The Basics of Price Analysis Presented by Edmund Kowalski Financial Services Office (FSO) Updated as of April 19, 2006
Pricing Wisdom A cynic is a man who knows the price of everything and the value of nothing. Oscar Wilde
Agenda/Briefing Topics • Price Analysis • GAO Report • Two Types of Cost or Pricing Data • Price Analysis Techniques • Commercial Items • Price Analysis Arithmetic • Price Analysis Documentation • Commercial Versus Government Contracting/Pricing • Price Comparisons Discussion • Price Analysis Techniques: Discussion • Discounts • Discussions with Offerors • Unbalanced Pricing
Introduction • This module presents the FAR, DFARS, and AFARS sections related to price analysis: • definitions and concepts discussed in the regulations • direction and support for pricing evaluations. • This module is set up to be used as a price analysis reference guide. • The contractors know the regulations! • YOU should know the regulations too!!
Disclaimer • This module and others in the series represent a summary covering the pricing basics. • Not an exhaustive, all inclusive presentation on pricing • They do not replace attending the series of DAU price and cost courses. • This module covers many types of pricing situations, not just those pertaining to contracting in Europe.
Price Analysis Defined • Per FAR 15.404-1(b): Price Analysis is the process of examining and evaluating a proposed price, without analyzing its separate cost elements and proposed profit.
In Plain English:What is a Price Analysis? • It’s a comparison! • A comparison of the proposed price to • All offered prices • The current contract price • The previous/historic contract price • A similar item’s/service’s price • An IGCE • Others
Why Perform a Price Analysis? • A Price Analysis is performed to ensure that the offered/proposed price is fair and reasonable. • FAR 15.402(a): Contracting officers shall purchase supplies and services from responsible sources at fair and reasonable prices. • FAR 15.404-1(a)(1): The contracting officer is responsible for evaluating the reasonableness of offered prices.
What is a Fair and Reasonable Price? • There is no specific definition for “Price Reasonableness” or “Fair and Reasonable Price” in the FAR. • Suggestion: Substitute price for cost in the FAR definition below. • Cost Reasonableness: A cost (price) is reasonable if, in its nature and amount, it does not exceed what a prudent person would pay in the conduct of competitive business [FAR 31.201-3(a)]. • Bottom Line: Price Reasonableness is determined by the results of a price analysis.
FSO Working Definition of Price Reasonableness • A price is determined reasonable if it does not exceed what a prudent consumer and/or businessman would pay in the conduct of competitive business, based on the written results of a price/cost analysis for which the contracting officer’s rationale, assumptions, calculations, and final conclusion (reasonableness determination) are verifiable and convincing to a third party.
When Must a Price Analysis Be Performed? • A Price Analysis is always performed! • Price analysis shall be used when (certified) cost or pricing data are not required [FAR 15.404-1(a)(2)]. • If a cost analysis is performed when (certified) cost or pricing data are required, a price analysis should also be used to verify that the overall price is fair & reasonable [FAR 15.404.1(a)(3)]. • At a minimum, the contracting officer must use price analysis to determine whether the price is fair and reasonable whenever acquiring a commercial item [FAR 15.403-3(c)(1)]. • Be prepared: Management always asks how the proposed price compares to the previous contract figure or similar items/services on the market.
Examples of When a Price Analysis Is Used • Competitive Procurement: Comparing competing offers. • Competitive or Sole Source Procurement: Comparing the low or proposed price to a • Historic price (data) for the same or similar item • Current price (data) for the same or similar item • Sole Source Procurement: cost analysis performed • Unit/total price is compared to historic or current contract prices for the same or similar item/service as additional support for the cost analysis
Summary Results of GAO Report, June 1999: DOD Pricing of Commercial Items Needs Continued Emphasis: (1 of 3) 1. Price Analyses are too limited to ensure that the proposed prices were fair and reasonable. • Pertinent historical pricing information was not utilized in price analyses, such as prior contracts or contracts at other agencies. 3. Base comparison prices were not determined to be fair and reasonable; thus, they are not valid for use in price comparisons.
Summary Results of GAO Report, June 1999: DOD Pricing of Commercial Items Needs Continued Emphasis: (2 of 3) 4. Buyers are accepting offered prices as fair and reasonable, when identical to the catalog or list price figures (ignoring discounts, etc.). 5. Some prices included the costs for services that were not requested (paying price premiums). 6. PCOs are not using the discretionary clause (FAR 52.215-20), requiring offerors to provide information other than cost or pricing data, such as sales data, as support for proposed prices. 7. Contract files lacked documentation .
Summary Results of GAO Report, June 1999: DOD Pricing of Commercial Items Needs Continued Emphasis: (3 of 3) • Conclusion? • Management is looking at the price analyses performed by the contracting community • Price analysis is an important function and part of the contract specialist’s job • Documentation is essential • Opinion: There doesn’t appear to be any negative fallout if it is not done properly • Report Number: GAO/NSIAD-99-90, June 1999 • Study references ODUSDA(AR) Information Guide, Commercial Pricing
IG DoD Audit Report • Contracting Officer Determinations of Price Reasonableness When Cost or Pricing Data Were Not Obtained • Report Number D-2001-129, dated 30 May 2001 • Office of the Inspector General Department of Defense • Basically, it came to the same conclusions
First Type: (Certified) Cost or Pricing Data [FAR 2.101] • Definition: All facts that, as of the date of price agreement or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price, prudent buyers, and sellers would reasonably expect to affect price negotiations significantly. • Are factual, not judgmental, and are verifiable. • Includes data forming bases of judgments. • More than historic accounting data. • All facts contributing to soundness of estimates.
Second Type: Information Other than Cost or Pricing Data[FAR 2.101] • Definition: Any type of information that is not required to be certified IAW FAR 15.406-2 and is necessary to determine price reasonableness or cost realism. • Such information may include pricing, sales, or cost information, and includes cost or pricing data for which certification is determined inapplicable after submission. • Certification is the difference between the two categories of cost/price data!
Certification of Cost or Pricing Data [FAR 15.406-2] • When cost or pricing data are required, the contracting officer shall require the contractor to execute a Certificate of Current Cost or Pricing Data. • “To the best of my knowledge and belief, the cost or pricing data submitted, either actually or by specific identification in writing, to the Contracting Officer or the Contracting Officer’s representative in support of (the proposal) are accurate, complete, and current as of (date negotiations complete or price agreement reached).”
Certification Implications for the Contractor • Emphasis on non-certified data was an Acquisition Streamlining change: • To reduce lead-times and costs to the Government & Contractors • Facilitate evaluations and reduce post award administration • Certification is expensive to the contractor in terms of time, manpower, and cost. • Administrative and Legal problems for contractors with certification: • Truth in Negotiations Act (TINA) - 10 U.S.C. 2306a and 41 U.S.C. 254b) • DCAA post award audits • Potential defective pricing
Exemptions from (Certified) Cost or Pricing Data Requirements • FAR 15.403-1(b) provides five exemptions • Adequate price competition • Prices set by law or regulation • Commercial items • Waivers • Modifying commercial item/service contract or subcontract • FAR 15.403-2 adds the exercise of options if the price was established at contract award or initial negotiation. • Also FAR 15.403-1(a): Cost or pricing data shall not be obtained for acquisitions at or below the simplified acquisition threshold.
Adequate Price Competition [FAR 15.403-1(c)(1)] 1 of 3 1. Two or more responsible offerors, competing independently, submit offers that satisfy the expressed requirement • Award based on best value where price is a substantial factor in the source selection. • There is no finding that the price of the otherwise successful offeror is unreasonable. (A finding that the price is unreasonable must be supported by statement of the facts, approved at the level above the PCO.)
Adequate Price Competition [FAR 15.403-1(c)(1)] 2 of 3 2. Received only one offer but: • PCO expected competition (two or more responsible offerors, etc) based on market research or other assessment • PCO concludes offeror also expected competition • A written Determination documents that the price • Is based on adequate competition • Is reasonable • Is approved at level above PCO
Adequate Price Competition [FAR 15.403-1(c)(1)] 3 of 3 3. “Price Analysis clearly demonstrates that the proposed price is reasonable in comparison with current or recent prices for the same or similar items, adjusted to reflect changes in market conditions, economic conditions, quantities, or terms and conditions under contracts that resulted from adequate price competition.”
Waivers [FAR 15.403-1(c)(4)]1 of 2 • The Head of the Contracting Agency (HCA) may waive the requirement for submission of cost or pricing data in exceptional cases. • This authorization must be in writing with supporting rationale. • The waiver is based on a determination of the price as fair and reasonable without submission of (certified) cost or price data. • Example: data submitted on previous production buys sufficient for the current one, when combined with updated information, • Subcontractors are still required to submit certified data unless a separate waiver is obtained.
Waivers [FAR 15.403-1(c)(4)]2 of 2 • Per DFARS 215.403-1(c)(4), DOD also waived the requirement for submission of cost and pricing data for: • Canadian Commercial Corporation (CCC) and its subcontractors. • Nonprofit organizations, including educational institutions, on cost-reimbursement-no-fee contracts.
Obtaining Information to Establish Price Reasonableness [FAR 15.402(a)] • Do not obtain more info than necessary. • Data collection/preparation is expensive • Order of preference for type of data required. 1. No additional information, if price based on adequate price competition (except as in FAR 15.403-3(b)) 2. Information other than cost or pricing data 3. (Certified) cost or pricing data
Order of Preference for Obtaining Information Other Than Cost or Pricing Data • FAR 15.402(a)(2) states • Rely first on information available within the Government. • Second, on information obtained from sources other than the offeror. • If necessary, on information obtained from the offeror.
Information Other than Cost or Pricing Data General [FAR 15.403-3(a)] • If the PCO obtains information other than cost or pricing data from the offeror, it must include appropriate information on the prices at which the item or similar items have been sold, adequate for determining price reasonableness. • Example: Prices/sales data from the same/similar items at comparable quantities. • See Chapter 2, Volume 3, Contract Pricing Reference Guides
Proposal Price Analysis Techniques[FAR 15.404-1(b)(2)] • Compare offers received * • Compare proposed prices to price history * • or system bill of material or current contract • Parametric methods • Comparison to published (catalog) price lists and published market prices • Comparison with independent government estimates • Compare proposed prices to market research or pricing data for same/similar items • Analysis of pricing information provided by the offeror. * preferred techniques per FAR 15.404-1(b)(3)
An Aside: FAR 2.101 Definitions • “Catalog price” • means a price included in a catalog, price list, schedule, or other form that is regularly maintained by the manufacturer or vendor, is either published or otherwise available for inspection by customers, and states prices at which sales are currently, or were last, made to a significant number of buyers constituting the general public. • Artifact of the old days • Use/view with caution since price lists are easily produced • “Market prices” • means current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated through competition or from sources independent of the offerors.
Proposal Price Analysis Techniques DFARS 215.404-1(a)(i) – (iv)] • For spare parts and support equipment, perform an analysis • If proposed price exceeds last price paid (in last 12 months) by 25% or more • Comparison of item description and proposed price indicate potential for overpricing • Significant high-dollar items • Random sample of low dollar items
Auxiliary Price Analysis Techniques • These include: • Value Analysis: List the functions required, and compare to those of alternative products with know prices • Visual Analysis: Inspect the item or drawings to get a general idea of price, and to prevent oversights • These techniques cannot be used alone: They provide subjective results that can be used to support traditional techniques.
Comparing Offers Received • If you have competition on a fixed-price type contract, comparing offers received will normally satisfy the requirement for price analysis. (FAR 15.305(a)(1)) • Generally, when the lower/lowest proposed prices are in a close range, it is more likely that the prices are fair and reasonable. • If you find that the price is unreasonable [FAR 15.403-1(c)(1)(i)(B)], a cost analysis may be required.
Comparing Offers ReceivedSample Problem • You receive three offers for a widget: Offeror A proposed $100 per unit. Offeror B proposed $125 per unit. Offeror C proposed $130 per unit. • Trick Question: Is the price based on adequate price competition?
Answer to Sample Problem on Comparing Offers Received • There is not enough information. • The problem didn’t state if the offerors are competing independently • Are they dealers or manufacturers? • Nor did it state that a price analysis clearly demonstrates that the proposed price is reasonable in comparison with other contracts.
What is a Commercial Item? • Commercial Pricing Information Guide, Volume 1, ODUSD(AR), provides a working definition: • A commercial item is any item evolving from, or available in the commercial market place that will be available in time to satisfy the user requirement.
Commercial Item Defined FAR 2.101 • Any item, other than real property, that is of a type customarily used for non-governmental purposes and that: • Has been sold, leased, or licensed to the general public • Has been offered for sale, lease, or licensed to the general public • Has evolved from a commercial item that is sold or offered for sale as a result of technological advancement • Requires either modifications or a type that is customarily available in the commercial market place or minor modifications for unique government purposes or • Is any of the above • Also government unique items that are developed exclusively at public expense and sold to multiple state and local governments.
Commercial Services Defined FAR 2.101 • Installation services, maintenance services, repair services, training services, and other services if-- • Such services are procured for support of a commercial item, regardless of whether such services are provided by the same source or at the same time as the item; and • The source of such services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government; • Services of a type offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard commercial terms and conditions. This does not include services that are sold based on hourly rates without an established catalog or market price for a specific service performed or a specific outcome to be achieved.
Commercial Items Are Exempt from Certified Cost or Pricing Data • Except for certain alterations to the items and contract modifications, commercial items are exempt from the requirement for certified cost/pricing data. • Requests for offeror’s sales data should be limited to data for the same or similar items during a relevant time period [FAR 15.403-3(c)(2)(I)]. • To the maximum extent practicable, limit any request for info to include only info that is in the form regularly maintained by the offeror [FAR 15.403-3(c)(2)(ii)].
FAR Part 12 Acquisition of Commercial Items (1 of 2) • Point to be Made: cross referencing of FAR cites. • Per FAR 12.209 Determination of Price Reasonableness – established IAW • FAR 13 Part Simplified Acquisition Procedure • Cites FAR 13.106-3 Award and Documentation • FAR Part 14 Sealed Bidding • Cites FAR 14.408-2 Responsible Bidder – Reasonableness of Price • References price analysis techniques in FAR 15.404-1(b) • FAR Part 15 Contracting by Negotiation • Cites FAR 15.4 Contract Pricing
FAR Part 12 Acquisition of Commercial Items (2 of 2) • FAR 13.106-3 Award and Documentation • Before making award, the contracting officer must determine that the proposed price is fair and reasonable. (1) Whenever possible, base price reasonableness on competitive quotations or offers. (2) If only one response is received, include a statement of price reasonableness in the contract file. The contracting officer may base the statementon -- (i) Market research; (ii) Comparison of the proposed price with prices found reasonable on previous purchases; (iii) Current price lists, catalogs, or advertisements. However, inclusion of a price in a price list, catalog, or advertisement does not, in and of itself, establish fairness and reasonableness of the price; (iv) A comparison with similar items in a related industry; (v) The contracting officer’s personal knowledge of the item being purchased; (vi) Comparison to an independent Government estimate; or (vii) Any other reasonable basis.
Price Premiums • Per FAR 12.209: Commercial item prices are affected by factors as • speed of delivery, length and extent of warranty, limitations of seller’s liability, quantities ordered, length of the performance period, and specific performance requirements. • Per FAR 12.209: The contracting officer must ensure that contract terms, conditions, and prices are commensurate with the Government’s need. • Be aware of “price premiums,” included but not specifically indicated/stated, on catalog/price lists for quick delivery, small or minimum quantity orders, etc. • Price Premium Example: Boeing’s catalog priced items for quick delivery (within 24 hours). • The buyer was unaware of this price premium. It was an unnecessary cost; the items were going to a depot for storage, not out to the field. • Result: the item was over-priced (high).
Minor Item Modification per FAR 2.101(c) • A modification that does not significantly alter the non-governmental function or essential physical characteristics of an item or component, or change the purpose of a process • Factors to consider: • Value and size of the mod versus the comparative value and size of the final product. • Dollar values and percentages are guideposts, not conclusive evidence.
Acquisitions of Modified (altered) Commercial Items • If the item modifications are of a type customarily available in the commercial marketplace, you should be able to evaluate the item and the modifications/alternations on a commercial basis. • If you are acquiring an otherwise commercial item with noncommercial alternations, you may need to get certified cost/pricing data (or information other than certified cost/pricing data) to evaluate the alternations, and evaluate the base commercial item on a commercial pricing basis.