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7 hours ago, Lionel Hutz said:

“Contracting Officer” is defined in the FAR.  It includes anyone “with authority to enter into … contracts and make related determinations and findings.”  See FAR 2.101.  Further, FAR 1.601 states, “Contracts may be entered into and signed on behalf of the Government only by contracting officers. In some agencies, a relatively small number of high level officials are designated contracting officers solely by virtue of their positions.”

Lionel,

FAR 2.101(a) states:

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A word or a term, defined in this section, has the same meaning throughout this regulation (48 CFR Chapter 1), unless—

(1) The context in which the word or term is used clearly requires a different meaning

 

In the context of FAR subpart 15.4, I think a different meaning is required. In addition to the meaning given at FAR 2.101, the "contracting officer" is organizationally beneath others, such as the "head of the contracting activity". For example, FAR 15.403-4(a)(2) states:

Quote

Unless prohibited because an exception at 15.403-1(b) applies, the head of the contracting activity, without power of delegation, may authorize the contracting officer to obtain certified cost or pricing data for pricing actions below the pertinent threshold in paragraph (a)(1) of this subsection, provided the action exceeds the simplified acquisition threshold.

See also FAR 15.403-1 which relieves the contracting officer of the requirement to obtain cost or pricing data if they obtain a waiver from the HCA. 

I think that in the context of FAR subpart 15.4, the contracting officer is clearly an agent of the HCA or other higher-level official. There's more to it than just meeting the criteria in the FAR 2.101 definition. I agree with Vern's interpretation of "contracting officer" to mean "working-level COs" in this context.

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3 hours ago, Vern Edwards said:

Thus, a contracting officer is a person who has certain authority. It does not logically follow that all persons who have that authority are contracting officers. All professional basketball players are athletes, but not all athletes are professional basketball players.

The FAR says that a person with authority to enter into contract is a contracting officer.  (FAR 2.101)

Your basketball analogy is not accurate because it assumes (correctly) that there are other people that can be athletic but not play basketball. 

But that is not the case with contracting officers.  People other than contracting officers cannot award contracts.  The FAR states that “Contracts may be entered into and signed on behalf of the Government only by contracting officers.”  (FAR 1.601)  The word “only” couldn’t be any clearer.  It does not say “Contracts may be entered into and signed on behalf of the Government only by contracting officers and other people with contracting authority.”

When the boundaries of a group (contracting officer) are defined limited by a single characteristic (authority to contract), then the presence of that single characteristic (authority to contract) means the individual fits in that group.  To paraphrase Vern’s analysis, in the context of the FAR definitions, all Agency Heads are contracting officers, but not all Contracting Officers are Agency Heads. 

3 hours ago, Vern Edwards said:

Yet the Federal Circuit has found that the terms "agency head" and "contracting officer," as used in the Contract Disputes Act, are not equivalent.

Whether or not the Federal Circuit distinguishes between the terms “Agency Head” and “Contracting Officer” under the Contract Disputes Act (“CDA”) is a red herring.  I agree that that in the context of the CDA, the term Contracting Officer does not include an Agency Head.  But we are not dealing with the CDA.  The CDA is a different statute with, contrary to your assertion, different definitions.  Let me put the relevant portions one after the other, so the difference is clear. 

First the FAR definition:

Quote

’Contracting officer’ means a person with the authority to enter into, administer, and/or terminate contracts and make related determinations and findings.

The FAR definition of a contracting officer is a person with authority to contract.  It doesn’t matter how they got that authority.  The FAR makes clear that an official can be a contracting officer by virtue of being in a designated position (FAR 1.601(a)), or by being appointed in accordance with Agency regulations (FAR 1.603).

Next the CDA definition:
 

Quote

The term “contracting officer”—

(A) means an individual who, by appointment in accordance with applicable regulations, has the authority to make and administer contracts and to make determinations and findings with respect to contracts…

This definition is clearly limited to those who have contracting authority arising out of their “appointment in accordance with applicable regulations.”  It does NOT include those whose contracting authority arise out of the nature of their position, i.e., Agency Head or other high-level designated position.

So, in Morton v. US, when the Federal Circuit held a restriction on an Agency Head does not apply to a contracting officer, it is because the CDA defined those terms to be mutually exclusive.  No so in the FAR where the definition of contracting officer encompasses Agency Heads and other high-level designated officials.

Based on this I conclude the FAR clearly and expresses contemplates that a contracting officer is anyone that has contracting authority and that the FAR 15.402(a) restriction applies to all contracting officers.

3 hours ago, Vern Edwards said:

2. Moreover, just because a person is a head of a contracting activity does not mean that he or she has contracting authority, so by virtue of Lionel's argument such officials would not need a deviation in order to authorize award at an unreasonable price.

Vern, I have to be honest, I’m not sure what you are talking about here.

I never mentioned HCA’s in my post.  Unless the HCA has deviation authority, he may not authorize payment of an unreasonable price (under FAR Part 15) regardless of whether he is a contracting officer or not. 

3 hours ago, Vern Edwards said:

3. It is true that FAR 15.405(d) does not grant authority to authorize award at an unreasonable price.

I know of no statute or regulation that does.

I’m glad that Vern agrees there is no express statutory or regulatory language that authorizes a contracting officer to pay an unreasonable price contrary to FAR 15.402(a).

3 hours ago, Vern Edwards said:

FAR 15.402(a) indicates that contracting officers cannot award at unreasonable prices and that they must refer stalemates at unreasonable prices to higher level authority for disposition. What that disposition might be is a matter of agency policy and managerial discretion.

What if agency regulations are silent on the matter, as many (most?) are.  Under Vern’s scenario, the mere fact that a contracting office has “referred” a stalemate to a higher authority has satisfied the regulatory requirement.  Notice, the regulation does not require that the higher authority “resolve” or “dispose of” anything.  It doesn’t even mandate documentation of the disposition, only that it “should” be documented. 

Does it make sense that a contracting officer, who himself cannot award a contract at an unreasonable price, can authorize another contracting officer under him to award the contract?  “I can’t award the contract at that price.  But, because you are one level below me and you asked me, sure go ahead, no problem.  Just make sure you document it. Or not, if you can’t, no big deal.”

3 hours ago, Vern Edwards said:

I should add that this discussion in largely academic.

I agree completely!  But sometimes the academic issues are the most interesting. 

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Don, I understand and respect both yours and Vern's position.

But, I think it is a stretch to say that the context of FAR 15.402 "clearly requires a different meaning" to the definition of contracting officer. 

In fact the express granting of waiver authority to the HCA in the FAR provisions you cited argues against your interpretation.  Clearly the FAR Council knows how to grant the HCA authority to waive specific FAR requirements.  If the FAR meant for the HCA to be able to waive the requirement of 15.402(a), it would have so stated in language similar to that you identified. 

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Lionel:

Thanks for responding. I have learned at Wifcon Forum that there comes a time when two people simply cannot (or will not) agree with each other, and that when that happens it's best to stop debating. As far as I know, the only conclusive difference between you and me at this point is that you think an official who wants to authorize award at an unreasonable price must obtain approval to deviate from the FAR pursuant to Subpart 1.4, and I do not. Let's leave it at that.

I'd prefer that we not address each other's arguments any further, because I don't want to debate with you further and don't want to have to come back to this thread to deal with what I consider to be unacceptable assertions or analyses of what I've said. We've both posted at length, I've let you have the final say, and I'd prefer to let readers choose the argument that they prefer without any continuation or supplement by the two of us. I hope you'll agree to that. I ask that you do. Please feel free to argue on with others.

Vern

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Lionel,  a fundamental question that should be addressed here is what is the definition of "fair and reasonable price" and what is a "reasonable price"?  Do you have such definitions?

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4 hours ago, Lionel Hutz said:

If the FAR meant for the HCA to be able to waive the requirement of 15.402(a), it would have so stated in language similar to that you identified. 

Lionel,

Your faith in the FAR Council is admirable.

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2 hours ago, Retreadfed said:

Lionel,  a fundamental question that should be addressed here is what is the definition of "fair and reasonable price" and what is a "reasonable price"?  Do you have such definitions?

This is what I keep returning to. Once a contracting officer elevates an action to a level above,  the higher official may determine a price is reasonable given available data on market conditions (i.e. there is no other palatable choice).

If the offeror will not budge and alternatives do not exist maybe the price is fair and reasonable, today. That is a possibility in free markets.

One more reason relying on previous fair and reasonable price determinations is not a best practice.

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Vern,

We can agree to disagree.  No problem.  I enjoyed the discussion, thanks!

My comments that follow are not directed at you or anything you have written.

Cheers!

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10 hours ago, Don Mansfield said:

Lionel,

Your faith in the FAR Council is admirable.

Don,

Ha ha.  Believe me, I know that consistency is not a strong suit of the FAR Council.  My statement was a reflection of a cannon of statutory and regulatory construction.  See pages 15-16 of this CRS Report for Congress (pdf pages 19-20) (https://fas.org/sgp/crs/misc/97-589.pdf) :

Quote

where Congress includes particular language in one section of a statute but omits it in another ..., it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.


And

Quote

Occasionally the Court draws a contrast between the language at issue and other statutory language that clearly and directly requires the interpretation being pressed by one of the parties. There are some instances—for example, failure to employ terms of art or other language normally used for such purposes—in which this can be a fairly persuasive argument. For example, the Court reasoned that, although “Congress knew how to impose aiding and abetting liability when it chose to do so,” it did not use the words “aid” and “abet” in the statute, and hence did not impose aiding and abetting liability.

I don't know that there is an organization more dysfunctional than Congress, yet that is how Courts and administrative bodies statutes and regulations.  Yes, sometimes cannons of construction are legal fictions.  But if the Courts and GAO use them, they're good enough for me.

Finally, I'll just add one last quote from GAO:

Quote

It is a fundamental requirement that a government agency cannot award a contract at more than a fair and reasonable price, and there is nothing in the TAA or its implementing regulations that indicates that TAA-compliant products can be acquired for an amount greater than a fair and reasonable price.   In this regard, FAR § 15.402(a) states that a contracting officer "must" purchase supplies and services "at a fair and reasonable price."

Granted, that is just one case.  But it is a protest in which GAO examined the language of FAR 15.402(a), noted that it said "contracting officer," and concluded that it is a "fundamental requirement" that applies to "a government agency."

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12 hours ago, Retreadfed said:

Lionel,  a fundamental question that should be addressed here is what is the definition of "fair and reasonable price" and what is a "reasonable price"?  Do you have such definitions?

There is no hard and fast definition.

U.S. Supreme Court Justice Potter Stewart once famously penned (about defining pornography), "I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it…"

I think the FAR and GAO have taken a similar approach with the definition of a fair and reasonable price. See, for example, Matter of Nutech Laundry & Textiles, Inc., B-291739, February 10, 2003:

Quote

A determination of price reasonableness is a matter of agency discretion, involving the exercise of business judgment, which our Office will not question unless it is shown to be unreasonable.

Here you can see GAO essentially saying, it is up to a contracting officer to determine whether a price is reasonable, unless they think it is unreasonable.  While they may render a decision on a case by case basis, they do not try to establish the outer boundaries of reasonableness.

Even the Director of Defense Pricing, when discussing price reasonableness in the context of a Commercial Item purchase, does not establish a bright line rule.  He writes,

Quote

The standard to be used by Contracting Officers is whether a reasonable businessman or business woman reviewing the data would conclude that it is sufficient to demonstrate that the taxpayers are paying a fair and reasonable price for the item.

http://www.acq.osd.mil/dpap/policy/policyvault/USA007164-14-DPAP.pdf

On the one hand, it would be nice to have more guidance, but on the other, the more you define and establish hard and fast definitions, the more you limit the discretion afforded to a contracting officer.

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On 5/18/2017 at 0:16 PM, Retreadfed said:

Lionel,  a fundamental question that should be addressed here is what is the definition of "fair and reasonable price" and what is a "reasonable price"?  Do you have such definitions?

Now, Retread, it has long been understood that "fair and reasonable price" or "reasonable price" is an undefined, subjective standard.

A little history: The earliest reference to "fair and reasonable price" that I could find in the Federal Register was from the Department of the Interior and did not apply to procurement, but to industry group pricing of coal sales to the public. In fact, most early references in the Federal Register concerned agricultural and other commodity pricing. There was no mention with respect to procurement until the beginning of World War II.

Early regulations for military procurement do not say much about pricing and make no mention that I could find of "price analysis," probably because awards were made by formal advertising and went to the low bidder. A 1916 regulation of the Army Quartermaster Corps told quartermaster officer to inform themselves concerning "prevailing prices" before buying on the open market without advertising. 

But the phrase fair and reasonable price was around and used much earlier. The earliest mention that I could find in U.S. federal court decisions was in an 1865 decision of the U.S. Court of Claims, Joseph W. Parish v. U.S., 1 Ct. Cl. 357. The chief quartermaster of St. Louis authorized a man named Parish to buy some horses for use by the cavalry. He bought them for $110 each. Parish's payment vouchers were approved by a commission headed by one Captain Phillip Sheridan. But when Parish sought payment the Army deducted $5 from the unit price. Parish sued for the total of $5,790 that was withheld. The court held for the plaintiff, saying: "There is abundant proof to show that the horses were purchased by Parish in the expectation that he would receive the sum of $110 [per horse] from the government, and that this was a fair and reasonable price." I could find no mention of the phrase in U.S. statutes before that time, so for all I know that court decision was the origin of its use.

"Fair and reasonable price" has always been a phrase used mainly in connection with negotiated procurements, when price was not necessarily determined through competition. Volume I of the Contract Pricing Reference Guides provides an extended dissertation on the concept of "fair and reasonable price" in section I.2.1. But the best one I have read appeared in the 1986 edition of the Armed Services Pricing Manual, on pages 2-6 and 2-7. Here it is:

 

Quote

 

Armed Services Pricing Manual (DOD, 1986)

2.3 Fair and Reasonable Price [Chapter 2, Price and Price Analysis, pages 2-6 and 2-7]

You are to procure supplies and services at fair and reasonable prices, but what is fair and reasonable? In Appendix B, a fair and reasonable price is described as one that is fair to both parties, considering the promised quality and timeliness of contract performance. Thus, to be fair to both parties, the price must represent a reasonable compromise between the seller's and the buyer's view of a fair price.

In any given procurement situation, there rarely is a single price that is fair and reasonable from all viewpoints. More likely, there may be a range of prices that are fair under the circumstances, considering the degree of competition and the character of the market in which the item or service, and other, similar ones, are usually bought and sold. "Reasonable," however, is subjective and implies a personal viewpoint: there is a price that is reasonable. As a result, you should consider "fair and reasonable" in three dimensions: fair under current market conditions; reasonable to the seller; and reasonable to the buyer.

Price theory tells us that the kind and degree of competition determine which dimension will be dominant in any given situation. The fair market price is determined by supply and demand if there is perfect or effective competition. Whether that price is also reasonable to either buyer or seller is a material question only if it causes one to enter or leave that particular market.

Under conditions of imperfect competition, the fair market price becomes a progressively less material question as conditions move toward monopoly. The emphasis shifts toward what price is reasonable to the buyer and what price is reasonable to the seller. The buyer's idea of reasonable price is determined by value, utility, and the existence of alternatives. The seller's idea often is based on full costs plus a reasonable return.

While this seems to beg the question, remember that in any given procurement situation no one price is fair and reasonable from all viewpoints. It is more important to understand the economic forces working on the price at which the product will change hands than to arrive at a complete definition of a fair and reasonable price.

Fair and reasonable describes a conclusion that the price is acceptable to both the Government and the seller. in sealed bid procurements, it usually is presumed that the lowest bid price is fair and reasonable. The same presumption usually exists in procurements placed after other competitive procedures, if price competition is effective.

In either case, if price competition is not effective, the lowest offer is not necessarily fair and reasonable. Other factors that must be considered are quality in relation to use, ability to deliver on time, and ultimate cost to the taxpayer. (Ultimate cost may be measured by ease nd cost of maintenance, transportation costs, and service life, including time between overhauls, in addition to the cost of acquisition.) Demonstration that. a given price is fair and reasonable will depend on how the buyer reached the decision to buy at that price, the price comparisons made, the Government engineering estimates used and detailed estimates of the costs to perform, and how the buyer prepared for and conducted negotiations.

Appendix B, the Glossary:

Fair and reasonable price: A price that is fair to both parties, considering the agreed-upon conditions, promised quality, and timeliness of contract performance. Although generally a fair and reasonable price is a function of the law of supply and demand, there are statutory, regulatory, and judgmental limits on the concept.

The glossary entry is described as an explanation, not a definition.

Jamal:

What more guidance do you want?

It has long been understood that "the market" does not necessarily yield what many people would consider fair and reasonable prices. Go to the pharmacy and ask about drug prices. I learned yesterday that a single dose of CroFab rattlesnake antivenom costs $14,000, and if you're bitten you may need more than one dose. The cost of making it is about 0.1 percent of the price. See http://www.smithsonianmag.com/smart-news/why-single-vial-antivenom-can-cost-14000-180956564/. See also http://www.cbsnews.com/news/rattlesnake-selfie-results-in-a-153k-medical-bill/. (Still hate Obamacare?)

Is $14,000 fair and reasonable? Hell no. It's neither fair nor reasonable, but I'll pay it if I'm bitten. What choice do I have? (Although, a friend of my brother got bit near Flagstaff, Arizona, while illegally looking for Indian artifacts. He doesn't have health insurance and he refused to let them treat him with it at the hospital. He went home. His leg turned black up to his crotch and he said it hurt like hell, but he survived without long term ill effect. Of course we told him he was nuts, but there are many nuts out in that desert backcountry and he said he didn't feel alone.)

Some people would say $14,000 is fair and reasonable if you need the stuff in order to survive. If anyone tells you that, make sure you don't vote for them if they run for public office, and don't offer them a drink if they come to your house for any reason other than to split their lottery winnings. Just because you have to have it doesn't make $14,000 per dose fair and reasonable. That's nonsense. Fortunately, I own knee high snake boots and wear them when I'm in rattler country. What if your dog gets bitten? Tip: Don't take stupid or aggressively curious dogs into rattler country. My dog Jonah stays home. He's an idiot and noses or chases anything that moves. As my youngest son would say, if he gets bit, oh well.

This is from Forbes, "Yes, The Market's Unfair," by Paul Maidment, May 8, 2008: "Everything you've heard about the virtues of competition in markets--and about how supply and demand work in concert to set the proper prices for goods, services, and securities, is irrelevant. There are no perfectly functioning markets outside of the imagination of economists."

Some CO's can determine fair and reasonable without any trouble. Others agonize.

But, Retread, you knew that. Jamal, let it go.

^_^

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Vern, thanks for the history lesson.  I was a history major in college and find the origins of things to be interesting.  As to the reason for my question, in my experience, many COs think that a fair and reasonable price is a price that is developed strictly through cost/price analysis.  I wanted to see where Lionel was on this.

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On Friday, May 19, 2017 at 11:47 PM, Vern Edwards said:

What more guidance do you want?

Vern,

I have been intellectually satisfied several posts ago; however, I do value the on-going discussions. That's in regard to unreasonable prices. Maybe it is possible to award at unreasonable prices and maybe FAR 15.404-1(b)(2)(A) supports that. Why else would they caveat comparison with historical prices paid by saying "...if the reasonableness of the prior price is uncertain, then the prior price may not be a valid basis for comparison."? Sounds like some contract prices are assumed to be unreasonable. Also, FAR 13.106-3(A)(2)(ii) states that contracting officers can determine a price fair and reasonable by comparison of the proposed price with prices found reasonable on previous purchases. Is that suggesting that not all purchase prices are found reasonable? 

I still think so-called unreasonable can be called reasonable under the FAR concept of a fair and reasonable price, which has elsewhere been described as the price that a prudent and competent businessperson would be willing to pay for an item or service under market conditions, given available data on the marketplace.

In essence, for me, price reasonableness is largely a judgement call based on market conditions, alternatives for meeting the requirement, price-related factors, non-price evaluation factors that relate to each procurement, and what price can be negotiated with an offeror. Willing to pay is a different standard than happy or wanting to pay. I don't like it, but that's how I see it. I would document the file to explain the situation and move forward.

As always, thank you for the thoughtful and thought-provoking analysis. I'll go watch Disney's Frozen with the kiddos and 'let it go' …

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3 hours ago, Jamaal Valentine said:

I still think unreasonable can be called reasonable under the FAR concept of a fair and reasonable price, which has elsewhere been described as the price that a prudent and competent businessperson would be willing to pay for an item or service under market conditions, given available data on the marketplace.

In essence, for me, price reasonableness is largely a judgement call based on market conditions, alternatives for meeting the requirement, price-related factors, non-price evaluation factors that relate to each procurement, and what price can be negotiated with an offeror. Willing to pay is a different standard than happy or wanting to pay. I don't like it, but that's how I see it. I would document the file to explain the situation and move forward.

Jamal,

The only thing that bothers me about what you say is that it sounds like there will never be a price that cannot be justified by someone as reasonable. That seems to render the whole concept of fair and reasonable price as phony. So if someone comes along and says, "Hey, you paid too much for that," you can say, "No, it was reasonable to me. It really needed it." Isn't $14,000 reasonable if your life is at stake?

My reaction is that there is nothing reasonable about $14,000 for a single dose of snake antivenom. It may be necessary, because that's the only way to get it, but it's not fair and reasonable unless reasonable is based on degree of need. A sliding scale? The more you need it, the higher the threshold of fairness and reasonableness? Maybe. But then why bother with the concept of price gouging in disasters. Maybe price gouging is even good. Here are some things to read:

https://definitions.uslegal.com/p/price-gouging/

http://www.doj.state.or.us/consumer/Pages/price_gouging.aspx

https://knowledgeproblem.com/2012/11/03/list-of-price-gouging-laws/

http://www.cnbc.com/2017/04/18/airbnb-doubles-down-it-its-efforts-to-fight-hotel-price-gouging.html

http://business.time.com/2012/11/02/post-sandy-price-gouging-economically-sound-ethically-dubious/

https://hbr.org/2013/07/the-problem-with-price-gouging-laws

https://www.nytimes.com/2017/04/20/opinion/how-to-stop-drug-price-gouging.html?_r=0

https://www.technologyreview.com/s/529961/in-praise-of-efficient-price-gouging/

https://www.technologyreview.com/s/529961/in-praise-of-efficient-price-gouging/

https://mises.org/library/price-gouging-saves-lives-hurricane

What's a poor man (or government) to do? FAR 15,405(d)? Why worry?

 

 

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See "Military healthcare paying more than $400 for a $46 can of baby formula," http://www.wcnc.com/news/health/military-healthcare-paying-more-than-400-for-46-can-of-baby-formula/441585928, dated May 21, 2017.

See also "Is there any reason for the outrageous price of cinnamon sticks? An Investigation," https://theoutline.com/post/930/why-are-cinnamon-sticks-so-expensive

Interesting discussion about pricing on Amazon: "Thread: Why Do Some Sellers Charge Impossibly High Prices?" https://sellercentral.amazon.com/forums/thread.jspa?threadID=185839

There are many stories of outrageous commercial prices, which is something to think about now that the HASC plans to force the government into buying from online commercial sources like OfficeMax,Grainger, and Staples. http://breakingdefense.com/2017/05/thornberry-reform-bill-directs-pentagon-to-just-buy-commercial-products-online/

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Cinnamon sticks and vanilla beans. Currently, for fresh produce, I pay four to five times the cost compared to the states.

Not many people signup to bring  a fruit-tray to bbqs or office parties. Growing up in Southern California I was spoiled … here, it's $4 for five small jalapenos, $20 for a watermelon, don't even think about mangoes, strawberries, or blueberries.

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On 5/20/2017 at 0:06 AM, Jamaal Valentine said:

I still think unreasonable can be called reasonable under the FAR concept of a fair and reasonable price, which has elsewhere been described as the price that a prudent and competent businessperson would be willing to pay for an item or service under market conditions, given available data on the marketplace.

In essence, for me, price reasonableness is largely a judgement call based on market conditions, alternatives for meeting the requirement, price-related factors, non-price evaluation factors that relate to each procurement, and what price can be negotiated with an offeror. Willing to pay is a different standard than happy or wanting to pay. I don't like it, but that's how I see it. I would document the file to explain the situation and move forward.

Jamal, I agree.

When examining issues of “reasonableness” the law uses what is known as the “Reasonable Person” standard.  It is most often associated with the law of Torts, but is equally applicable to contract law, when it is sometimes called the “reasonably prudent business person” standard. 

Quote

Such a “person” is really an ideal, focusing on how a typical person, with ordinary prudence, would act in certain circumstances. The test as to whether a person has acted as a reasonable person is an objective one, and so it does not take into account the specific abilities of a defendant. Thus, even a person who has low intelligence or is chronically careless is held to the same standard as a more careful person or a person of higher intelligence.

http://injury.findlaw.com/accident-injury-law/standards-of-care-and-the-reasonable-person.html

When we talk about whether a price is reasonable, we are asking whether a reasonably prudent business person in a given situation would pay the price in question.  This standard is reflected in the advice of the Director of Defense Pricing (quoted in my post above) when he states that the determination should be made from the point of view of “a reasonable businessman or business woman reviewing the data.” 

Under this standard, it is not be enough for the contracting officer merely to say, “The price is reasonable to me.”  Nor is it required that the specific price be reasonable in all situations.  Rather, the contracting officer must be able to say, “A typical business person, with ordinary prudence, in the same circumstances I am in, would be willing to pay this price.”  When you see examples of unreasonable pricing, it is because it does not meet that criteria.  Either, there are other equivalent options at better prices, or the government’s need is not great enough to pay the requested price and it is more prudent to simply go without.

For example, under normal circumstances, a contracting officer is not going to be able to determine $10,000 to be a reasonable price for a coffee pot.  It does not matter how much he or she subjectively loves coffee.  Nor is it enough that an extravagant millionaire might purchase a $10,000 coffee pot as a luxury.  There are many options when it comes to purchasing coffee pots, and a typical business person, with ordinary prudence under normal circumstances is not going to pay that price for a coffee pot.

A good example in private industry is a television commercial.  Without context, $4M for a 30 second commercial sounds unreasonable.  And, if a local cable company demands $4M from Pepsi for a 30 second ad during a rerun of McHale’s Navy, it would be unreasonable.  The need for any one ad is not that great, and there are other less expensive, equally effective opportunities to air commercials.  A reasonably prudent business person would not pay that price.

But if FOX demands $4M from Pepsi for a 30 second ad during the Super Bowl, it may be determined to be a reasonable price.  The number of viewers plus the potential for ads to go viral and generate “buzz” make the return on that $4M purchase a much better deal.  Considering prices at this year’s Super Bowl approached $5M, one might even think Pepsi was getting a good deal at only $4M. The product and price haven't changed, but the circumstances have.

Tweak the scenario just a bit more and the price can become unreasonable again.  Imagine a company that does not sell products to the general public and is operating at maximum capacity such that a Super Bowl commercial is not going to help generate sufficient revenue to justify the purchase.  In that case, even the “bargain” rate of $4M is not a price that a typical business person with ordinary prudence would pay in those circumstances.

Keep changing the circumstances, i.e., the data, and you can find multiple scenarios in which the same price for the same item is either reasonable or unreasonable from the point of view of an typical business person with ordinary prudence.  If reasonableness of price did not depend on the specific facts of a procurement, then the Government could come out with a universal price list that capped the prices across all government contracts.  The FAR recognizes the variable nature of the price reasonableness determination and puts that responsibility on the individual with the most knowledge of the circumstances of the procurement.

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Two things I would like to make clear to readers:

1. Price reasonableness (contracting officer) is separate from requirements definition (client, program manager, etc.). I have witnessed contracting officers overstepping their roles because of price related concerns.

2. Price reasonableness always considers the non-cost/price factors of the source selection. (e.g. the evaluation factors and significant subfactors that establish the requirements of acceptability including past performance)

 

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On 5/19/2017 at 3:06 PM, Jamaal Valentine said:

I still think unreasonable can be called reasonable under the FAR concept of a fair and reasonable price, which has elsewhere been described as the price that a prudent and competent businessperson would be willing to pay for an item or service under market conditions, given available data on the marketplace.

Emphasis added.

The highlighted statement, taken literally, is absurd. A proposed or quoted price is reasonable or it is not.

The DOD memo cited and linked by Lionel Hutz is entitled, "Commercial Items and the Determination of Reasonableness of Price for Commercial Items" and is dated Feb. 4, 2015. It does not address determinations of price reasonableness in noncommercial acquisitions. Moreover, it does not explain the precise nature of Lionel's "reasonably prudent business person" standard. Read what the memo says carefully:

Quote

The standard to be used by contracting officers is whether a reasonable businessman or businesswoman reviewing the data would conclude that it is sufficient to demonstrate that the taxpayers are paying a fair and reasonable price for the item.

Think about that. Think carefully. Do you agree?

5 hours ago, Lionel Hutz said:

When examining issues of “reasonableness” the law uses what is known as the “Reasonable Person” standard.  It is most often associated with the law of Torts, but is equally applicable to contract law, when it is sometimes called the “reasonably prudent business person” standard. 

Lionel cited a Findlaw entry, "Standards of Care and the 'Reasonable Person'," but the entry does not support his assertion that the "reasonably prudent business person" standard used in tort and criminal law is "equally applicable" to contract law. It makes no mention of contract law. If you're going to say things like that you should cite an apt reference. See, instead, Dimatteo, "The Counterpoise of Contracts: The Reasonable Person Standard and the Subjectivity of Judgment," South Carolina Law Review (Winter 1997). https://www.cisg.law.pace.edu/cisg/biblio/dimatteo5.html 

The reasonable person standard applied in contract law is not identical with the reasonable person standards applied in tort and criminal law. From the Dimatteo article:

Quote

Professor Prosser notes that the reasonable person of tort is a hypothetical personification of the "community ideal of reasonable behavior." Although stemming from the same family tree, the reasonable person of contract differs in make-up and disposition. In tort the reasonable person is a more universalized personage, reflective of the general duties of care owed to fellow human beings. The reasonable person of contract is a more specialized creature, possessing all of the idiosyncratic features of the contracting parties viewed within the context of their interaction.

Footnote omitted.

In any case, pre-award determinations of price reasonableness are not matters of contract law, and FAR Part 15 makes no mention of any "reasonable person" or "reasonably prudent business person" standard for pre-award determinations of price reasonableness.

The standard for post-award contractual determinations of cost reasonableness is stated in FAR 31.201-3 and is a matter of contract law and regulation. You can see FAR 31.201-3 applied in Kellogg Brown & Root Services, Inc. v. U.S., 742 F. 3d 967 (Fed. Cir. 2014). See also Kellogg Brown & Root Services, Inc. v. U.S., 107 Fed.Cl. 16 (2012). 

The interesting questions to be answered for the purposes of this thread are:

  1. What is to be the standard of price reasonableness in any given case?
  2. Is the standard of price reasonableness for the item constant or does it change with circumstances, including circumstances of need? (Is price reasonableness ever a function of the degree of need? If a given price is unreasonable in routine acquisitions, can it be reasonable in emergencies? If so, what of the concept of price gouging in cases of disasters?)
  3. Is the application of the standard of price reasonableness entirely subjective, or is there a threshold at which a price is reasonable or unreasonable to all?
  4. In cases in which cost analysis must be done, does price reasonableness necessarily turn on the relationship between estimated cost and proposed price?

FAR does not answer those questions. The closest FAR Part 15 comes to providing guidance about a standard for price reasonableness is probably the following, from FAR 15.405(b):

Quote

A fair and reasonable price does not require that agreement be reached on every element of cost, nor is it mandatory that the agreed price be within the contracting officer’s initial negotiation position.The contracting officer’s objective is to negotiate a contract of a type and with a price providing the contractor the greatest incentive for efficient and economical performance.

That does not strike me as especially helpful, and it does not seem applicable to the acquisition of commercial items.

According to Lionel:

5 hours ago, Lionel Hutz said:

When we talk about whether a price is reasonable, we are asking whether a reasonably prudent business person in a given situation would pay the price in question.  This standard is reflected in the advice of the Director of Defense Pricing (quoted in my post above) when he states that the determination should be made from the point of view of “a reasonable businessman or business woman reviewing the data.” 

Under this standard, it is not be enough for the contracting officer merely to say, “The price is reasonable to me.”  Nor is it required that the specific price be reasonable in all situations.  Rather, the contracting officer must be able to say, “A typical business person, with ordinary prudence, in the same circumstances I am in, would be willing to pay this price.”  When you see examples of unreasonable pricing, it is because it does not meet that criteria.  Either, there are other equivalent options at better prices, or the government’s need is not great enough to pay the requested price and it is more prudent to simply go without.

Emphasis added.

I emphatically disagree with both DOD's memo and the statement I highlighted from Lionel, because contracting officers are not "typical business persons." They are supposedly specially-trained agents of a particular kind of government, and our government's standards of prudence are not always the same as private sector standards. The government has responsibilities that "typical business persons" do not have (disaster relief) and buys many things that typical business persons do not buy (one year of test support services at Yuma Proving Ground; $400,000 flight helmets for F-35 pilots).

The difference between contracting officers and typical business persons is shown in the following from the Contract Pricing Reference Guides, Vol. 1, I.2.1:

Quote

As a buyer, you should consider a price that is TOO HIGH to be unfair. What happens if you agree to a price that is too high?

  • You will have failed to fulfill your most basic responsibility as a Government contracting officer or contract specialist. 
  • You will waste scarce Government funds. 
  • Since you are publicly accountable as a Federal employee for your decisions, you may have to answer to management, the Inspector General, the General Accounting Office, a Congressional committee, or the public at large.

Also, keep this in mind, from FAR 15.405(a):

Quote

Taking into consideration the advisory recommendations, reports of contributing specialists, and the current status of the contractor’s purchasing system, the contracting officer is responsible for exercising the requisite judgment needed to reach a negotiated settlement with the offeror and is solely responsible for the final price agreement.

Bottom line: I think that a CO determination of fairness and reasonableness is subjective within what I'll call "publicly acceptable" boundaries. Despite the "solely responsible" phrase in FAR 15.405(a), a CO's determination cannot be entirely subjective, because it may be judged by critical persons with a special point of view, and a CO must think about what such persons' standards might be before biting the bullet. He or she must be prepared to respond to their objections with a coherent and reasonable explanation. As I mentioned in an earlier post, some government buyer thought that $400 was a reasonable amount to pay for baby formula. Now that the determination has come to light, a U.S. senator has some questions.

Having said all that, it appears to me that most COs make determinations of price reasonableness without much difficulty or risk. But who knows what they'd say if asked to explain their determinations.

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Vern, some old mossbacks like me remember the Renegotiation Board.  Would you be in favor of reviving it or something like it?

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1 hour ago, Vern Edwards said:

In any case, pre-award determinations of price reasonableness are not matters of contract law, and FAR Part 15 makes no mention of any "reasonable person" or "reasonably prudent business person" standard for pre-award determinations of price reasonableness.

See FAR 15.404-1(a)(7), which refers you to the informational Contract Pricing Reference Guides (CPRG) for instruction and professional guidance. Here is what Volume 1, Chapter 0 states:

What Is Reasonable? A reasonable price is a price that a prudent and competent buyer would be willing to pay, given available data on:

Market conditions, your alternatives for meeting the requirement, price-related factors, noncompetitive acquisitions, non-price evaluation factors, and applying judgment to the determination.

CPRG further provides that "…a price that is reasonable today may not be reasonable tomorrow."

*it is noted that the CPRGs are not directive in nature

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Quote

15.405(d): "If, however, the contractor insists on a price or demands a profit or fee that the contracting officer considers unreasonable.."

Quote

con·sid·er

kənˈsidər/
verb
  1. believe; think.
    • "at first women were considered to be at low risk from HIV"
    • take (something) into account when making an assessment or judgment.
      "one service area is not enough when you consider the number of cars using this highway"
      synonyms: take into consideration, take account of, make allowances for, bear in mind, be mindful of, remember, mind, mark, respect, heed, note, make provision for
      "the inquiry will consider those issues"
      antonyms: ignore

Note the actual words used : "consider" is primarily subjective, in that it refers to the weighing of information the CO considers relevant in order to reach a supportable conclusion.  A lack of information, or information in the wrong format,  can also lead a CO to "consider" a price or fee unreasonable within the bounds of the FAR.

The CO's job is not to make organizational-wide decisions; those calls are left to the politicals and their senior leadership. So of course if the CO can't make a determination in accordance with the FAR, higher-level concurrence is required to make an award.  That's just normal oversight.

Here's a perfect example: back in the day, I was negotiating a deal for a piece of gear for  a Navy fighter jet. The contractor's yield rates on the main component were so abysmal that I couldn't abide allowing 100% of the scrap rate.   Years later I found out that the reason for the low yields was the fact that the government data package we provided was "incomplete", i.e., the US acquired it using sources and methods of which I was unaware at the time....so not so 'unreasonable' after all, as it turned out.

 

 

 

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Retread:

No to renegotiation. It was never that good an idea, it was hard, and you could never get it through Congress these days.

Jamal:

The CPRG says "prudent and competent buyer," not "reasonably prudent business person." I think of a government buyer as what I described above: "specially-trained agents of a particular kind of government." Government contracting personnel are not "typical" businesspersons. Commonplace "reasonable" and "prudent" person standards do not take the government buyer's unique role and public interest concerns into account. What a business person selling something thinks would be fair to the taxpayer is not necessarily what a contracting officer would think is fair to the taxpayer.

 

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14 minutes ago, Retreadfed said:

Vern, some old mossbacks like me remember the Renegotiation Board.

Mulligans only belong in a game of golf.  Especially mine.

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