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Cost/Price Analysis on FFP Options


here_2_help

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I noticed that the DFARS has been revised and, in concert with PGI, now mandates that cost/price analysis must be performed on FFP options for spares before the option is exercised.

This is not my forte, so please excuse the dumb questions.

I'm not understanding the separate analysis before exercising an option. Wouldn't the option have been evaluated as part of the initial contract award? Why are FFP options for spares being treated differently from, say, cost-type options for services?

Thanks for your patience.

Here_2_Help

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It may be clarifying that the KO is expected to ensure that the option price is more advantageous to the Government in lieu of a new procurement. For example, there is a class deviation requiring DoD KOs to use Part 15 price analysis techniques to confirm that FSS prices are fair and reasonable. The DFARS PGI states (at least the version of the PGI current through 14 October):

The contracting officer shall use an appropriate sampling technique or request field pricing assistance, and document the contract file with the results of the cost or price analysis.

"Appropriate sampling technique" may be intended to mean checking prices on GSA schedules or GWACs prior to exercising the option.

I don't have experience with spare parts procurement, so I may be off base. I would appreciate input from other WIFCON members.

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17.207 Exercise of options.

(a) When exercising an option, the contracting officer shall provide written notice to the contractor within the time period specified in the contract.

(B ) When the contract provides for economic price adjustment and the contractor requests a revision of the price, the contracting officer shall determine the effect of the adjustment on prices under the option before the option is exercised.

© The contracting officer may exercise options only after determining that—

(1) Funds are available;

(2) The requirement covered by the option fulfills an existing Government need;

(3) The exercise of the option is the most advantageous method of fulfilling the Government’s need, price and other factors (see paragraphs (d) and (e) of this section) considered;

(4) The option was synopsized in accordance with Part 5 unless exempted by 5.202(a)(11) or other appropriate exemptions in 5.202;

(5) The contractor is not listed in the System for Award Management Exclusions (see FAR 9.405-1);

(6) The contractor’s past performance evaluations on other contract actions have been considered; and

(7) The contractor’s performance on this contract has been acceptable, e.g., received satisfactory ratings.

(d) The contracting officer, after considering price and other factors, shall make the determination on the basis of one of the following:

(1) A new solicitation fails to produce a better price or a more advantageous offer than that offered by the option. If it is anticipated that the best price available is the option price or that this is the more advantageous offer, the contracting officer should not use this method of testing the market.

(2) An informal analysis of prices or an examination of the market indicates that the option price is better than prices available in the market or that the option is the more advantageous offer.

(3) The time between the award of the contract containing the option and the exercise of the option is so short that it indicates the option price is the lowest price obtainable or the more advantageous offer. The contracting officer shall take into consideration such factors as market stability and comparison of the time since award with the usual duration of contracts for such supplies or services.

(e) The determination of other factors under paragraph ©(3) of this section

(1) Should take into account the Government’s need for continuity of operations and potential costs of disrupting operations; and

(2) May consider the effect on small business.

(f) Before exercising an option, the contracting officer shall make a written determination for the contract file that exercise is in accordance with the terms of the option, the requirements of this section, and Part 6. To satisfy requirements of Part 6 regarding full and open competition, the option must have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract, e.g.—

(1) A specific dollar amount;

(2) An amount to be determined by applying provisions (or a formula) provided in the basic contract, but not including renegotiation of the price for work in a fixed-price type contract;

(3) In the case of a cost-type contract, if—

(i) The option contains a fixed or maximum fee; or

(ii) The fixed or maximum fee amount is determinable by applying a formula contained in the basic contract (but see 16.102©);

(4) A specific price that is subject to an economic price adjustment provision; or

(5) A specific price that is subject to change as the result of changes to prevailing labor rates provided by the Secretary of Labor.

(g) The contract modification or other written document which notifies the contractor of the exercise of the option shall cite the option clause as authority.

(The purpose of the separate analysis is that after time market prices can change. You need to ensure you are not paying to much for a specific product. For example, lets say one of your spare parts is made out of Aluminum and when you signed the contract 3 years ago Aluminmum was $4 dollars an ounce. If today, the price for an ounce of Aluminum is $1 dollar your option would fail the above because a new solicitation would produce significantly better prices.)

Hope this helps.

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Thanks to all who replied. I'm starting to see some light.

As I understand the requirements, even though an option for FFP spares was proposed and priced in the original proposal, and the price was found to be fair and reasonable, before exercising that option the CO must evaluate whether doing so is advantageous to the government. As part of that evaluation, the CO must reperform cost/price analysis.

Does this mean the contractor must submit certified cost or pricing data in order to support that analysis, if the CO thinks it to be necessary -- even though the contractor submitted such (and certified to it) at the time of the original proposal?

Seems .... wasteful.

Thanks for your help here.

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Guest Vern Edwards

here_2_help:

Certified cost or pricing data are not required prior to the exercise of an option. See FAR 15.403-2(a).

The DOD PGI does nothing more than prompt COs to exercise common business sense. So you got an option price(s) for spares and it looked good at the time. It's now some time later and you need more spares and are thinking about exercising the option. You can be a lazy idiot and exercise because it's easier than doing a new procurement, or you can act like a businessperson and check to see if those spares can be gotten for less. For an illustration of the spare parts option pricing problem, see the (heavily redacted) DOD IG report, Excess Inventory and Contract Pricing Problems Jeopardize the Army Contract with Boeing to Support the Corpus Christi Army Depot, D-2011-61, May 3, 2011. http://www.dodig.mil/audit/reports/fy11/11-061redacted.pdf

Ordinarily, options protect a buyer from spare part price increases, but sometimes the costs of spares production and the prices of spares can drop after the award of a contract with an option due to any number of factors. Checking option prices before buying is sound practice, and in order to do that you have to do some kind of price or cost analysis, depending on the nature of the spare part. If the spares are commercial, do a price analysis. If the spares are military-peculiar and you've got or can get production and learning curve data, do a cost analysis.

Don't forget that we had a terrible spare parts pricing scandal in DOD in the early 1980s. (Don't confuse the spare parts pricing scandal with the scandal about overpriced hammers, toilets, coffee pots and such. Same era, but slightly different pricing problem.) As someone who lived through that at an Air Force command headquarters, it's still vivid in my memory. Although the spares pricing scandal was not about options, per se, that was part of the problem, along with IDIQs and BOAs.

What's wasteful (and shameful), H-2-H, is paying too much for something just because you had competition and got prices for it in the past. Sometimes an option price is a bargain, and sometimes it's a potential ripoff. There is no one more incompetent than a CO who would exercise an option just because she's got one. Oh boy! No new procurement! Google John Martino, GAO Dec. B-262168, May 24, 1996.

For some press history, see:

Hiatt, "Auditors Report Pentagon Spending Too Much on Parts," Washington Post, July 12, 1983. Available online in Washington Post archives.

Mohr, "Pentagon Audit Finds Sharp Price Increase For Parts," New York Times, July 12, 1983, http://www.nytimes.com/1983/07/12/us/pentagon-audit-finds-sharp-price-increase-for-parts.html

Hiatt, "Pentagon Concedes Routine Overpaying For Its Spare Parts," Washington Post, June 2, 1984. Available online in Washington Post archives.

For more extensive background see Christian, The Impact of Agency Audits on the Buy Our Spares Smart (BOSS) Program, Master's Thesis, Naval Postgraduate School, June 1988, AD-A198 249, available online through DTIC,

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Vern,

As you describe it, I agree that it's prudent and businesslike.

My concern was over last week's revision (link in my post above) which seemed, in my layperson's view, to require a separate cost/price analysis prior to exercising an option that had been previously subject to cost/price analysis. If the analysis is simply a comparison of the price of the spare parts in the option to the price of the spare parts in a separate (new) procurement, no beef from me.

My assumption was that the direction "Before exercising an option for firm-fixed-price contracts containing spare parts, the contracting officer shall perform a cost or price analysis of the proposed spare parts. The contracting officer shall use an appropriate sampling technique or request field pricing assistance, and document the contract file with the results of the cost or price analysis" was something more formal than what everybody has described.

Thanks for setting me straight.

H2H

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Guest Vern Edwards

I'm not sure that I did set you straight.

The CO is supposed to do a price or cost analysis to determine if the existing option prices for spares are fair and reasonable.

That can mean comparing the existing option prices to current market prices.

Or, if the option prices were negotiated based on estimated production costs and negotiated profit, the CO might ask DCMA, DCAA, and the contractor whether current production costs are what were expected when the option prices were negotiated. For instance, if the contract is for military-peculiar items with a sole source and the contractor's production learning rate has been better than expected, or if its indirect or materials costs will be lower than expected, so that its unit costs will be lower than were expected when the option price was negotiated, then the CO might want to renegotiate the option prices (in which case certified cost or pricing data might be required). Or, if the contract was awarded on a sole source basis, but competition has since emerged (unlikely, but possible), the CO might want to think about conducting a competition instead of exercising the option.

It is a separate question whether any of this is feasible as a practical matter. But a CO might want to think twice about exercising an option at higher prices than he or she would pay now. Nothing upsets Congress like high prices for spares. I've been there. I know.

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