1 Contract Pricing Principles Breakout Session # WC Janie Maddox, CPCM, Fellow and Marge Rumbaugh, CPCM, Fellow Tuesday, July 12 4:00–5:15pm

"We simply intend to be much more professional, much more capable, when it gets to sitting at the table and negotiating the price on behalf of the taxpayers," said Shay Assad, the newly named director of defense pricing. 1-2 Current Perspectives on Pricing A Aston Carter's Better Buying Power initiative to buy more for less money. 2

3 Seminar Objectives Understand the principles of contract pricing from both the buyer (Govt. and Federal Contractors (subcontracting)) and sellers (Federal Contractors) perspective

4 BUSINESS PLANNING... MARKETING Contract Pricing and The Contracting Process Market Research SelectionAward PROPOSAL PREPARATION NEGOTIATION CONTRACT ADMINISTRATION Kick off Contract/System Compliance Performance Monitoring Contract Modifications Completion / Payment / Closeout... SUBCONTRACTING... DELIVERY & COMPLIANCE... CHANGES, INVOICING... SCHEDULING MONITORING ACCEPTANCE CLAIMS & DISPUTES CLOSEOUT & COLLECTION Acq Planning RFP Competitive Or Sole Source Evaluation/ Negotiation Note: Shaded area represents contractors activities during each Phase Pre-Award and SolicitationEvaluation and Award Requirements Determination

Overview Pricing Theory and Strategies used by Federal Government/Contractor buyers Truth in Negotiations Act Price Analysis Cost Analysis Subcontract Pricing 5

6 Pricing Strategies…Two Perspectives versus Seller’s Objectives  Profit  Market share  Long-term survival  Product quality  Technology leader  High productivity GOVT Objectives  Fair & reasonable price  Price each contract separately  Exclude contingencies Strategies Market-based  Profit maximization  Market share  Market skimming  Current Revenue  Promotional  Demand differential Cost-based  Mark-up  Margin  ROI Price Analysis Cost Analysis Cost Realism

The buyer’s pricing objective for all procurement actions is to acquire supplies and services from responsible sources at fair and reasonable prices FAR (a) Buyer’s Pricing Objectives 7

8 Fair and Reasonable Price Reasonable: A price that a prudent and competent buyer would be willing to pay, given knowledge of: Market conditions Supply and demand General economic conditions Competition Market definition Relative pricing Fair: Fair to both the seller and buyer

Market Research: –This is critical. To establish reasonable prices, it is important to understand the market In establishing the reasonableness of the offered prices, You must obtain sufficient information to make a “fair and reasonable determination”. Establishment of Fair & Reasonable 9

Using Market Research As a price analysis method means: –pricing of same or similar items offered in the commercial marketplace that may or may not be offered to the Government. –the conditions and environment surrounding the price must be evaluated for similarity to purchase A source of info on performing market research is: opical/MR_files/guides/market_research_gui de.doc opical/MR_files/guides/market_research_gui de.doc See other sources for pre-prepared Market Research Reports – Commercial and Government sources 10

Market Research 11 Critical! FAR (e) states that you must document your market research. It doesn't say how. Use your best judgment. Make sure to document who you talk to, what you discuss, and other sources you use for information.

Sources Of Published Data Manufacturer and dealer catalogs Product brochures and promotional material Trade journals Product standard and testing organizations Source identification publications Federal Supply Schedules (FSS) Government economic data Non-government economic data 12

Govt.’s Primary Techniques to Proposal Analysis Price analysis is the process of examining and evaluating a proposed Cost analysis is the review and evaluation of the separate cost elements and profit Cost Realism analysis is the review/evaluation of an offeror’s proposal to determine whether the estimated proposed cost elements are realistic for the work to be performed; 13

14 When Govt.’s Primary Techniques to Proposal Analysis are utilized Price analysis shall be used when certified cost or pricing data are not required; but should be used always….. Cost analysis shall be used when certified cost or pricing data are required. Cost realism analyses shall be performed on cost-reimbursement contracts to determine the probable cost of performance for each offeror.

Before a buyer can determine the appropriate proposal analysis technique/s, the buyer must first decide if the Truth in Negotiation Act (TINA) applies………

(TINA)-Certified Cost or Pricing Data Requirements The threshold is $700,000 under the following when no exceptions apply: –The award of any negotiated contract –The award of a subcontract if prime or higher tier was required –Modification of a any sealed bid or negotiated contract where the aggregate change exceeds $700,000 16

17 Exceptions to TINA/Certified Cost or Pricing Data Requirements Adequate Price Competition Prices set by law or regulation Acquisition of a commercial item Where a waiver has been granted Modifications for commercial items

18 Certificate Of Current Cost Or Pricing Data This is to certify that, to the best of my knowledge and belief, the cost or pricing data (as defined in section of the Federal Acquisition Regulation (FAR) and required under FAR subsection ) submitted, either actually or by specific identification in writing, to the contracting officer or to the contracting officer's representative in support of ________* are accurate, complete, and current as of ________**. This certification includes the cost or pricing data supporting any advance agreements and forward pricing rate agreements between the offeror and the Government that are part of the proposal. Firm __________________________________________ Signature _______________________________________ Name _________________________________________ Title ___________________________________________ Date of execution*** _____________________________ * Identify the proposal, request for price adjustment, or other submission involved, giving the appropriate identifying number (e.g., RFP No. ). ** Insert the day, month, and year when price negotiations were concluded and price agreement was reached or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price. *** Insert the day, month, and year of signing, which should be as close as practicable to the date when the price negotiations were concluded and the contract price was agreed to.

19 Comparison means using five steps: 1.Select prices for comparison to: Competitive prices.(Proposed Prices) Historical prices (Previous prices) Commercial prices(Catalog/Market) Independent Govt. or Company Estimates (IGE/ICE). 2.Identify compatibility factors. 3.Determine the potential impact of these factors. 4.Adjust prices. 5.Compare adjusted prices to the offer. What is Price Analysis? Determining what a price should be through COMPARISON 19

Comparison of Proposed Prices Comparison of Proposed Prices is a method by which the analyst compares offers received in response to a solicitation. Selecting the best value based on comparing the offers usually results in a reasonable price Analyst is looking for Adequate Price Competition (APC)* 20 * However, does not necessarily mean price is Fair and Reasonable

Adequate Price Competition The buyer must receive at least two offers Each offeror must be competing independently of one another. Proposals must satisfy government requirements. Best value award, price and other factors must be considered. Price offered should not be unreasonable. Price is a substantial factor. 21

22 One Offer APC* Can APC exist with only one offer in a competitive solicitation? Yes, under the following conditions: There was a reasonable expectation that two or more responsible offerors would submit offers. The Contracting Officer can reasonably conclude that the offer was submitted with the expectation of competition: Circumstances indicate that the offeror believed at least one other offeror was capable of submitting a meaningful offer. The offeror had no reason to believe the other potential offerors did not intend to submit an offer. * Currently does not apply in DoD

23 Compare to Previous Prices Validate a price by looking at a previous price that was paid for the same or similar item and that has been determined to be reasonable. It is important to consider the following: Was it a competitive price? Was it sole source or commercial? How long ago was that price paid? What was the quantity? Were there technical or market changes that would affect price? Depending on the answers to these questions, the previous price will need to be adjusted to make it useful and valid for comparison

24 Parametric Analysis – Development of Cost Estimating Relationships (CERs) A Parametric Analysis is a means of determining prices based on a mathematical formula. It is a valid and accepted price analysis method that is occasionally used.

Parametric Calculations in developing a CER 1000 Square Feet 15 Cost ($K) Container A Container B CER Container X

26 Catalog Prices The FAR states that “when obtaining information from the offeror is necessary, …information submitted by the offeror shall include, at a minimum, appropriate information on the prices at which the same or similar items have been sold previously…”. Compare the offered prices found to the actual sales prices of the same or similar items sold by that offeror. The offered catalog prices should be considered a sole source offer to be negotiated. Important to take into account the following: Trade discounts Terms and conditions Quantity discounts Payment terms

GSA Schedule GSA Schedule should not be used as the sole basis for determining a reasonable price. –a valuable starting point, but additional analysis is required. GSA does perform price analysis, but it is limited. –GSA encourages negotiation of schedule prices, especially if the buy is for large quantities. –GSA prices frequently represent a quantity of one. Use GSA prices as a data point for comparison, but don't rely on them exclusively. –They must be supplemented with other analysis. If you use GSA prices, document the manner in which they were used 27

Comparison to Government Estimates A government estimate is usually developed for budgetary purposes, and should not automatically be considered reasonable If the government estimate significantly varies from the proposed prices, try to identify and quantify the primary reasons for the difference. These may include: –Technical differences –Market conditions –Budget constraints 28

Pricing Information from Offeror If other methods do not provide support for a reasonable price, the Govt. buyer can request “data other than certified cost or pricing data”. Requires Cost Analysis Obtaining “data other than certified cost or pricing data” is the least preferred way of obtaining support for a reasonable price because it is the most intrusive and least valuable in determining cost reasonableness. 29

Cost Analysis requires analysis of Cost Proposal elements such as: Material  Bill of Material  Purchased Parts  Subcontracts Labor  Labor Mix  Labor Hours and Rates Overhead Rates Profit/Fee 30

Subcontract Pricing The buyer must determine price reasonableness for subcontracting costs –Even when subcontract prices have been negotiated before negotiation of the prime contract The prime contractor or subcontractor shall: –Conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices –Include the results of these analyses in the price proposal 31

Janie Maddox Lecturer Naval Postgraduate School Marge Rumbaugh Adjunct Professor University of Virginia Contacts 32

Questions?????????????? 33