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Adequate Price Competition = Fair and Reasonable Price


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It's easy enough to direct a contract specialist to provide more findings, but I'd rather compel them that additional findings are required not because I ask but, because it's appropriate given the scenario. My hope is that by equipping them with information will make us all better in the long run.

Jamaal:

When I stumbled across a scenario such as yours in the distant past, I would have to prove to the agency that something was wrong before the agency would pay attention. That is what you will have to do to get your point across to contract specialists or higher-ups.

There are two items in your scenario that I would attempt to analyze to make my point. The first is the government estimate. Take it apart. What does your analysis of it say? Was it done conscientiously?

The second part involves the quote below

three competitive quotes for $150K, $250K, and $325K.

I believe that is from your original post. As I read it, I initially viewed that phrase as an oxymoron. What do those quotes have to do with any competition for the same service? Look at Vern's example directly above. To make any point, you will have to go through the government's requirement and the 3 offers and determine if there is a problem. If there is, what is it? Why are those offers spread like that? Unfortunately, with the low dollar scenario you present, there may be limited information to do an analysis.

In the end, you may find that the government estimate is well supported and that the government requirement was clear and the offerors all understood it. They actually may be competitive quotes.

Either way your analysis works out, keep this procurement as an example for your records so you may use it as a device to teach your staff.

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My thanks to all the contributors on this forum for taking the time to post information so others may read it.

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Guest Vern Edwards

A number of factors could account for the differences in the quotes. The biggest component of service total cost in my experience is labor: rates x time. If that's true in this case, then:

Rates are often related to geography. Look at where the work will be done. If one offeror is in New York City and another in Tulsa Oklahoma, I would expect higher rates for the offeror in New York. If all three offerors will perform in the same locality, that probably is not going to be the case.

Incumbency can affect interpretation of the statement of work. An incumbent might know that the work will take more or less hours than the others expect. The government estimate is $400K. If the incumbent proposed the $325K, that might suggest something about the know-how of the firms that quoted lower amounts.

Hard to say. A lot to think about. However, at $150,000, people in your office might not think it's worth much thought.

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Jamaal, if there was a way to "LIKE" the last three posts (#25-27) by Vern and Bob, I would express that in the strongest terms. Thanks to you,gentlemen.

I was also wondering about how much time one could devote to properly determine that everyone mutually understands the same scope of work because of the small size of the acquisition. I didn't mention that because we are documenting a discussion of the principles that should apply to answer your basic question, whether a large or small contract action.

At any rate, those three posts are excellent.

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ji20874:

Understanding that the courts make the distinction that price reasonableness is to determine if a price is too high, I believe it's worth mentioning that many working and authoritative definitions of fair and reasonableness include an analysis that the price is fair to both parties. If we accept these definitions, determining that a price is not too high only satisfies one element of fair and reasonable.

I mention this mainly because I notice you did not mention the term fair in any of your posts. Not sure if it was intentional or not but, clarifying the existence of two elements, Fair AND Reasonable, may be helpful to the community of readers at large.

Thanks for your posts and references!

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Guest Vern Edwards

Jamaal:

You're right about lowness being an issue when determining what is fair and reasonable. However, that issue arises in connection with negotiations, when the government seeks a price that is lower than the one proposed. It is not an issue in your example, in which firms have submitted competitive quotes, but there have been no negotiations.

In my opinion, when firms are preparing competitive bids, proposals, or quotes, they are solely responsible for determining whether the amounts they seek are fair and reasonable compensation for their work. COs are not nannies. When conducting an analysis of competitive bids, proposals, and quotes, a CO need not be concerned with determining whether the amounts sought by the competitors are fair and reasonable for themselves. It is when a CO decides to bargain for a lower price that he or she must be concerned about whether the lower price being sought for the government is fair and reasonable to the competitors.

Moreover, I do not think that fairness and reasonableness is a matter of what is fair and reasonable to a particular firm. It is a matter of what is fair and reasonable in light of market conditions and competitive proposal terms. If a particular concern cannot deliver competitive quality at a competitive market price, that is not the concern of the CO except as a matter of fairness and reasonableness to the government and, perhaps, of cost or price realism. When a CO is negotiating a price for a new contract, it's too bad if a particular firm cannot recover its costs or make a profit at the market competitive price for market competitive quality. But it's just too bad. It's not unfair or unreasonable for the CO to seek a market competitive price. (A different pricing principle applies when a CO seeks to negotiate an "equitable adjustment" under the terms of an existing contract.)

Of course, COs must be concerned about the possibility of mistakes and defective, vague, or ambiguous specs, in which case the government has court-imposed legal obligations that it must fulfill.

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Vern:

Agreed. It seems fair to both parties could or would also include a meeting of the minds to ensure the government's "expressed requirement" is mutually understood and was not subject to more than one reasonable interpretation, mistakes in pricing, vague, or ambiguous specs, etc.

Or is this outside the scope of fair and covered elsewhere?

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It seems to me that if it's just too bad for the contractor, then why are we using anything other than IFB or price only methods? In circumstances where you are evaluating "technical acceptability" of a quote or offer, it should be paramount concern that both parties at least understand what the requirement is.

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Guest Vern Edwards

Jamaal:

I think that mutual understanding of the government's requirement is a necessary condition for fair and reasonable pricing. Which raises an issue:

It is notoriously difficult to specify and assess service quality, especially for long-term (one year or longer) and complex (multiple tasks and multiple performances under varying conditions and circumstances) requirements. It may be the biggest challenge to acquisition practitioners in our time. That raises two questions:

First, given the difficulty of clear and unambiguous specification of long-term and complex services, is competitive proposal writing and price competition under FAR Part 15, with its limited opportunities for in-depth discussion and price negotiation, a good way to acquire such services?

Second, if the answer to the first question is no, then might architect-engineer style competence-based contractor selection followed by one-on-one, in depth contract and price negotiations (see FAR 36.602) produce better specification and mutual understanding and better pricing that the Part 15 approach and thus be a better method for contractor selection and contract formation? Might that process also be more cost efficient than Part 15?

Joel: Agreed.

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In this case, firms submitted "quotes", so it may a solicitation for commercial services under some simplified acq method (e.g., shortcuts built in)?

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Jamaal's scenario referred to LPTA. It may be off topic, but since the push for using LPTA, has there been an increase in the percentage of Request for Equitable Adjustments (REA)/Claims?

I can only speak from what I've seen in my agency, but I'm seeing more REAs/Claims now than before the push to use LPTA as the source selection process. I've read a claim in which the filing contractor stated the government shouldn't used LPTA as the source selection process.

The $150K could be fair and reasonable, but if the government ends up receiving an REA/Claim, there may be an underlying problem.

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I thought this recent decision was interesting and worth sharing http://www.gao.gov/assets/680/673709.pdf . GAO sustained this protest on for a LPTA solicitation because the RFQ did not reference that price realism would be an evaluation criteria and the Government deemed the lowest bidder as technicall unacceptable on concerns of LOE risk for a fixed price effort.

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Thanks, WhoKnows. The GAO's decision is exactly on point with my postings in this thread (or rather, my postings were exactly on point with the GAO jurispridence).

An extract from the decision, with emphasis added and internal citations omitted--

Before awarding a fixed-price contract, an agency is required to determine that the price offered is fair and reasonable. FAR § 15.402(a). An agency’s concern in making a price reasonableness determination focuses primarily on whether the offered prices are higher than warranted. Although not required, an agency may also provide for a price realism analysis in a solicitation for the award of a fixed-price contract for the purpose of assessing whether a vendor’s low price reflects a lack of understanding of the contract requirements, or risk inherent in a vendor’s approach. However, where there is no relevant evaluation criterion pertaining to realism or understanding, a determination that a vendor’s price on a fixed-price contract is too low generally concerns the vendor’s responsibility, i.e., the vendor’s ability and capacity to successfully perform the contract at its offered price. Agencies therefore may not conduct a price realism analysis without first advising vendors that the agency intends to do so.

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Guest Vern Edwards

That GAO decision is based on long-standing case law. It has nothing to do with the issues initially raised by Jamaal. A pointless distraction that is not face-saving.

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You asked -"would a determination of the lowest price being fair and reasonable, solely on the basis of adequate price competition, be compliant with the governing rules?"

I ask you, could you defend your determination to a wise tribunal? did you consider all pertinent facts? Where there any inconsistencies vis a vis the lowest price? i.e. was it much TOO low?

Ask yourself, what do I have besides the competition? Is there pertinent price history? what price did we expect? Do they understand the requirement? what is our G.E. amount? Again, it is about the situation in which the determination is made. Have you considered all pertinent information? Do you have enough?

If you believe you could defend your decision to an objective, outside, unbiased party, then reduce it to writing. No man is an island. the governing rules put the burden on the one who determines the price fair and reasonable.

Happy Trails!

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That GAO decision is based on long-standing case law. It has nothing to do with the issues initially raised by Jamaal. A pointless distraction that is not face-saving.

I agree.

Who said that Jamaal should perform a price realism analysis? I suggested taking "full advantage of the acquisition method chosen to assure that both the government and the industry** understand the stated scope of work. [Jamaal] might end up avoiding problems for both the contractor and the government if the scope of work isn't clear or doesn't represent what the government really intends."

I also said that "I've found over the years that taking short cuts up front in the contract formation often results in difficulties and messes down the road that somebody had to deal with and that harmed one or both parties. To me, it is "easier" to get it right up front..."

**I didn't limit the term "industry" to one firm. There are widely varying prices for the "same quantity and delivery of identical services" and a much higher government estimate that might or might not represent the same understanding of the requirements by everyone.

I would be initially concerned about possible confusion over the scope of work.

If Jamaal is satisfied that the scope is mutually understood, then one should decide if and how to discuss price. As the GAO said, if the government thinks that the risk of performance failure due to a low price is too high, then there are other steps that would follow.

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EXAMPLE SCENARIO: In response to a anticipated FFP award, a LPTA solicitation with a Government estimate of $400K was issued and you receive three competitive quotes for $150K, $250K, and $325K.

Each quote is for the same quantity and delivery of identical services and the government would like to determine the price of $150K as fair and reasonable based on adequate price competition.

Jamaal,

Yes, you may determine the $150k price fair and reasonable. The price isn't too high, and you aren't assessing price realism so you're not assessing too low. Apparently, you are satisfied that all three quotes are based on the same delivery and performance and quality expectations, and I suppose you are not on constructive notice of the possibility of a mistake. You have multiple quotations from apparently responsible sources on identical requirements. Yes, yes, yes, you may determine the price fair and reasonable based on adequate price competition. With these facts, you cannot call it unreasonable. The IGCE variance has nothing to do with price reasonableness based on adequate price competition.

If you have some reason to think the $150k quoter isn't promising the same delivery and performance and quality expectations as the other quoters, you may ask some questions in a clarifications or discussions approach. If the quoter stands by its price, well, you may call it reasonable.

If you think the quoter will not successfully perform, well, this is a matter of responsibility. The price is reasonable, but the quoter may be non-responsible. There is no connection between price reasonableness and responsibility.

I can't say much more, so I'll sign off of this topic. Other commenters seemingly don't want you to determine the price fair and reasonable based on adequate price competition. You decide.

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Guest Vern Edwards

The opening inquiry was as follows:

Does adequate price competition establish a fair and reasonable price [ipso facto]?

(Ipso facto is Latin for “by that very fact,” i.e., in and of itself.)

Ji20874 says:

Yes, you may determine the $150k price fair and reasonable. The price isn't too high, and you aren't assessing price realism so you're not assessing too low. Apparently, you are satisfied that all three quotes are based on the same delivery and performance and quality expectations, and I suppose you are not on constructive notice of the possibility of a mistake. You have multiple quotations from apparently responsible sources on identical requirements. Yes, yes, yes, you may determine the price fair and reasonable based on adequate price competition. With these facts, you cannot call it unreasonable. The IGCE variance has nothing to do with price reasonableness based on adequate price competition.

That, like ji20874’s other comments, is not responsive to the question, which is whether adequate price competition, in and of itself, establishes price fairness and reasonableness.

FAR 15.404-1(2)(i) says that adequate price competition “normally” establishes price fairness and reasonableness. It does not say that it necessarily establishes price fairness and reasonableness.

The Contract Pricing Reference Guides -- to which COs are referred by FAR 15.404-1(a)(7) -- Vol. 1, Ch. 0, say this about determining price reasonableness:


A reasonable price is a price that a prudent and competent buyer would be willing to pay, given available data....

Your determination of whether an offer is fair and reasonable is a matter of judgment. There is no simple formula in which you can just plug in a few values and receive a firm answer of fair and reasonable. Determining what is fair and reasonable depends on market conditions, your alternatives for meeting the requirement, price-related factors, and the non-price evaluation factors that relate to each procurement. It also depends on what price you can negotiate with an offeror.

That does not say that the lowest quoted price is necessarily fair and reasonable.

In this thread, several of us have indicated to Jamaal that there are other things to consider when determining price fairness and reasonableness beside simple price comparisons. Based on what I can recall and determine based on a review of the posts, no one has said that ji20874 cannot determine price fairness and reasonableness based on adequate price competition. In Post #3, Joel said “not necessarily” and pointed out other things to consider. I did the same in subsequent posts, as did Matt Fleharty, Bob Antonio, Weno2, and br549dewey. I said that I would be wary, given the price spread among the quotes. Something seems off.

Ji20874’s position rests on language in GAO and court decisions about the distinction between price reasonableness and price realism. He said: “The price is reasonable according to the GAO’s and COFC’s jurisprudence.” Those tribunals have said that the primary objective of evaluations of price reasonableness is to determine whether a price is too high, while the primary objective of evaluations of price realism is to determine whether a price is too low. That’s interesting, but what does it have to do with Jamaal’s question? Does adequate price competition, in and of itself, establish price fairness and reasonableness?

ji20874’s reasoning goes like this:

Since a determination of price reasonableness is concerned with whether a price is too high, and since the $150,000 quote in Jamaal’s LPTA example was the lowest received, and since each quote “is for the same quantity and delivery of identical services,” it follows that $150,000 is not too high and that it is, therefore, reasonable. Yes, yes, yes.

Other posters to this thread, myself included, have been more cautious. I reject ji20874’s reasoning as an overly simplistic formula: unsound and inconsistent with the guidance in FAR and in the Contract Pricing Reference Guides.

While GAO and court decisions are legally significant, they are not the opinions of contracting practitioners and are of only limited value in determining what is sound contracting practice. As a friend of mine says about GAO decisions: "Stupid is not illegal." GAO attorneys do not have to document and justify determinations of price reasonableness to IGs and management reviewers. The decisions that ji20874 has cited are of no utility whatsoever in answering Jamaal's question: Does adequate price competition, in and of itself, establish price fairness and reasonableness?

Since the opening post, Jamaal has told us that he is concerned that a determination of reasonableness based on the quotes received would be hasty. Only he has all the facts. ji20874’s “Yes, yes, yes, you may determine the price fair and reasonable based on adequate price competition,” should, in the context of this thread, be filed in the category of Sloppy Advice.

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That GAO decision is based on long-standing case law. It has nothing to do with the issues initially raised by Jamaal. A pointless distraction that is not face-saving.

Your right and I should have been more specific. What I was trying to convey by providing that GAO case was that unless you had a true technical discrepany, (like the great example you provided regarded the Sealed Bidding scenario), you could not determine a proposal as technically unacceptable by utilizing Price Realism where it was not listed in a RFP (at least that is how I interpreted the decision).

I agree that while competition does cover the requirements of determining of "Fair and Reasonable" it makes sense to still investigate if a price would seem to good to be true to avoid potential default or a product that does not meet expectations.

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I said I was bowing out, but since my previous comments haven't been fairly characterized, I'll make one more comment in the interest of fairness.

The original poster said all three quoters promised to deliver the same quantity and delivery of identical services on a firm-fixed-price basis. I take the original poster at his word. Three quoters providing quotations for the same quantity and delivery of identical services is adequate price competition.

Vern thinks the $150K price might be unreasonable, or he at least denies anyone else the privilege of saying the price is reasonable based on adequate price competition under the facts as set forth in the original posting. He wrote, "I said that I would be wary, given the price spread among the quotes. Something seems off." I agree that something might be off, based on the disparity in prices, but I disagree that the price is therefore unreasonable (or cannot be determined to be reasonable) -- I follow the GAO jurisprudence that price reasonableness is concerned with whether a proposed price is too high, not too low. If I thought a price was too low, I would not determine the price to be unreasonable. Apparently, others would.

Rather, I would deal with the low price by (1) considering whether a mistake was made, (2) conducting some clarifications and/or discussions to satisfy myself that the quoter understands the requirement, and/or (3) dealing with the low price as a matter of responsibility. But I would do (1), (2), and/or (3) without determining the price to be unreasonable. If Jamaal did determine the price to be unreasonable, and used that unreasonable price (too low) as the basis for selecting another higher-price quoter for award, that determination could be the basis for the GAO sustaining a protest against the award decision for introducing an unstated evaluation factor. The GAO case cited earlier makes this point well.

Jamaal, let us know whether you decicde to determine the $150K price reasonable or unreasonable.

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ji20874:

This was for the purpose of discussion.

I'm interested in how you would process the following changes to the scenario:

In response to desiring three FFP multiple award task order contacts, a LPTA solicitation with a Government estimate for as sample project of $800K was issued and you receive four proposals for $150K, $250K, $325, and $625K.

Similarly, each proposal is for the same quantity and delivery of identical services.

Would you use the same approach in saying adequate price competition, in and of itself, establishes fair and reasonable prices?

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Guest Vern Edwards

ji20874:

Again, GAO jurisprudence has nothing to do with the issue at hand. Moreover, the question is not whether the $150,000 is or is not reasonable. The question is whether the $150,000 can be said to be reasonable based on adequate price competition, in and of itself, that is, without further inquiry.

I don't know whether the $150,000 quote is too high or too low. It might be neither. It might be one or the other. But on the face of things, the disparity among the quotes suggests that further investigation would be appropriate before making any declaration.

You would declare the price to be reasonable because it is the lowest received, without futher investigation. ("Yes, yes, yes.") And your rationale? Because GAO says reasonableness is about being too high and a price can't be too high if it's the lowest received. That's nonsense.

The Contract Pricing Reference Guides say that a reasonable price is one that a prudent and competent buyer would pay. In light of the disparity among quotes, and notwithstanding Jamaal's assertion that they all proposed the identical services, would a prudent and competent buyer declare the $150,000 to be fair and reasonable without first making some inquiries? It could be that $150,000 is too much to pay for the service that quoter is actually planning to render based on its interpretation of the statement of work. The $325,000 might be much more reasonable. We simply do not have enough facts to know. So maybe we should get more facts. If we need more facts than the prices themselves, then adequate price competition cannot, ipso facto, be the basis for determining the price to be fair and reasonable.

Jamaal said that all quotes were based on identical services. Whatever can that mean? The quoters wouldn't have said "identical." The quoters would have said what A.B. Dick said: "My quote is based on your requirements." So identicality is some kind of conclusion or assumption. We don't know if there were comprehensively descriptive technical proposals. So we don't know how the quoters interpreted those requirements or how the government interpreted the quotes. Did all quoters interpret them the same way and in the same way as the government? Did they actually propose to do identical work and identical quality work? Would the government get the exact same acceptable service from each? That seems unlikely, and if not, then the $150,000 quote might not be too low. It might be too high. I don't think we can take Jamaal's opening statement at face value if we want an intelligent discussion of his question.

In light of the facts that we've been given, I would send a buyer to training to learn to be a prudent and competent buyer if he or she came to me and said that the $150,000 is reasonable because of GAO jurisprudence and because it was the lowest quote received.

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"Fair and reasonable" is a construct. We see that it is more involved than a few stipulations or a few slides. Although a fair and reasonable price determination has been summarized in many ways, and likewise described and detailed in numerous ways, it is a construct that is really an abbreviated way of naming a very involved subset (pricing) of a very large body of knowledge (contracting). It is a construct we go back to because the determination is about getting appropriate consideration "in contract". i.e. can we support accepting this price on behalf of the Government? A GAO decision will give us insight, but still does not give us complete, in depth understanding. Hence, we have entire books and guides written on this little term - "fair and reasonable".

So what do we do? We study this construct, "fair and reasonable price", year after year, with its many dimensions and particulars, so that we are better able to assess if a specific scenario supports a determination of a fair and reasonable price. What else to do? One can have experienced peers read his or her Price Memorandum. A good friend/peer can tactfully play the devil's advocate, helping us identify flaws or holes in our logic. We keep learning, and listening, and the construct steadily comes to mean more to us, and our understanding gets deeper, and wider, as we learn and practice contracting.

No man is an island.

P.S. I like reading the decisions, but take pause at the time involved...

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br549dewey:

Can you explain this statement a little further?

It is a construct we go back to because the determination is about getting appropriate consideration "in contract". i.e. can we support accepting this price on behalf of the Government?

I've never read or heard of fair and reasonable determination being linked to appropriate consideration in the manner stated above. What is this statement based on since money is only one form of consideration?

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