Jamaal Valentine

Unreasonable Price

61 posts in this topic

I followed FAR 1.108(a) convention and used the following common dictionary meaning of buyer:

1. A person who makes a purchase.

1.1 A person employed to select and purchase stock or materials for a large retail or manufacturing business.

https://en.oxforddictionaries.com/definition/buyer

FAR uses the term buyer at least thirteen times - all seemingly consistent with one or more of the definitions above. In my judgement, FAR's use of the term buyer includes the general public, private sector, and government buyers. (Unless a specific use requires a different interpretation)

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I know it's commonly accepted that price reasonableness is only concerned with prices that are too high, but is that all a prudent and competent buyer would be concerned with?

CPRG alludes to price reasonableness being concerned with prices being fair to the seller (not too low).

Awarding at prices that are unfairly low may have an undesired impact on the market and the buyer's own interest. For example, Canada took advantage of an expired trade deal in 2015 and sold lumber at unfairly low prices here in the U.S, and that [resulted in less competition as smaller mills could not compete]. At that point, the remaining sellers had more control over prices.

https://www.google.co.jp/amp/s/www.marketplace.org/amp/2017/05/22/economy/timber-tariff-cuts-different-ways-in-canada-us

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For those seeking an advanced degree in the history of government contract pricing, a few titles from my library (prompted by Retreaded's mention of renegotiation):

  • Brande, Stuart D., Warhogs: A History of War Profits in America (The University Press of Kentucky, 1997)
  • Braucher, Robert, The Renegotiation Act of 1951, 66 Harvard Law Review 270 (December 1952)
  • Crowell, J. Franklin, Government War Contracts (Oxford University Press, 1920)
  • Miller, John Perry, Pricing of Military Procurements (Yale University Press, 1949)
  • Nash, Ralph C., Pricing Policies in Government Contracts, 29 Law and Contemporary Problems 361 (1964)
  • Seidman, J.S., Seidman's Legislative History of Excess Profits Tax Laws 1946 - 1917 (William S. Hein & Co., Inc., 1998)
  • Weston, J. Fred, ed., Procurement and Profit Renegotiation (Wadsworth Publishing Co., Inc., 1960)
  • Wilson, Mark P., "Taking A Nickel Out Of The Cash Register": Statutory Renegotiation of Military Contracts And The Politics Of Profit Control In The United States During World War II, 28 Law and History Review 343 (May 2010)
  • University of Michigan, Official Publication, Vol. 45, No. 127, April 8, 1944, Renegotiation and Termination of War Contracts 1942 -1944

There is an amazing amount of historical stuff out there bearing on how we got to where we are today. I'll post more titles as I unpack boxes.

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More history of pricing:

  • Preston, L.E., Contract Negotiations and Results in Aircraft Procurement: Case Studies of the B-52 and B-58 (Rand, 1962).
  • Fascinating.Pricing for Profit (Harvard Business Review Reprints 1970 -74). Dated, but interesting.
  • Joint Economic Committee of Congress, Report of the Subcommittee on Economy in Government: The Economics of Military Procurement (1969)
  • Pownall, G., An Empirical Analysis of the Regulation of the Defense Contracting Industry: The Cost Accounting Standards Board (2 Journal of Accounting Research 291 (Autumn 1986)
  • House Committee on Banking and Currency, Hearings,To Renew the Defense Production Act of 1950, as amended (1968). These hearings were the origins of the Cost Accounting Standards. It is "The Admiral Hyman Rickover Show," and provides extended views on some aspects of contract pricing

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I’d like to correct something I wrote earlier. 

I previously stated that “Price reasonableness is a subjective determination.”  When I stated that, I meant that a determination of price reasonableness would vary depending on the facts and conditions of the acquisition.

I still believe that; however, that is not the proper use of the term “subjective.” 

The reasonable person standard is an objective, not subjective standard.  In an objective standard, the personal beliefs of the party are irrelevant.  What matters is what a typical person exercising ordinary prudence would find reasonable.  On the other hand, a subjective standard considers the actual beliefs of the party when deciding whether he or she acted reasonably.  See the following article for a discussion of The Objective Theory of Contracts. (http://scholarship.law.tamu.edu/cgi/viewcontent.cgi?article=1301&context=facscholar) which states:

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The objective theory of contracts provides that mutual assent to a contract is determined by reference to external acts and manifestations, not by evidence of subjective, internal intention. Stated more simply, contract formation depends on what is communicated, not on what is merely thought. Thus, modem objective theory provides that "objective manifestations of intent of [a] party should generally be viewed from the vantage point of a reasonable person in the position of the other party.”

The Dimatteo article cited by Vern also makes this same point when it states:

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A reasonable person must therefore be constructed on a case by case basis. This substituted contracting party possesses the intellect, sophistication, and good faith demeanor of the average reasonable person. The issue in dispute is then resolved by the application of this reasonable party. The subjective intent of the parties is replaced by the intent of this reasonable person applied ex ante.

Further, I agree that when dealing with professionals, the reasonable person standard is elevated to that of a reasonable professional in that field.  A professional has skills and abilities superior to the average person and is expected to utilize those skills/abilities when appropriate.  So, for example, a doctor that treats a person with a broken leg will be held to the standard of a typical doctor exercising ordinary prudence, not just a typical person.

So, to summarize up to this point: There is not a limit on what can be considered a reasonable price in all acquisitions; it will vary depending on the circumstances.  In addition, the whims and subjective beliefs of a contracting officer are NOT considered in determining whether a price is reasonable.  Rather, the decision must be viewed from the objective standpoint of a reasonable person.  And finally, because we are dealing with professionals exercising skill in their chosen profession, the reasonable person standard is elevated to the standard of a reasonable professional.

It seems, the disagreement lies in whether the hypothetical “reasonable professional“ should be the more specific “typical contracting officer,” or the more general “typical business person.”

First, with regard to determining price reasonableness, contracting officers are not generally accepted as having skills and abilities superior to business people in private industry, such that they should be considered separate or held to a higher standard. There are highly skilled, intelligent and educated people in both the public and private sector.  It may appear that the two groups are at odds in determining price reasonableness if you compare the price at which a typical business person would like to SELL to that which a typical contracting officer would like to PAY.  But that is the wrong comparison because the circumstances are not the same (sell vs pay). Rather, the question to be asked is, whether under the same circumstances, a typical business person would PAY the price being evaluated for the needed goods or services.  In other words, is the Government getting a worse deal than the private sector would get in the same situation?  I see no reason to believe contracting officers, as a class, have superior abilities and make better price reasonableness determinations such that they should be held to a higher standard.

Next, the rights and duties of a contracting officer are not inherently greater than that of a private business person. The US Supreme Court stated, “When the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals.” Winstar v. United States, 518 U.S. 839, 895 (1996) (quoting Lunch v. United States, 292 U.S. 571 (1934)).  When the Government wants to impose rules, obligations or standards on a contracting officer that are in addition to, or more strict than, the private sector (for example, restrictions on accepting gifts) it does so through specific statutes, regulations, and policy.  Absent such a specific requirement, the actions of the Government and its contracting officers are governed by the law applicable to the private sector.

Finally, the FAR already allows a contracting officer to rely on what a typical business person considers reasonable in the form of published market prices.  See FAR 15.404-1(b)(2) (“The Government may use various price analysis techniques and procedures to ensure a fair and reasonable price.  Examples of such techniques include… (iv) Comparison with competitive published price lists, published market prices of commodities, similar indexes…”)  There is no caveat that private industry market prices support a determination of price reasonableness only if they also pass another more stringent level of scrutiny.

Based on this, I believe that a contracting officer can conclude that a price is fair and reasonable if he or she determines that typical business person, with ordinary prudence, in the same circumstances, would pay the price.

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Lionel:

What constitutes a "fair and reasonable price" is a matter of regulatory interpretation, not contract interpretation, and not negligence. Does your reasonable person standard apply to regulatory interpretation? Please cite references.

I should add that you do not seem to understand that there is more than one reasonable person standard. The standard for torts is not the same as the standard for crimes or for contracts. Also, you are asserting many things for which you provide no support, such as:

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First, with regard to determining price reasonableness, contracting officers are not generally accepted as having skills and abilities superior to business people in private industry, such that they should be considered separate or held to a higher standard.

and

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Next, the rights and duties of a contracting officer are not inherently greater than that of a private business person. 

I don't think Winstar has ever been interpreted to support the assertion that you are making. Are you going to give us anything other than your own unsupported opinion?

Finally:

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There is not a limit on what can be considered a reasonable price in all acquisitions; it will vary depending on the circumstances. 

No one has suggested that there is a universal standard applicable to all circumstances. Are you saying that in any particular set of circumstances there is no limit on what can be considered a reasonable price?

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...An example or two of competitive published price lists for commercial items?  Thanks. 

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I don't see any benefit in asserting that a price reasonableness decision must be objective.  As I see it, a price reasonableness decision includes both factual observations (objective?) and value judgments (subjective?).  Some price reasonableness decisions will have more of an objective flavor; some will have more of a subjective flavor.

In torts, they say an action based on a reasonable person standard is objective and an action based on a person's feelings is subjective.  But surely the method of divining or discerning a reasonable person standard (what a reasonable person would do) is very much subjective.  So in a tort case, the lawyers argue and the judge uses a subjective method to come up with a reasonable person standard, and then retroactively imposes that standard on the defendant in the case.  Objective?  Really?

I am fine with price reasonableness determinations that are influenced by a contracting officer's value judgments; providing, the contracting officer is faithfully doing his or her job.

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The problem with Lionel's analysis is that he is trying (needlessly, in my opinion) to apply a judicial standard to a situation to which it does not apply. Pre-award determinations of price reasonableness do not involve litigation. There is no basis (or reason) for applying a judicial standard to the determination. If there were a judicial issue of regulatory interpretation, then the question might be asked if there is a reasonable person standard in matters of regulatory interpretation. If there were any such standard, then we'd have to determine what that interpretation might be.

The determination of price reasonableness is one of professional practice, and if there is any standard for making it, it is a professional standard of judgment, not a judicial one.

In short, Lionel has given us no reason to assent to his rather broad assertion that:

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The decision [about price reasonableness] must be viewed from the objective standpoint of a reasonable person. 

I see nothing in FAR or in any other guidance indicating that the determination of price reasonableness is to be based on an "objective standpoint." On the other hand, the decision is not entirely subjective. The regulations provide extensive guidance about what COs should consider when determining price reasonableness. That guidance establishes broad boundaries of reasonableness--broad, but boundaries nontheless. See FAR 15.404-1, which says, in part:

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(b) Price analysis for commercial and non-commercial items.

(1) Price analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit. Unless an exception from the requirement to obtain certified cost or pricing data applies under 15.403-1(b)(1) or (b)(2), at a minimum, the contracting officer shall obtain appropriate data, without certification, on the prices at which the same or similar items have previously been sold and determine if the data is adequate for evaluating the reasonableness of the price. Price analysis may include evaluating data other than certified cost or pricing data obtained from the offeror or contractor when there is no other means for determining a fair and reasonable price. Contracting officers shall obtain data other than certified cost or pricing data from the offeror or contractor for all acquisitions (including commercial item acquisitions), if that is the contracting officer’s only means to determine the price to be fair and reasonable.

(2) The Government may use various price analysis techniques and procedures to ensure a fair and reasonable price. Examples of such techniques include, but are not limited to, the following:

(i) Comparison of proposed prices received in response to the solicitation. Normally, adequate price competition establishes a fair and reasonable price (see 15.403-1(c)(1)(i)).

(ii) Comparison of the proposed prices to historical prices paid, whether by the Government or other than the Government, for the same or similar items. This method may be used for commercial items including those “of a type” or requiring minor modifications.

(A) The prior price must be a valid basis for comparison. If there has been a significant time lapse between the last acquisition and the present one, if the terms and conditions of the acquisition are significantly different, or if the reasonableness of the prior price is uncertain, then the prior price may not be a valid basis for comparison.

(B) The prior price must be adjusted to account for materially differing terms and conditions, quantities and market and economic factors. For similar items, the contracting officer must also adjust the prior price to account for material differences between the similar item and the item being procured.

(C) Expert technical advice should be obtained when analyzing similar items, or commercial items that are “of a type” or requiring minor modifications, to ascertain the magnitude of changes required and to assist in pricing the required changes

(iii) Use of parametric estimating methods/application of rough yardsticks (such as dollars per pound or per horsepower, or other units) to highlight significant inconsistencies that warrant additional pricing inquiry.

(iv) Comparison with competitive published price lists, published market prices of commodities, similar indexes, and discount or rebate arrangements.

(v) Comparison of proposed prices with independent Government cost estimates.

(vi) Comparison of proposed prices with prices obtained through market research for the same or similar items.

(vii) Analysis of data other than certified cost or pricing data (as defined at 2.101) provided by the offeror.

See also:

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(c) Cost analysis.

(1) Cost analysis is the review and evaluation of any separate cost elements and profit or fee in an offeror’s or contractor’s proposal, as needed to determine a fair and reasonable price or to determine cost realism, and the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency.

(2) The Government may use various cost analysis techniques and procedures to ensure a fair and reasonable price, given the circumstances of the acquisition. Such techniques and procedures include the following:

(i) Verification of cost data or pricing data and evaluation of cost elements, including—

(A) The necessity for, and reasonableness of, proposed costs, including allowances for contingencies;

(B) Projection of the offeror’s cost trends, on the basis of current and historical cost or pricing data;

(C) Reasonableness of estimates generated by appropriately calibrated and validated parametric models or cost-estimating relationships; and

(D) The application of audited or negotiated indirect cost rates, labor rates, and cost of money or other factors.

(ii) Evaluating the effect of the offeror’s current practices on future costs. In conducting this evaluation, the contracting officer shall ensure that the effects of inefficient or uneconomical past practices are not projected into the future. In pricing production of recently developed complex equipment, the contracting officer should perform a trend analysis of basic labor and materials, even in periods of relative price stability.

(iii) Comparison of costs proposed by the offeror for individual cost elements with—

(A) Actual costs previously incurred by the same offeror;

(B) Previous cost estimates from the offeror or from other offerors for the same or similar items;

(C) Other cost estimates received in response to the Government’s request;

(D) Independent Government cost estimates by technical personnel; and

(E) Forecasts of planned expenditures.

(iv) Verification that the offeror’s cost submissions are in accordance with the contract cost principles and procedures in part 31 and, when applicable, the requirements and procedures in 48 CFR Chapter 99 (Appendix to the FAR looseleaf edition), Cost Accounting Standards.

(v) Review to determine whether any cost data or pricing data, necessary to make the offeror’s proposal suitable for negotiation, have not been either submitted or identified in writing by the offeror. If there are such data, the contracting officer shall attempt to obtain and use them in the negotiations or make satisfactory allowance for the incomplete data.

(vi) Analysis of the results of any make-or-buy program reviews, in evaluating subcontract costs (see 15.407-2).

None of that suggests that a determination of price reasonableness depends on what Lionel called "whims and subjective beliefs." On the other hand, none of it suggests that the determination must be that which would be made by some hypothetical "typical businessperson."

Lionel appears to contradict himself when he says, on the one hand:

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Because we are dealing with professionals exercising skill in their chosen profession, the reasonable person standard is elevated to the standard of a reasonable professional.

Followed by:

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With regard to determining price reasonableness, contracting officers are not generally accepted as having skills and abilities superior to business people in private industry, such that they should be considered separate or held to a higher standard.

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I see no reason to believe contracting officers, as a class, have superior abilities and make better price reasonableness determinations such that they should be held to a higher standard.

Really?! The assertion that COs should not be held to a higher standard than a typical business person, is frankly ridiculous. A businessperson is free to do with his or her money what no contracting officer is free to do with the public's. A contracting officer is charged with a very high standard of responsibility:

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1.602-1(b) No contract shall be entered into unless the contracting officer ensures that all requirements of law, executive orders, regulations, and all other applicable procedures, including clearances and approvals, have been met.

1.602-2 Contracting officers are responsible for ensuring performance of all necessary actions for effective contracting, ensuring compliance with the terms of the contract, and safeguarding the interests of the United States in its contractual relationships. In order to perform these responsibilities, contracting officers should be allowed wide latitude to exercise business judgment. Contracting officers shall—

(a) Ensure that the requirements of 1.602-1(b) have been met, and that sufficient funds are available for obligation;

(b) Ensure that contractors receive impartial, fair, and equitable treatment; 

(c) Request and consider the advice of specialists in audit, law, engineering, information security, transportation, and other fields, as appropriate

See also FAR 1.108, FAR Conventions:

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(f) Imperative sentences. When an imperative sentence directs action, the contracting officer is responsible for the action, unless another party is expressly cited.

Those obligations condition every determination of price reasonableness. They are burdens that the typical business person does not bear when dealing with the government. The typical business person is free to take risks and employ tactics that contracting officers are not free to take or employ.

COs are not business persons at all, much less typical ones. They are government officials. There is a world of difference between a contracting officer and a typical business person. Is a typical business person qualified to be a contracting officer? See FAR 1.603-2 and DFARS 201.603-2. See GSAM 501.603-2. I don't think so.

The special expertise of the CO is especially apparent when he or she must make decisions. See Nash, "Contracting Officer Decisions: How Much Independence", The Nash & Cibinic Report (January w013):

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Most importantly, a decision must represent the contracting officer's independent judgment. See Pac. Architects & Eng'rs Inc. v. United States, 491 F.2d 734, 744, 203 Ct. Cl. 499 (Ct. Cl. 1974) (quoting N.Y. Shipbldg. Corp. [v. U.S.], 385 F.2d [427] at 435 [(Ct. Cl. 1967)] (holding that a contracting officer must “put his own mind to the problems and render his own decisions”)); N. Star Alaska Hous. Corp. v. United States, 76 Fed. Cl. 158, 209 (2007) (“[A] contracting officer may not forsake his duties, but rather must ensure that his decisions are the product of his personal and independent judgment.”); CEMS, Inc. v. United States, 65 Fed. Cl. 473, 479 (2005) (noting that the contracting officer “failed to take ownership of all determinations included in the final contracting officer's opinion”); see also Air-O-Plastik Corp., GSBCA 4802 et al., 81-2 BCA ¶ 15,338 (“Usually a holding that a given decision does not represent the independent judgment of the contracting officer is reached only when the purported decision is imposed by higher authority or when the contracting officer completely abandons his decisional responsibility to another.”). To inform that judgment, contracting officers are entitled to obtain technical and legal advice. See Pac. Architects & Eng'rs Inc., 491 F.2d at 744 (noting that when a contracting officer is preparing a decision, there is “no implied prohibition against his first obtaining or even agreeing with the views of others”); Barringer & Botke, IBCA 428-3-64, 65-1 BCA ¶ 4,797 (“[A] contracting officer may, for the purpose of forming his independent judgment, obtain information and advice from his staff offices and advisors, particularly in the areas of law, accounting and engineering, in which fields he may have little or no expertise.”). However, contracting officers may not substitute the judgment of others for their own independent judgment. See N.Y. Shipbldg. Corp., 385 F.2d at 435 (holding that it is improper for a contracting officer to “merely rubber-stamp[ ] a subordinate's or superior's findings”); CEMS, Inc., 65 Fed. Cl. at 480 (“Although a contracting officer may review claims using in-house assistance, he must still understand and be persuaded by the determination made in his contracting officer's final decision.”); Jamco Constructors, Inc., VABCA 3271, 94-1 BCA ¶ 26,405 (“[A] contracting officer may not abdicate his responsibility by accepting any opinion offered without subjecting it to some analysis--particularly where he is, or should be, aware of information which calls that opinion into question.”).

To what typical business person do the courts apply such standards?

In Penner Installation Corp. v. U.S., 116 Ct.Cl. 550 (1950), the U.S. Court of Claims provided described the special standing of contracting officers in a comment about the CO's role in deciding disputes:

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They are the Government's representatives, charged with the duty of seeing that the Government gets what it bargained for. Many contractors, on the other hand, bent upon making as much money as they can out of the contract, are constantly seeking ways out of doing this and doing that. Frequently, it is a constant battle--the contracting officer as the Government's representative, on the one hand, and the contractor on the other. To ask the contracting officer to act impartially when he must decide a dispute between the contractor and his employer is, indeed, putting upon him a burden difficult to bear.

That is not the role of the typical business person. Finally, from FAR 15.405(a):

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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. However, when significant audit or other specialist recommendations are not adopted, the contracting officer should provide rationale that supports the negotiation result in the price negotiation documentation.

The determination of price reasonableness is subjective within the broad limits delineated by FAR, within the boundaries of of professional responsibility, and within the boundaries of professional pride. It is a matter of special public trust. The standard is not that of the typical business person. The law does not require the typical business person to worry about whether a price is fair to the other party. Thus, $600 for an EpiPen 2Pak and $406 for $46 worth of baby formula.

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Ah well, unfortunately, I do not have time for a proper response as an extra-long weekend is calling my name, and there is work yet to be done.  I'll just say I disagree and return the courtesy of leaving you the last word.  As always, thanks for the discussion!

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Have fun and be safe over the holiday weekend.

Vern

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