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If a contractor de-escalates the salaries through out all of the options (base year salary is higher than the option years) on a FFP type contract, is this considered unbalanced pricing? Would this throw up red flags for the government? I believe they are trying to capture their costs in the base year in case the options are not exercisted.

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The definiition of unbalanced pricing is where the price of one or more contract line items is significantly over or understated as indicated by the application of cost or price analysis techniques - from The Government Contracts Reference Book.

Does the work change (decrease) in the option years? Has the contractor planned for the learning curve, meaning work in option years can be performed more efficiently than in the base year? I agree that normally you would not see a decrease in price but there may be more to the story.

~jj

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See also FAR 15.404-1(g):

"(g) Unbalanced pricing.

(1) Unbalanced pricing may increase performance risk and could result in payment of unreasonably high prices. Unbalanced pricing exists when, despite an acceptable total evaluated price, the price of one or more contract line items is significantly over or understated as indicated by the application of cost or price analysis techniques. The greatest risks associated with unbalanced pricing occur when—

(i) Startup work, mobilization, first articles, or first article testing are separate line items;

(ii) Base quantities and option quantities are separate line items; or

(iii) The evaluated price is the aggregate of estimated quantities to be ordered under separate line items of an indefinite-delivery contract.

(2) All offers with separately priced line items or subline items shall be analyzed to determine if the prices are unbalanced. If cost or price analysis techniques indicate that an offer is unbalanced, the contracting officer shall—

(i) Consider the risks to the Government associated with the unbalanced pricing in determining the competitive range and in making the source selection decision; and

(ii) Consider whether award of the contract will result in paying unreasonably high prices for contract performance.

(3) An offer may be rejected if the contracting officer determines that the lack of balance poses an unacceptable risk to the Government."

So it sounds like you may have a case of unbalanced pricing, but you must analyze the situation, as described, to, for example, determine if there are explanations or if overstatement and understatement exist, and if so, are they significant.

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Thank you, I believe the contractor wanted to cover their costs in the base year in case the options were not exercise. The work does not decrease in the option years but I think they could argue that the pool of qualified applicants may be greater as time goes by if these positions become eliminited which could happen.

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  • 5 weeks later...

If a contractor de-escalates the salaries through out all of the options (base year salary is higher than the option years) on a FFP type contract, is this considered unbalanced pricing?

It's a Firm Fixed Price contract. I'm assuming the Contractor is showing the cost of salaries only as a basis for it's proposed Price. The Salaries going down doesn't necessarily mean they will actually pay lower salaries during the performance of the contract - It’s a risk by the Contractor that a bigger pool of employees will be available and/or the Contractor will develop efficiencies during the out years to lower its overall costs.

Either way, I don't see it as unbalanced at all.

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