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nomical performance. When negotia- the lowest price or lowest cost to the tions indicate the need for using other Government is properly the deciding than a firm fixed price contract, there factor in source selection in many inshould be compatibility between the stances, award of a contract properly type of contract selected and the con may be influenced by the proposal tractor's accounting system.

which promises the greatest value to (b) In the course of a procurement the Government in terms of possible program, a series of contracts, or a performance, ultimate producibility, single contract running for a lengthy growth potential, and other factors as term, the circumstances which make may be the case, for example, when for a selection of a given type of con procuring research and development, tract at the outset will frequently special or professional services (such change so as to make a different type as architect-engineer services) or when more appropriate during later periods. cost-reimbursement type contracting In particular, the repetitive or unduly is anticipated (see § 1-3.805-2). protracted use of cost-reimbursement (a) After receipt of initial proposals, type or time and materials contracts is written or oral discussions shall be to be avoided where experience has conducted with all responsible offerors provided a basis for firmer pricing who submitted proposals within a which will promote efficient perform competitive range, price and other facance and will place a more reasonable tors considered, except that this redegree of risk on the contractor. Thus, quirement need not necessarily be apin the case of a time and materials plied to: contract, continuing consideration (1) Procurements not in excess of should be given to converting to an $10,000 in accordance with small purother type of contract as early in the chase procedures (see Subpart 1-3.6); performance period as practicable.

(2) Procurements in which rates of

prices are fixed by law or regulations; $ 1-3.804 Conduct of negotiations.

(3) Procurements in which time of Evaluation of offerors' or contrac delivery will not permit such discustors' proposals, including price revi- sions; sion proposals, by all personnel con- (4) Procurements of the set-aside cerned with the procurement, as well portion of partial set-asides or by as subsequent negotiations with the small business restricted advertising; offeror or contractor, shall be com- or pleted expeditiously. Complete agree- (5) Procurements in which it can be ment of the parties on all basic issues clearly demonstrated from the existshall be the objective of the contractence of adequate competition or accunegotiations. Oral discussions or writ rate prior cost experience with the ten communications shall be conduct product or service that acceptance of ed with offerors to the extent neces the most favorable initial proposal sary to resolve uncertainties relating without discussion would result in a to the purchase or the price to be paid. fair and reasonable price: Provided, Basic questions should not be left for That the request for proposals conlater agreement during price revision tains a notice to all offerors of the posor other supplemental proceedings. sibility that award may be made withCost and profit figures of one offeror out discussion of proposals received or contractor shall not be revealed to and, hence, that proposals should be other offerors or contractors.

submitted initially on the most favora

ble terms, from a price and technical $ 1-3.805 Selection of offerors for negotia standpoint, which the offeror can tion and award.

submit to the Government. In any

case where there is uncertainty as to § 1-3.805-1 General.

the pricing or technical aspects of any The procedures set forth in this § 1- proposals, the contracting officer shall 3.805-1 are generally applicable to ne- not make award without further exgotiated procurement. However, they ploration and discussion prior to are not applicable where their use award. Also, when the proposal most would be clearly inappropriate. While advantageous to the Government in


volves a material departure from the posals will be evaluated to determine stated requirements, consideration those which are acceptable to the shall be given to offering the other Government or which, after discusfirms which submitted proposals an sion, can be made acceptable, and opportunity to submit new proposals upon submission of prices thereafter, on a technical basis which is compara- 'award shall be made to that offeror of ble to that of the most advantageous an acceptable proposal who is the low proposal: Provided, That this can be responsible offeror. done without revealing to the other (d) When, during negotiations, a firms any information which the of- substantial change occurs in the Gov. feror does not want disclosed to the ernment's requirements or a decision public (see § 1-3.103(b)),

is reached to relax, increase, or other(b) Whenever negotiations are con wise modify the scope of the work or ducted with more than one offeror, no statement of requirements, such indication shall be given to any offeror change or modification shall be made of a price which must be met to obtain in writing as an amendment to the further consideration since such prac quest for proposals, and a copy shall tice constitutes an auction technique

be furnished to each prospective conwhich must be avoided. Likewise, no tractor. Oral advice of change or modiofferor shall be advised of his relative fication may be given if (1) the standing with other offerors as to

changes involved are not complex in price or be furnished information as to

nature, (2) all prospective contractors the prices offered by other offerors. are notified simultaneously (preferAfter receipt of proposals, no informa

ably by a meeting with the contracting tion regarding the number or identity

officer), and (3) a record is made of of the offerors participating in the ne

the oral advice given. In such ingotiations shall be made available to

stances, however, the oral advice the public or to any one whose official should be promptly followed by a writduties do not require such knowledge.

ten amendment verifying such oral Whenever negotiations are conducted

advice previously given. The dissemiwith several offerors, while such nego

nation of oral advice of changes or tiations may be conducted successive

modifications separately to each prosly, all offerors selected to participate

pective contractor during individual in such negotiations (see $ 1-3.805- negotiation sessions should be avoided 1(a)) shall be offered an equitable op

unless preceded, accompanied, or importunity to submit such price, techni

mediately followed by a written cal, or other revisions in their propos

amendment to the request for proposals as may result from the negotia

als embodying such changes or modifitions. All such offerors shall be in

cations. formed of the specified date (and time (29 FR 10155, July 24, 1964, as amended at if desired) of the closing of negotia 39 FR 28438, Aug. 7, 1974; 40 FR 44139, tions and that any revisions to their Sept. 25, 1975) proposals should be submitted by that date. In addition, all such offerors § 1-3.805-2 Cost-reimbursement type conshall be informed that after the speci

tracts. fied date for the closing of negotia In selecting the contractor for a tions, no information (other than pre- cost-reimbursement type contract, esaward notice of unacceptable propos timated costs of contract performance als or offers) will be furnished to any and proposed fees should not be conofferor until award has been made. sidered as controlling, since in this For the requirements and limitations type of contract advance estimates of concerning the furnishing of informa cost may not provide valid indicators tion after awards have been made, see of final actual costs. There is no re8 1-3.103.

quirement that cost-reimbursement (c) Except where cost-reimburse- type contracts be awarded on the basis ment type contracts are to be used of either (a) the lowest proposed cost, (see § 1-3.805-2), a request for propos- (b) the lowest proposed fee, or (c) the als may provide that after receipt of lowest total estimated cost plus proinitial technical proposals, such pro- posed fee. The award of cost-reim

bursement type contracts primarily on only secondarily with the eventual the basis of estimated costs may en cost and profit to the contractor. courage the submission of unrealistically low estimates and increase the § 1-3.807 Pricing techniques. likelihood of cost overruns. The cost estimate is important to determine the

$ 1-3.807-1 General. prospective contractor's understanding (a) Policies set forth in this Subpart of the project and ability to organize 1-3.8 may be applied in a variety of and perform the contract. The agreed ways in the evaluation of offerors' or fee must be within the limits pre

contractors' proposals and in the negoscribed by law and agency procedures

tiation of contract prices. This § 1and appropriate to the work to be per 3.807 describes the principal price and formed (see $ 1-3.808). Beyond this,

cost evaluation techniques and the cirhowever, the primary consideration in

cumstances under which each may be determining to whom the award shall

used. They are equally applicable to be made is: which contractor can per

initial and subsequent price negotiaform the contract in a manner most

tions. advantageous to the Government.

(b) For the purpose of this $ 1-3.807,

the terms "adequate price competi§ 1-3.806 Cost, profit, and price relation

tion” and “established catalog or ships.

market prices of commercial items

sold in substantial quantities to the (a) Where products are sold in the

general public" shall be construed in open market, costs are not necessarily

accordance with the following general the controlling factor in establishing a

guidelines. particular seller's price. Similarly,

(1) Adequate price competition. (i) where competition may be ineffective

Price competition exists if offers are or lacking, estimated costs plus esti

solicited and (A) at least two responsimated profit are not the only pricing

ble offerors (B) who can satisfy the criteria. In some cases, the price ap

purchaser's (e.g., the Government's) propriately may represent only a part

requirements (C) independently conof the seller's cost and include no esti

tend for a contract to be awarded to mate for profit or fixed fee, as in re

the responsive and responsible offeror search and development projects

submitting the lowest evaluated price where the contractor is willing to

(D) by submitting priced offers reshare part of the costs. In other cases,

sponsive to the expressed requireprice may be controlled by competi

'ments of the solicitation. Whether tion as set forth in § 1-3.805-1(a). The

there is price competition for a given objective of the contracting officer

procurement is a matter of judgment shall be to negotiate fair and reason

to be based on evaluation of whether able prices in which due weight is

each of the foregoing conditions (A) given to all relevant factors, including

through (D) is satisfied. Generally, in those in § 1-3.102.

making this judgment, the smaller the (b) Profit or fee is only one element number of offerors, the greater the of price and normally represents a need for close evaluation. smaller proportion of the total price (ii) If conditions (A) through (D) in than do such other estimated elements (i) above are met, price competition as labor and material. While the may be presumed to be “adequate" public interest requires that excessive unless the purchaser (e.g., the conprofits be avoided, the contracting of tracting officer) finds that: ficer should not become so preoccu (A) The solicitation was made under pied with particular elements of a con- conditions that unreasonably deny to tractor's estimate of cost and profit one or more known and qualified ofthat the most important considera ferors an opportunity to compete; tion, the total price itself, is distorted (B) The low competitor has such a or diminished in its significance. Gov. determinative advantage over the ernment procurement is primarily con other competitors that he is practicalcerned with the reasonableness of the ly immune to the stimulus of competiprice which the Government pays and tion in proposing a price (e.g., a deter

minative advantage because substan- wise available for inspection by custial costs, such as start-up or other tomers, and (3) states prices at which nonrecurring expenses, have already sales are currently or were last made been absorbed in connection with pre to a significant number of buyers convious sales, thus placing the competi- stituting the general public. An “estor in a preferential position); or

tablished market price" is a current (C) The lowest final price is not rea price established in the usual and ordisonable and supports such finding by nary course of trade between buyers an enumeration of the facts upon and sellers free to bargain which can which it is based: Provided, That such be substantiated from sources indefinding is approved at a level above pendent of the manufacturer or the contracting officer.

vendor. (iii) A price is “based on” adequate (B) A “commercial item" is an item, price competition if it results directly which term includes both supplies and from such competition or, if price services, of a class or kind which (1) is analysis (not cost analysis) shows regularly used for other than Governclearly that the price is reasonable in ment purposes and (2) is sold or traded comparison with current or recent in the course of conducting normal prices for the same or substantially business operations. the same items procured in compara (C) Supplies are "sold in substantial ble quantities under contracts awarded quantities" when the facts or circumas a result of adequate price competi- stances are sufficient to support a reation (e.g., exercise of an option in a sonable conclusion that the quantities contract for which there was adequate regularly sold are sufficient to constiprice competition if the option price tute a real commercial market for the has been determined to be reasonable item. Nominal quantities, such as and the option price is not greater models, specimens, samples, and protothan the contract price; or an item is type or experimental units, cannot be normally procured competitively but considered as meeting this requirein a particular situation only one ment. Services are sold in substantial other is solicited or received, and the quantities if they are customarily proprice clearly is reasonable in compari- vided by the contractor, with personson with recent purchases of compara nel regularly employed, and with ble quantities for which there was ade- equipment, if any is necessary, reguquate price competition).

larly maintained, solely or principally (2) Established catalog or market for the purpose of providing such servprices of commercial items sold in sub- ices. There must be a sufficient stantial quantities to the general number of commercial buyers so that public. (i) Application of this excep their purchases establish an ascertaintion also requires judgment and analy- able going price for the service. Subsis on a case-by-case basis. In making stantial quantity cannot be precisely this judgment, the various elements of defined. the term must be considered, and a (D) An item is sold "to the general price must meet all these conditions in public" if it is sold to other than affiliorder to be considered for exception. ates of the seller for end use by other In other words, the price must be, or than the Government. Items sold to be based on, (A) an established catalog affiliates of the seller and sales for or market price, (B) of commercial end use by the Government are not items, (C) sold in substantial quanti- sales to the general public. ties, (D) to the general public.

(iii) A price may be considered to be (ii) The following criteria should be “based on" established catalog or applied in determining whether an market prices of commercial items item falls within the scope of this ex- sold in substantial quantities to the ception:

general public if the item being pur(A) An “established catalog price' is chased is sufficiently similar to a coma price included in a catalog, price list, mercial item to permit the difference schedule, or other form that (1) is reg. between the prices of the items to be ularly maintained by the manufactur- identified and justified without resort er or vendor, (2) is published or other 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 reasonable ness 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 normal. ly provided to commercial purchasers; El. 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. 129 FR 10155, July 24, 1964, as amended at 43 FR 46303, Oct. 6, 1978)

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 ana 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

§ 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

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