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nomical performance. When negotiations indicate the need for using other than a firm fixed price contract, there should be compatibility between the type of contract selected and the contractor's accounting system.

(b) In the course of a procurement program, a series of contracts, or a single contract running for a lengthy term, the circumstances which make for a selection of a given type of contract at the outset will frequently change so as to make a different type more appropriate during later periods. In particular, the repetitive or unduly protracted use of cost-reimbursement type or time and materials contracts is to be avoided where experience has provided a basis for firmer pricing which will promote efficient performance and will place a more reasonable degree of risk on the contractor. Thus, in the case of a time and materials contract, continuing consideration should be given to converting to another type of contract as early in the performance period as practicable.

§ 1-3.804 Conduct of negotiations.

Evaluation of offerors' or contractors' proposals, including price revision proposals, by all personnel concerned with the procurement, as well as subsequent negotiations with the offeror or contractor, shall be completed expeditiously. Complete agreement of the parties on all basic issues shall be the objective of the contract negotiations. Oral discussions or written communications shall be conducted with offerors to the extent necessary to resolve uncertainties relating to the purchase or the price to be paid. Basic questions should not be left for later agreement during price revision or other supplemental proceedings. Cost and profit figures of one offeror or contractor shall not be revealed to other offerors or contractors.

§ 1-3.805 Selection of offerors for negotiation and award.

§ 1-3.805-1 General.

The procedures set forth in this § 13.805-1 are generally applicable to negotiated procurement. However, they are not applicable where their use would be clearly inappropriate. While

the lowest price or lowest cost to the Government is properly the deciding factor in source selection in many instances, award of a contract properly may be influenced by the proposal which promises the greatest value to the Government in terms of possible performance, ultimate producibility, growth potential, and other factors as may be the case, for example, when procuring research and development, special or professional services (such as architect-engineer services) or when cost-reimbursement type contracting is anticipated (see § 1-3.805-2).

(a) After receipt of initial proposals, written or oral discussions shall be conducted with all responsible offerors who submitted proposals within a competitive range, price and other factors considered, except that this requirement need not necessarily be applied to:

(1) Procurements not in excess of $10,000 in accordance with small purchase procedures (see Subpart 1-3.6);

(2) Procurements in which rates of prices are fixed by law or regulations;

(3) Procurements in which time of delivery will not permit such discussions;

(4) Procurements of the set-aside portion of partial set-asides or by small business restricted advertising;

or

(5) Procurements in which it can be clearly demonstrated from the existence of adequate competition or accurate prior cost experience with the product or service that acceptance of the most favorable initial proposal without discussion would result in a fair and reasonable price: Provided, That the request for proposals contains a notice to all offerors of the possibility that award may be made without discussion of proposals received and, hence, that proposals should be submitted initially on the most favorable terms, from a price and technical standpoint, which the offeror can submit to the Government. In any case where there is uncertainty as to the pricing or technical aspects of any proposals, the contracting officer shall not make award without further exploration and discussion prior to award. Also, when the proposal most advantageous to the Government in

volves a material departure from the stated requirements, consideration shall be given to offering the other firms which submitted proposals an opportunity to submit new proposals on a technical basis which is comparable to that of the most advantageous proposal: Provided, That this can be done without revealing to the other firms any information which the offeror does not want disclosed to the public (see § 1-3.103(b)).

(b) Whenever negotiations are conducted with more than one offeror, no indication shall be given to any offeror of a price which must be met to obtain further consideration since such practice constitutes an auction technique which must be avoided. Likewise, no offeror shall be advised of his relative standing with other offerors as to price or be furnished information as to the prices offered by other offerors. After receipt of proposals, no information regarding the number or identity of the offerors participating in the negotiations shall be made available to the public or to any one whose official duties do not require such knowledge. Whenever negotiations are conducted with several offerors, while such negotiations may be conducted successively, all offerors selected to participate in such negotiations (see § 1-3.8051(a)) shall be offered an equitable opportunity to submit such price, technical, or other revisions in their proposals as may result from the negotiations. All such offerors shall be informed of the specified date (and time if desired) of the closing of negotiations and that any revisions to their proposals should be submitted by that date. In addition, all such offerors shall be informed that after the specified date for the closing of negotiations, no information (other than preaward notice of unacceptable proposals or offers) will be furnished to any offeror until award has been made. For the requirements and limitations concerning the furnishing of information after awards have been made, see § 1-3.103.

(c) Except where cost-reimbursement type contracts are to be used (see § 1-3.805-2), a request for proposals may provide that after receipt of initial technical proposals, such pro

posals will be evaluated to determine those which are acceptable to the Government or which, after discussion, can be made acceptable, and upon submission of prices thereafter, award shall be made to that offeror of an acceptable proposal who is the low responsible offeror.

(d) When, during negotiations, a substantial change occurs in the Government's requirements or a decision is reached to relax, increase, or otherwise modify the scope of the work or statement of requirements, such change or modification shall be made in writing as an amendment to the request for proposals, and a copy shall be furnished to each prospective contractor. Oral advice of change or modification may be given if (1) the changes involved are not complex in nature, (2) all prospective contractors are notified simultaneously (preferably by a meeting with the contracting officer), and (3) a record is made of the oral advice given. In such instances, however, the oral advice should be promptly followed by a written amendment verifying such oral advice previously given. The dissemination of oral advice of changes or modifications separately to each prospective contractor during individual negotiation sessions should be avoided unless preceded, accompanied, or immediately followed a by written amendment to the request for proposals embodying such changes or modifications.

[29 FR 10155, July 24, 1964, as amended at 39 FR 28438, Aug. 7, 1974; 40 FR 44139, Sept. 25, 1975]

§ 1-3.805-2 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 (a) the lowest proposed cost, (b) the lowest proposed fee, or (c) the lowest total estimated cost plus proposed fee. The award of cost-reim

bursement 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 agency procedures and appropriate to the work to be performed (see § 1-3.808). 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.

§ 1-3.806 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 fixed 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 § 1-3.805-1(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 § 1-3.102.

(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 primarily concerned with the reasonableness of the price which the Government pays and

only secondarily with the eventual cost and profit to the contractor.

§ 1-3.807 Pricing techniques.

§ 1-3.807-1 General.

(a) Policies set forth in this Subpart 1-3.8 may be applied in a variety of ways in the evaluation of offerors' or contractors' proposals and in the negotiation of contract prices. This § 13.807 describes 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) For the purpose of this § 1-3.807, 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.

(1) Adequate price competition. (i) Price competition exists if offers are solicited and (A) at least two responsible offerors (B) who can satisfy the purchaser's (e.g., the Government's) requirements (C) independently contend for a contract to be awarded to the responsive and responsible offeror submitting the lowest evaluated price (D) 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 (A) through (D) is satisfied. Generally, in making this judgment, the smaller the number of offerors, the greater the need for close evaluation.

(ii) If conditions (A) through (D) in (i) above are met, price competition may be presumed to be "adequate" unless the purchaser (e.g., the contracting officer) finds that:

(A) The solicitation was made under conditions that unreasonably deny to one or more known and qualified offerors an opportunity to compete;

(B) The low competitor has such a determinative advantage over the other competitors that he is practically immune to the stimulus of competition in proposing a price (e.g., a deter

minative advantage because substantial costs, such as start-up or other nonrecurring expenses, have already been absorbed in connection with previous sales, thus placing the competitor in a preferential position); or

(C) The lowest final price is not reasonable and supports such finding by an enumeration of the facts upon which it is based: Provided, That such finding is approved at a level above the contracting officer.

(iii) 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., exercise of an option in a contract for which there was adequate price competition if the option price has been determined to be reasonable and the option price is not greater than the contract price; or an item is normally procured competitively but in a particular situation only one other 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. (i) 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.

(ii) The following criteria should be applied in determining whether an item falls within the scope of this exception:

(A) An "established catalog price" is a price included in a catalog, price list, schedule, or other form that (1) is regularly maintained by the manufacturer or vendor, (2) is published or other

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(B) A "commercial item" is an item, which term includes both supplies and services, of a class or kind which (1) is regularly used for other than Government purposes and (2) is sold or traded in the course of conducting normal business operations.

(C) 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. There must be a sufficient number of commercial buyers so that their purchases establish an ascertainable going price for the service. Substantial quantity cannot be precisely defined.

(D) 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.

(iii) 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 a commercial item to permit the difference between the prices of the items to be identified and justified without resort to cost analysis.

(iv) Even though an item qualifies for exemption from the requirements for submission of certified cost or pricing data, price analysis must be performed to determine the reasonableness of the price and the need for further negotiation. While the additional information required may be available from Government sources, it may be necessary to obtain it from the prospective supplier. The specific information will vary with the procurement involved but may include: (A) The supplier's marketing system; i.e., use of jobbers, brokers, sales agencies, distributors, etc.; (B) the services normally provided to commercial purchasers; e.g., engineering, financing, advertising, or promotion; (C) normal quantity per order; and (D) annual volume of sales to largest customers. Altered terms, minor configuration changes, or quantity differences are all good reasons for pricing items differently from the formal catalog or market prices. The ultimate objective is to achieve fair and reasonable prices for items bought. The Government and contractor personnel must recognize this fact by seeking innovative methods of satisfying the needs clearly but with a minimum of burdensome paperwork.

[29 FR 10155, July 24, 1964, as amended at 43 FR 46303, Oct. 6, 1978]

§ 1-3.807-2 Requirements for price or cost analysis.

(a) General. Some form of price or cost analysis should be made 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 paragraph (c) of this section when cost or pricing data is required to be submitted under the conditions described in § 1-3.807-3; 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.

(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, Governmentfurnished 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 contracting 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 § 1-3.8073) 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

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