Selling To The Government: What 'Fair And Reasonable Pricing' Means

Our last installment of this series on selling to the government looked at a variety of contract methods used in federal government procurement. This time, let's delve a bit more deeply into the meaning of one of the more arcane phrases used in the procurement process: "fair and reasonable pricing."

The Federal Acquisition Regulation (FAR) requires contracting officers, prior to signing most contracts, to establish whether or not the price is "fair and reasonable." Under some circumstances, a simple affirmation by a contracting officer is all that's necessary. For example, that could happen in a simplified acquisition when only one offer is received but the contracting officer has personal knowledge about the item being purchased.

Under other conditions, if the contracting officer states that "adequate price competition" exists and does a standard price analysis, then that's enough, too. Adequate price competition exists when at least two companies compete independently. Should only one company respond to a solicitation, competition is considered to exist in civilian procurements if the contracting officer believes that the single company's quote or proposal was based on the expectation of competition. In the Department of Defense, a single response requires price analysis.

A price analysis is pretty much what it sounds like: a comparison of the offered price to historical prices paid for the same or similar items. Matters become considerably more complex if the government demands certified "cost-or-pricing data," which it can do at will for solicitations valued at $700,000 or more.

Don't let the "or" in cost-or-pricing data fool you -- if the government requests it, it's calling for "all facts that ... affect price negotiations significantly." Essentially, it's all of the information companies use to establish price, meaning direct and indirect costs and profit.

NEXT: The Two Tests That Define Cost

What counts as a cost, according to the government, undergoes two tests -- first, it must be "reasonable," and, second, it must be "allowable." The rules controlling both concepts appear in FAR Part 31, which is dedicated to cost principles and procedures. These government cost principles are mostly foreign to the private sector and pursuing an opportunity that requires certified cost-or-pricing data could require investing in expensive, specialized government accounting software and services.

Certified cost-or-pricing data also carries with it legal consequences. Contractors must declare that the data is "accurate, complete and current." If a government auditor finds post-award errors in the data, no matter how unintentional they may be, the finding almost certainly will lead to price reductions, interest payments and possible fines. The government has a right to audit cost-or-pricing data for three years after the date of final payment.

There's a lot of confusion about what constitutes defective pricing; it doesn't occur just because actual costs turn out to be less than the certified amounts. Cost-or-pricing data is not an estimate of contract price, but rather the factual basis contractors use to make an estimate and contracting officers use to award a contract. If a contractor knows in advance it could get cheaper supplies than for the cost amount it certified, that's defective pricing. If a contractor manages, post-award, to lower costs thanks to a better deal with suppliers, that's business. The regulations clearly state that certification "does not constitute a representation as to the accuracy of the contractor's judgment on the estimate of future costs or projections."

Luckily, the FAR discourages contracting officers from requesting certified cost-or-pricing data, even going so far as to mostly prohibit its use for price reasonableness determinations in the acquisition of commercial items. Note, the FAR only discourages the request of this data but it doesn't entirely prevent it. A contractual modification to commercial-item acquisitions could trigger a cost-or-pricing data dump requirement even if the original contract price wasn't set on the basis of certified data.

As painful as it seems to provide cost-or-pricing data, the real hurt happens when contracting officers ask for "data other than certified cost-or-pricing data" to make a fair price determination. They're prone to asking for that -- and then, later on, demanding certification prior to contract award.

In the next installment of this series, we'll look more specifically at the types of contracts most commonly used in federal procurement.

This article was adapted and digested from the book "The Inside Guide to the Federal IT Market," published by Management Concepts Press. For more information, visit www.insideguidetofederalit.com. Steve Charles is a co-founder of immixGroup, which helps technology companies do business with government. He is a frequent speaker and lecturer on technology and the federal procurement process. He can be reached at [email protected].

PUBLISHED ON JUNE 28, 2013