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Contracts Neo

Price Analysis

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Hello,

New subscriber, first post, so be gentle.

I am relatively new to Federal Contracting and have some questions regarding when a price analysis needs to be completed.

Hypothetical: We are a Prime Contractor and were asked to submit a proposal to a Gov't agency. Our proposal contained several low-dollar (under $750k) sub-tier supplier quotes for material items and high-dollar (over $750k) sub-tier proposals for engineering services. We attempted to complete Part 15 Cost Analyses where applicable, but were denied access to the subcontractors’ proprietary information. These denials were relayed to the Gov’t. For whatever reason, my company did not complete price analyses for the “denying” subcontractors or for any of the low-dollar supplier quotes. A FFP Contract was awarded, but does not mention specific consent to subcontracting. We are now in an out-year and have had to request new quotes from several of our suppliers and subcontractors. Now a few questions:

1. Does a price analysis need to be completed for each acquisition at this stage?

1.a. If so, does the price analysis need to address/analyze each quote item or just the quote/proposal as a whole?

2. Are acquisitions below the micro-purchase threshold treated differently or are they subject to the same price analysis requirement? I cannot find anything in the FAR that clarifies this.

2.a. Same question as in “2” above, but what if the acquisition is over the simplified acquisition threshold?

4. Are material items treated differently from engineering services for the purposes of a price analysis?

5. Same facts as above, but our proposal was submitted to a Prime Contractor instead of the govt. Do our obligations change?

Any help on the above would be very much appreciated!

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You have a firm-fixed-price contract.  That contract does not include the clause at FAR 52.244-2, Subcontracts.

The price between the Government and you is already established and firm-fixed-price.  For the purpose of your contract, the Government really doesn't care what you pay your subcontractors and suppliers.  They can rob you and cheat you and overcharge you, but none of that has any effect on the price the Government will pay you.  You don't indicate in your original posting that the new quotes from subcontractors and suppliers are driven by a contract modification, so I suppose it is routine updating with no contract modification.  Based on all of this, my thought is your pricing effort is for your benefit, not the Government's benefit -- you should do whatever pricing exercise you need to maximize your objectives in performing your contract and making a profit.

My thought above is based solely on the instant contract.

However, my thought above is not the right answer if you're looking beyond the instant contract -- for example, if your firm already has or is seeking an approved purchasing system, then you need to think beyond the instant contract and consider the requirements of your firm's purchasing system.

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Neo, I did not see where you said that 52.244-2 is not in your contract.  If it is in the prime contract, does it require consent to subcontract despite the fact that you have an FFP contract?

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ji20874,

Thanks. I'll take your points into consideration.

It seems that a different contract vehicle, such as CPIF or CPFF, would change your response. Please let me know your thoughts on a fee-based contract.

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2 hours ago, ji20874 said:

You have a firm-fixed-price contract.  That contract does not include the clause at FAR 52.244-2, Subcontracts.

The price between the Government and you is already established and firm-fixed-price.  For the purpose of your contract, the Government really doesn't care what you pay your subcontractors and suppliers.  They can rob you and cheat you and overcharge you, but none of that has any effect on the price the Government will pay you.  You don't indicate in your original posting that the new quotes from subcontractors and suppliers are driven by a contract modification, so I suppose it is routine updating with no contract modification.  Based on all of this, my thought is your pricing effort is for your benefit, not the Government's benefit -- you should do whatever pricing exercise you need to maximize your objectives in performing your contract and making a profit.

My thought above is based solely on the instant contract.

However, my thought above is not the right answer if you're looking beyond the instant contract -- for example, if your firm already has or is seeking an approved purchasing system, then you need to think beyond the instant contract and consider the requirements of your firm's purchasing system.

I really don't know what to make of that answer. My reaction is that it was hasty.

Price analysis is fundamental to buying, whether by government or industry. It is nothing more than whatever must be done to determine whether a price is fair and reasonable. See the Contract Pricing Reference Guides, Vol. I, "Price Analysis," § I.3.1:

Quote

Definition of Price Analysis. Price analysis is the process of examining and evaluating a proposed price to determine if it is fair and reasonable, without evaluating its separate cost elements and proposed profit. Price analysis may be, when necessary, supplemented by evaluation of cost elements.

When to Use Price Analysis. When an offeror is not required to provide cost or pricing data, you must use price analysis to ensure that the overall price is fair and reasonable.

There might be any number of reasons why the conduct and documentation of price analysis is important under an FFP contract, even without the subcontracts clause, even if the government and the prime have already reached an agreement on price. We do know that cost analysis was required for some of the subs. That could mean that certified cost or pricing data were required from those subs, even if the subcontracts clause was not in the contract.  "For the purpose of your contract, the Government really doesn't care what you pay your subcontractors and suppliers." Really? What if the "instant" contract is terminated for convenience?

Any company working under a government prime contract that does not do and document enough of a price analysis to support a determination that a prospective sub's price is fair and reasonable is run by idiots. Every purchase should be supported by a price analysis, even if it takes only ten minutes, even if the documentation is only two sentences.

I'm not looking for a fight here, although I'll probably get one now. I'm simply pointing out what 40+ years of contracting has taught me.

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Vern,

Thank you for your reasoned feedback. Would you be able to assist with the remaining questions in my original post? Additionally, please provide the basis for the low level price analysis you state here as this does not seem to comply with FAR Part 15:

38 minutes ago, Vern Edwards said:

Every purchase should be supported by a price analysis, even if it takes only ten minutes, even if the documentation is only two sentences.

Also, let's say that we did have an award containing 52.244-6 and subparagraph (d) was left blank. Let's further say that no consent was required under subparagraphs (b), (c) or (e). Am I off the mark to state that a price analysis that conforms to Part 15 is unnecessary? My point is as follows: the gov't accepted our proposal and awarded the contract. By virtue of the award, compliance with submitting price analyses simultaneously with the proposal (per 15.404-3) is impossible/moot. What are your thoughts? Again, thank you!

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19 hours ago, Contracts Neo said:

1. Does a price analysis need to be completed for each acquisition at this stage?

1.a. If so, does the price analysis need to address/analyze each quote item or just the quote/proposal as a whole?

2. Are acquisitions below the micro-purchase threshold treated differently or are they subject to the same price analysis requirement? I cannot find anything in the FAR that clarifies this.

2.a. Same question as in “2” above, but what if the acquisition is over the simplified acquisition threshold?

4. Are material items treated differently from engineering services for the purposes of a price analysis?

5. Same facts as above, but our proposal was submitted to a Prime Contractor instead of the govt. Do our obligations change?

1. Yes. Why? Because there may be pricing action after award of the prime contract that involves subcontracts. FAR Subpart 31.2 will apply to post-award pricing actions, at which point subcontract prices are costs of the prime and must be reasonable under FAR Subpart 31.2. When the time comes for an adjustment, an auditor or the CO might question the reasonableness of subcontract price and ask how you determined it to be so. They'll want to see your price analysis. They may want to see a cost analysis, too, depending on the facts. Without your analysis the cost may well be considered questioned or unsupported. Any such characterization will delay settlement. Don't give the government an excuse to challenge you on the ground that you can't show how you determined a price to be fair and reasonable.

1.a. I'd say that depends on what the items are, their unit prices, and whether they are parts of a whole or entirely separate. As a CO, I wouldn't accept an analysis based on the quote or proposal as a whole if the individual items were significantly different in function, composition, method of production, use, pricing regime, etc. 

2. See FAR 13.203(a)(3). That applies to government personnel, so it would be reasonable to argue that it applies to contractors, although there is no guarantee that an auditor or CO would agree in any particular instance. Dollar value is only one factor to take into consideration.

2.a. I don't understand what you're asking.

3. I don't see a 3.

4. I'm not sure that I understand what you mean by "for the purposes of a price analysis." The rules about whether or not you have to do a price analysis are the same. The specific methods by which you do a price analysis will likely differ.

5. Not from the point of view of a competent and responsible auditor or contracting officer, but the prime may be lax, like your company was.

Quote

Also, let's say that we did have an award containing 52.244-6 and subparagraph (d) was left blank. Let's further say that no consent was required under subparagraphs (b), (c) or (e). Am I off the mark to state that a price analysis that conforms to Part 15 is unnecessary? My point is as follows: the gov't accepted our proposal and awarded the contract. By virtue of the award, compliance with submitting price analyses simultaneously with the proposal (per 15.404-3) is impossible/moot. What are your thoughts?

Yes, you are off the mark. See what I wrote above. Contract pricing does not necessarily end with contract award, even under FFP contracts. On big contracts it almost certainly does not. Pricing decisions made by the contractor after award may come into question after award in light of new events. They do not necessarily arise from contractor proposals, but may arise from government claims.

Now, keep a couple of things in mind. First, I've spent time on you for free. From now on, do your own research. For a start, read FAR Subpart 15.4 from beginning to end and study it. Then read the supplement of the agency with which you or your prime does business. Then read the Contract Pricing Reference Guides. (Google it.) Steep yourself in the doctrine of government contract pricing, which is not always exactly the same as in the commercial sector. Learn to think in terms of what a CO or an auditor will expect. Keep in mind that not everyone goes by the book.

The fundamental rule about using price analysis in government procurement is in FAR 15.404-1(a)(2): "Price analysis shall be used when certified cost or pricing data are not required (see paragraph (b) of this section and 15.404-3)." Remember that in post-award contract pricing actions -- REAs, claims settlements, Ts for C, etc.-- you may be asked, pursuant to FAR 31.201-3, to justify the reasonableness of a subcontract price that you negotiated after contract award. If you didn't do a price analysis when you negotiated the subcontract, you may get an argument from an auditor or CO about the reasonableness of what you agreed to and the government's obligation to calculate your compensation on that basis.

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On 3/27/2017 at 2:00 PM, Vern Edwards said:

Remember that in post-award contract pricing actions -- REAs, claims settlements, Ts for C, etc.-- you may be asked, pursuant to FAR 31.201-3, to justify the reasonableness of a subcontract price that you negotiated after contract award. If you didn't do a price analysis when you negotiated the subcontract, you may get an argument from an auditor or CO about the reasonableness of what you agreed to and the government's obligation to calculate your compensation on that basis.

This statement proves my point -- whether or not you do a price analysis is largely your business (assuming a firm-fixed-price contract, the contract clause at FAR 52.244-2 Subcontracts is not included in the contract, the reason for the pricing effort is not driven by a contract modification, and you don't have or are not seeking an approved purchasing system -- and I'll add, assuming the contract doesn't include the clause at FAR 52.214-28 or 52.215-21) -- as far as I am aware, nothing in your contract requires a price analysis of your subcontracts.  However, as Vern points out, it makes sense to do it.

On 3/27/2017 at 0:23 PM, Vern Edwards said:

Any company working under a government prime contract that does not do and document enough of a price analysis to support a determination that a prospective sub's price is fair and reasonable is run by idiots. Every purchase should be supported by a price analysis, even if it takes only ten minutes, even if the documentation is only two sentences.

Vern is right here, too, but this also points to should rather than to must.  Nothing in the FAR prohibits companies being run by idiots.

Should you do price analysis given the circumstances described?  Yes.  Do it as a matter of good business for your company's benefit and in anticipation of problems that might potentially arise.

Must you do price analysis given the circumstances described?  No.  No one here has provided you with a citation that requires it.

On 3/27/2017 at 10:57 AM, Contracts Neo said:

It seems that a different contract vehicle, such as CPIF or CPFF, would change your response. Please let me know your thoughts on a fee-based contract.

A CPIF or CPFF contract will necessarily include the clause at FAR 52.244-2 Subcontracts, and that changes everything.  You would either have to have an approved purchasing system (and if so, you will already have guidelines that you have pledged to follow) or obtain consent to subcontract for some, many, or all subcontracts (and if so, you will have to provide a negotiation memorandum for those proposed subcontracts).

Our profession suffers when we are unable to differentiate between must and should.  I interpreted your question as a must question ("does a price analysis need to be completed...?) and answered it as such.  

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On 3/27/2017 at 6:51 AM, Contracts Neo said:

Does a price analysis need to be completed for each acquisition at this stage?

 

On 3/28/2017 at 9:35 AM, ji20874 said:

Must you do price analysis given the circumstances described?  No.  No one here has provided you with a citation that requires it.

The question was need it be done, not must it be done. Therefore, no one has tried to prove that it must be done as a matter of law, regulation, or contract.

Off hand, I know of nothing in FAR, including any contract clause, that requires that a contractor ever perform a price analysis. FAR 15.404-3(b)(1) is an instruction to COs and is not binding on contractors. (We have recent case law on point in that regard. See my article on the Wifcon articles page about the contractual force and effect of the FAR.)

The presence or absence of the Subcontracts clause, FAR 52.244-2, has no bearing on the question. That clause does not state that a contractor must perform a price analysis. Neither the word analysis nor the term price analysis appears in that clause. Nothing in FAR Part 44 requires that a contractor perform a price analysis. Yet contractors need to do it, not because the law, a regulation, or a contract clause says so, but because an auditor and a CO will expect the contractor to have done it. FAR instructs them to check whether the contractor has done so. Failure to do so is not a violation of law or a breach of contract, but if the contractor hasn't done so it may become an issue for the government. A contractor that does not anticipate and act accordingly is foolish. Something might happen during performance that requires a pricing action that raises questions about subcontract pricing. Postaward pricing actions are usually subject to FAR Subpart 31.2. See FAR 31.103(b). Under those principles, the contractor bears the burden of establishing the reasonableness of costs incurred. See FAR 31.201-3(a). A contractor who has not performed and documented at least a price analysis in connection with the award of a subcontract is going to be on thin ice in that regard.

All readers of Wifcon Forum have to be alert to the possibility that someone will answer hastily and provide poor advice or information. It happens. We all have done so. We are not infallible. The advantage that Wifcon Forum has over Ask A Professor and other "professional" Q&A sites is that the people here are "rude" enough to call someone out if they respond to a question hastily, with bad information, or based on unfounded opinion.

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