answer. Of course, there were instances where the prices still were out of line and then you would go get on the phone and negotiate. Simply put we did price analysis and very little cost analysis due to the small dollar values. (Just how old am I…well the simplified acquisition level was….5 numbers and that is all I admit to!)
I went up the ladder and moved on to buying major weapon systems for the Navy. Price reasonableness got much more complex! Pricing binders weighed 50lbs for a production contract from all the cost and pricing data that the defense contractors were required to submit with the proposal. The Government would spend weeks looking at cost estimating relationships, overheads, markups and direct cost not only for the prime but for major subcontractors. Teams of contract specialists and program personnel would break the proposal apart and evaluate the numbers. The contracting office would also enlist the support of the Defense Contract Audit Agency to perform an audit to ensure compliance with the DoD Cost Accounting Standards which, back in the old days, were as big as the FAR.
After all this is done, the contract specialist would write a memo to explain to the contracting officer if the offered price is reasonable. How many times do you think I accepted the initial offer? Never happened because on most deals industry expects the government to challenge cost. After negotiations the government then completes the documentation to explain the results of the negotiation. This details the areas that were questioned and the resulting agreement.
But you know what else that documentation had to include? A section on price analysis! Okay I have no competition, and have spent weeks going over every item on the bill of material and every engineering support hour and now I must do price analysis? The only thing left is comparing historical prices for the last production lots, which required some regression analysis and other techniques. I am not sure that was really a value-added activity. After review at multiple levels and getting a sign off, the contract can be awarded with a price that is determine fair and reasonable.
Price reasonableness isn’t about the lowest price its about the Government not paying more than any other buyer of that product. It is important to remember that contracting officers are stewards of the tax payers’ money and they are charged with making sure the Government is using the tax dollars wisely.