January 29, 2018
Your company is taking a gamble if it fails to perform sufficient price analyses for goods or services it proposes to use or has already purchased for a cost-based federal contract. Insufficient price assessments can mean the government will reject your enterprise’s cost proposals, increase scrutiny of its incurred costs and ultimately determine that its business systems are inadequate.
- Provide your firm’s buyers with sufficient training and instructions on performing and documenting price analyses for federal cost-based contracts. Include appropriate references to techniques outlined in the FAR.
- Establish a reasonable threshold for buyer discretion of at least $3,000. Increase that amount when appropriate.
- Ensure documentation supports conclusions that prices are fair and reasonable. Support should be readily accessible when submitting forward pricing proposals or in the event of an audit of billings or incurred costs.
Generally, when subcontractors are not required to submit certified cost of pricing data, it’s up to your firm, as the prime contractor, to perform the price analysis. The government expects contractors to assess prices proposed for a subcontract without evaluating their separate cost elements and proposed profits.
Part 44 of the Federal Acquisition Regulation (FAR) addresses the policies and procedures for consent to, or advance notification of, subcontracts. The section outlines how to review, evaluate and approve contractors’ purchasing systems and it provides guidance on how to conduct a contractor purchasing systems review (CPSR).
These reviews evaluate the efficiency and effectiveness with which a contractor spends government money and complies with federal policies when subcontracting. If administrative contracting officers determine that a contractor has not performed an adequate price analysis, an audit will often find unsupported or questionable costs.
If the amounts are significant, the cost proposal may be rejected and the contractor’s estimating system may be deemed inadequate or noncompliant. In that case, contracting officers can withhold or withdraw approval of the firm’s purchasing system.
When the buyer expects contract prices to be based on certified cost or pricing data, FAR Table 15-2 must typically be used to prepare forward pricing proposals. The table includes the requirements for price analyses when a subcontractor submits certified cost or pricing data as well as all other subcontractor proposals.
Under cost-reimbursable contracts, the contractor may invoice and recover costs allowed under the Contracts with Commercial Organizations section of FAR 31. For a cost to be allowed, your business must provide supporting documents showing that the costs were incurred, allowable and reasonable. Without proof of an adequate analysis of direct or indirect costs, billings could be withheld and ultimately, your firm’s accounting system may be found inadequate.
The contractor may use the same price analysis procedures used by U.S. government buyers to ensure a fair and reasonable price for commercial and non-commercial items. Among the techniques, outlined in FAR 15.404(b), Price Analysis, are comparisons of:
- Proposed prices received in response to the solicitation (cost competition usually establishes price reasonableness).
- Proposed prices to historical prices paid for the same or similar items, assuming that the validity of the comparison and the reasonableness of the earlier prices can be established.
These are the two preferred techniques. However, if the price information is unavailable or insufficient, the buyer may use other techniques outlined in the section.
In cases of lower-dollar acquisitions, the buyer’s discretion may be acceptable. FAR 13.202 guidelines for making acquisitions at or below the micro-purchase threshold (normally $3,000) state that the costs of verifying reasonable costs may more than offset potential savings from detecting overpricing. Consequently, prices need to be verified only if:
- The buyer suspects or has information indicating that the price may not be reasonable; or
- No comparable pricing information is readily available.
The U.S. government also provides standards at FAR 13.106-3 for buying items costing more than the lower-dollar level but less than the simplified acquisition threshold — normally $150,000. The buyer should attempt to base price reasonableness on competitive quotations or offers. If there is only one bid, the buyer must include a statement of price reasonableness based on factors such as:
- Market research;
- Comparisons with prices found reasonable on previous purchases;
- Current price lists, catalogs or advertisements; and
- The contracting officer’s own knowledge of the item.
Keep in mind that FAR 13 and 15 guidelines are aimed at U.S government buyers and that federal contract auditors, purchasing analysts and other oversight officials might not accept statements of personal knowledge or buyer discretion as support for acquisition costs. As well, other solicitations or contract provisions may have more stringent requirements.