11 May 1964, Rev. 5 PRICE NEGOTIATION POLICIES AND TECHNIQUES 355 3-805.2 Cost-Reimbursement Type Contracts. In selecting the contractor for a cost-reimbursement type contract, estimated costs of contract performance and proposed fees should not be considered as controlling, since in this type of contract advance estimates of cost may not provide valid indicators of final actual costs. There is no requirement that cost-reimbursement type contracts be awarded on the basis of either (1) the lowest proposed cost, (2) the lowest proposed fee, or (3) the lowest total estimated cost plus proposed fee. The award of cost-reimbursement type contracts primarily on the basis of estimated costs may encourage the submission of unrealistically low estimates and increase the likelihood of cost overruns. The cost estimate is important to determine the prospective contractor's understanding of the project and ability to organize and perform the contract. The agreed fee must be within the limits prescribed by law and appropriate to the work to be performed (see 3-808). Beyond this, however, the primary consideration in determining to whom the award shall be made is: which contractor can perform the contract in a manner most advantageous to the Government. 3-806 Cost, Profit, and Price Relationships. (a) Where products are sold in the open market, costs are not necessarily the controlling factor in establishing a particular seller's price. Similarly where competition may be ineffective or lacking, estimated costs plus estimated profit are not the only pricing criteria. In some cases, the price appropriately may represent only a part of the seller's cost and include no estimate for profit or fee, as in research and development projects where the contractor is willing to share part of the costs. In other cases, price may be controlled by competition as set forth in 3-805.1(a). The objective of the contracting officer shall be to negotiate fair and reasonable prices in which due weight is given to all relevant factors, including those in 3-101. (b) Profit or fee is only one element of price and normally represents a smaller proportion of the total price than do such other estimated elements as labor and material. While the public interest requires that excessive profits be avoided, the contracting officer should not become so preoccupied with particular elements of a contractor's estimate of cost and profit that the most important consideration, the total price itself, is distorted or diminished in its significance. Government procurement is concerned primarily with the reasonableness of the price which the Government ultimately pays, and only secondarily with the eventual cost and profit to the contractor. 3-807 Pricing Techniques. 3-807.1 General. (a) Policies. Policies set forth in this Part may be applied in a variety of ways in the evaluation of offerors' or contractors' proposals and in the negotiation of contract prices. The following paragraphs describe the principal price and cost evaluation techniques and the circumstances under which each may be used. They are equally applicable to initial and subsequent price negotiations. (b) Adequate Price Competition and Catalog or Market Prices. For the purpose of this paragraph, 3-807, the terms "adequate price competition" and "established catalog or market prices of commercial items sold in substantial quantities to the general public" shall be construed in accordance with the following general guidelines. ARMED SERVICES PROCUREMENT REGULATION 13-807.1 356 11 May 1964, Rev. 5 PROCUREMENT BY NEGOTIATION (1) Adequate Price Competition. a. Price competition exists if offers are solicited and (i) at least two responsible offerors (ii) who can satisfy the purchaser's (e.g., the Government's) requirements (iii) independently contend for a contract to be awarded to the responsive and responsible offeror submitting the lowest evaluated price (iv) by submitting priced offers responsive to the expressed requirements of the solicitation. Whether there is price competition for a given procurement is a matter of judgment to be based on evaluation of whether each of the foregoing conditions (i) through (iv) is satisfied. Generally, in making this judgment, the smaller the number of offerors, the greater the need for close evaluation. b. If conditions (i) through (iv) in a above are met, price competition may be presumed to be "adequate" unless the purchaser (e.g., the contracting officer) finds that: (i) the solicitation was made under conditions that unreasonably deny (ii) the low competitor has such a determinative advantage over the c. A price is "based on" adequate price competition if it results directly from such competition or, if price analysis (not cost analysis) shows clearly that the price is reasonable in comparison with current or recent prices for the same or substantially the same items procured in comparable quantities under contracts awarded as a result of adequate price competition (e.g., (i) exercise of an option in a contract for which there was adequate price competition if the option price has been determined to be reasonable in accordance with 1-1505(d) and the option price is not greater than the contract price; and (ii) an item is normally procured competitively but in a particular situation only one offer is solicited or received, and the price clearly is reasonable in comparison with recent purchases of comparable quantities for which there was adequate price competition). (2) Established Catalog or Market Prices of Commercial Items Sold in Substantial Quantities to the General Public. Application of this exception also requires judgment and analysis on a case-by-case basis. In making this judgment, the various elements of the term must be considered and a price must meet all these conditions in order to be considered for exception. In other words, the price must be, or be based on: (a) an established catalog or market price, (b) of commercial items, (c) sold in substantial quantities, (d) to the general public. The following criteria should be applied in determining whether an item falls within the scope of this exception: L ¶3-807.1 ARMED SERVICES PROCUREMENT REGULATION 29 January 1965, Rev. 9 PRICE NEGOTIATION POLICIES AND TECHNIQUES 357 (i) An "established catalog price" is a price included in a catalog, price list, schedule, or other form that (A) is regularly maintained by the manufacturer or vendor, (B) is either published or otherwise available for inspection by customers, and (C) states prices at which sales are currently, or were last, made to a significant number of buyers constituting the general public. An “established market price" is a current price, established in the usual and ordinary course of trade between buyers and sellers free to bargain, which can be substantiated from sources independent of the manufacturer or vendor. (ii) A "commercial item" is an item, which term includes both supplies and services, of a class or kind which (A) regularly used for other than Government purposes, and (B) is sold or traded in the course of conducting normal business operations. (iii) Supplies are "sold in substantial quantities" when the facts or circumstances are sufficient to support a reasonable conclusion that the quantities regularly sold are sufficient to constitute a real commercial market for the item. Nominal quantities, such as models, specimens, samples, and prototype or experimental units, cannot be considered as meeting this requirement. Services are sold in substantial quantities if they are customarily provided by the contractor, with personnel regularly employed, and with equipment, if any is necessary, regularly maintained, solely or principally for the purpose of providing such services. (iv) An item is sold "to the general public" if it is sold to other than affiliates of the seller for end use by other than the Government. Items sold to affiliates of the seller and sales for end use by the Government are not sales to the general public. A price may be considered to be "based on" established catalog or market prices of commercial items sold in substantial quantities to the general public if the item being purchased is sufficiently similar to such a commercial item to permit the difference between the prices of the items to be identified and justified without resort to cost analysis. 3-807.2 Requirement for Price or Cost Analysis. (a) General. Some form of price or cost analysis is required in connection with every negotiated procurement action. The method and degree of analysis, however, is dependent on the facts surrounding the particular procurement and pricing situation. Cost analysis shall be performed in accordance with (c) below when cost or pricing data is required to be submitted under the conditions described in 3-807.3; however, the extent of the cost analysis should be that necessary to assure reasonableness of the pricing result, taking into consideration the amount of the proposed contract and the cost and time needed to accumulate the necessary data for analysis. Price analysis shall be used in all other instances to determine the reasonableness of the proposed contract price. Price analysis may also be useful in corroborating the overall reasonableness of a proposed price where the determination of reasonableness was developed through cost analysis. ARMED SERVICES PROCUREMENT REGULATION ¶ 3-807.2 358 29 January 1965, Rev. 9 PROCUREMENT BY NEGOTIATION (b) Price Analysis. (1) Price analysis is the process of examining and evaluating a prospective price without evaluation of the separate cost elements and proposed profit of the individual prospective supplier whose price is being evaluated. Price analysis may be accomplished in various ways including the following: (i) the comparison of the price quotations submitted; (ii) the comparison of prior quotations and contract prices with current quotations for the same or similar end items (to provide a suitable basis for comparison, appropriate allowances must be made for differences in such factors as specifications, quantities ordered, time for delivery, Government-furnished materials, and experienced trends of improvement in production efficiency; it must also be recognized that such comparison may not detect an unreasonable current quotation unless the reasonableness of the prior prices was established and unless changes in the general level of business and prices have been considered); (iii) the use of rough yardsticks (such as dollars per pound, per horsepower, or other units) to point up apparent gross inconsistencies which should be subjected to greater pricing inquiry; (iv) the comparison of prices set forth in published price lists issued on a competitive basis, published market prices of commodities and similar indicia, together with discount or rebate arrangements; and (v) the comparison of proposed prices with estimates of cost independently developed by personnel within the purchasing activity. (2) Price analysis techniques should be used to support or supplement cost analysis wherever appropriate. (c) Cost Analysis. (1) Cost analysis is the review and evaluation of a contractor's cost or pricing data (see 3-807.3) and of the judgmental factors applied in projecting from the data to the estimated costs, in order to form an opinion on the degree to which the contractor's proposed costs represent what performance of the contract should cost, assuming reasonable economy and efficiency. It includes the appropriate verification of cost data, the evaluation of specific elements of costs, and the projection of these data to determine the effect on⚫ prices of such factors as: (i) the necessity for certain costs, (ii) the reasonableness of amounts estimated for the necessary costs, (iii) allowances for contingencies, (iv) the basis used for allocation of overhead costs; and (v) the appropriateness of allocations of particular overhead costs to the proposed contract. [The next page is 358.1] ¶ 3-807.2 ARMED SERVICES PROCUREMENT REGULATION 29 January 1965, Rev. 9 PRICE NEGOTIATION POLICIES AND TECHNIQUES 358.1 (2) Appropriate consideration should be given to Section XV, which contains general cost principles and procedures for the determination and allowance of costs in connection with the negotiation of cost-reimbursement type contracts, as well as guidelines for use, where appropriate, in the evaluation of costs in connection with negotiated fixed-price type contracts. (3) Among the evaluations that should be made where the necessary data are available, are comparisons of a contractor's or offeror's current estimated costs with: (i) actual costs previously incurred by the contractor or offeror; (iii) current cost estimates from other possible sources; and (iv) prior estimates or historical costs of other contractors manufacturing the same or similar items. (4) Forecasting future trends in costs from historical cost experience is of primary importance. In periods of either rising or declining costs, an adequate cost analysis must include some evaluation of the trends. In cases involving production of recently developed, complex equipment, even in periods of relative price stability, trend analysis of basic labor and materials costs should be undertaken. 3-807.3 Cost or Pricing Data. (a) The contracting officer shall require the contractor to submit in writing cost or pricing data and to certify, by use of the certificate set forth in 3-807.4, that, to the best of his knowledge and belief, the cost or pricing data he submitted was accurate, complete, and current prior to: (i) the award of any cost-reimbursement type, time and material, (ii) the award of any firm fixed-price or fixed-price with escalation ARMED SERVICES PROCUREMENT REGULATION ¶ 3-807.3 |