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I am working a Firm Fixed Price buy for a sole source item that has been determined commercial of a type.  Because of obsolescence the part has to be redesigned (last bought in the 90's).  The redesign effort involves NRE costs that are beyond the actual production costs and the contractor is only providing hours and a burdened rate for each labor category to support this NRE.  I have backed into the numbers the best I can but my counter offer is less than half of the proposed price for NRE.  The NRE total is for $850,000.  Without more data I am at a loss. The contractor keeps claiming because this is a commercial buy they won't support their price with more data. Do I have any options to persuade them on the front end?  What if I end up negotiating a price I am uncomfortable with to ensure supportability to our customer.  Is there something I can do Post Award to validate the price or uncover their true cost so we can use that data on similar buys our office is working.     

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Hi Brian -

I can give you my experience in helping primes work with subs.  If you're an agency CO, then someone else may be able to provide better information.

Document, document, document.

1.  Consult your company's policies and procedures.  What I have below will still ding you in a CPSR if it's not aligned with your company's P&P's.

2.  Make sure your commercial item determination and non-competitive source justifications are ROCK SOLID.  At $850K, this is going to set off alarm bells.

3.  Assuming you have a solid CID, look again at price analysis.  Although this was last purchased in the 90's, are there current versions of the item to which price could be compared?

4.  If the answer to 2 is no, proceed from your current position by communicating your findings with the supplier.  Show them what you came up with and ask them what you're missing.  It's up to them to support the price they're offering.  You'll have the most success with this approach if you come to the table with objective, verifiable, fact-based data such as...

  • Rates:  Use salary.com or calc.gsa.gov and add a % for overheads and profit
  • Hours:  Get expert opinions that break tasks down to the lowest level possible.  Use engineers if possible, but regardless of whose opinion it is, provide support for WHY those hours were determined reasonable. 

You want to give them something to argue against.  As they provide additional facts, your price should come up.

5.  If you get to the point where you have no other choice but to place the contract and cannot determine the price reasonable, then you need to document your efforts.  Include a very thorough negotiation memorandum that clearly shows the effort you put into getting a reasonable price from the supplier.

If you're a Prime with a certified procurement system, audit teams are going to scrutinize this package closely, so make sure your documentation is top-notch.

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1 hour ago, Brian Johnson said:

The contractor keeps claiming because this is a commercial buy they won't support their price with more data. 

That's ridiculous. You're being buffaloed. A contractor supplying a commercial item does not have to provide certified cost or pricing data. See the definition in FAR 2.101 and FAR 15.403-1(b)(3). That does not mean it doesn't have to supply other than certified cost or pricing data to support its quote and negotiation position. See FAR 2.101 and 15.403-3(c). Show them the reg. Be reasonable and specific about what you ask for. Explain why you need it.

BTW, this is a past performance issue. If you must, write a letter to a senior company executive.

Quote

(c) Commercial items. 

(1) At a minimum, the contracting officer must use price analysis to determine whether the price is fair and reasonable whenever the contracting officer acquires a commercial item (see 15.404-1(b)). The fact that a price is included in a catalog does not, in and of itself, make it fair and reasonable. If the contracting officer cannot determine whether an offered price is fair and reasonable, even after obtaining additional data from sources other than the offeror, then the contracting officer shall require the offeror to submit data other than certified cost or pricing data to support further analysis (see 15.404-1). This data may include history of sales to non-governmental and governmental entities, cost data, or any other information the contracting officer requires to determine the price is fair and reasonable. Unless an exception under 15.403-1(b)(1) or (2) applies, the contracting officer shall require that the data submitted by the offeror include, at a minimum, appropriate data on the prices at which the same item or similar items have previously been sold, adequate for determining the reasonableness of the price.

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Brian, is your concern only with the NRE?  If it is, what additional information are you asking for?  It is possible that what the contractor is offering is all that it has for the NRE since this is likely a one off event.  By the way, are you treating the NRE design as a commercial item?  If you look closely at it, it may not be.  In that case, you could have a separate CLIN in the contract for the non-commercial NRE and require certified cost or pricing data for that effort.  Just a thought without knowing more than what you have posted.

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“Commercial item” means—

(1) Any item, other than real property, that is of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and—

(i) Has been sold, leased, or licensed to the general public; or

(ii) Has been offered for sale, lease, or license to the general public;

 

What is the market price for the items of the same type that have been sold (or offered for sale) to the general public? 

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4 hours ago, Brian Johnson said:

I am working a Firm Fixed Price buy for a sole source item that has been determined commercial of a type.  Because of obsolescence the part has to be redesigned (last bought in the 90's).  The redesign effort involves NRE costs that are beyond the actual production costs and the contractor is only providing hours and a burdened rate for each labor category to support this NRE.      

It seems you are asking a commercial item provider to modify ("redesign") the commercial item, since it's been 20 years since it was last sold to the government and it's gone obsolete in that time. The cost of modification is being quoted separately from the cost of the item. You want the provider to support its estimated costs of modification. Is it possible that the contractor's accounting system simply cannot do so because it's systems are not set up for government accounting requirements? Is it possible that you are asking for something that the contractor literally cannot provide without tremendous (expensive) effort?

While you think about those questions, consider:

There are two variables to the NRE price. (1) quantity of hours by employee, and (2) price of each labor hour. You should be able to use technical analysis to determine the reasonableness of (1) and price analysis for (2), comparing the price per labor hour to other contractors (and non-contractors) in the same geographic location offering comparable services. In my opinion you do not need cost or pricing data from the contractor to perform your analysis of NRE price reasonableness.

Or--and here's an out-of-the-box thought--you could go into the marketplace and see what items are now available, 20 years later, to perform the required function. Who knows what changes have been made in that time? And perhaps, if the item is electronic, it could be procured for a cheaper price today.

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It cracks me up when government folk assume that price is, or should be, a function of cost. (I'm not saying that Brian thinks that.)

In a sole source situation in which the seller is looking at a one-time job that it may not want for a customer that it may not care about, price may be a function of the seller's desire for the work or the buyer's desperation for the product. The less the desire or the more desperate the customer, the higher the price. I don't really want that job, but I'll do it (sigh) if you'll pay that much. B)

If the government told such a seller that it had to submit cost or pricing data, certified or not, it might tell the government to get lost. Or it might say: You can have all the cost or pricing data that I have and you can analyze it to death. You can fact-find 'til hell freezes over. My price will still be that much. -_-

Of course, I don't know that that's Brian's situation.

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Vern, I could not agree more with you.  In my experience, many government contracting folks believe a contractor must base its price on the cost or pricing data the contractor submits to the government.  Of course that is incorrect.  As a DCAA auditor once testified in a deposition, the contractor  can base its price on the square root of the distance to the moon if it wants to. 

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I have to ask whether the sole source J&A was appropriate. It's been 20 (or more!) years. The item the vendor once provided has gone obsolete. Why is a sole source award appropriate? Can't another contractor design and provide the item? Of course, it still could be appropriate but, without knowing details, I am skeptical.

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Thank you all for the input.  The item is an electrical component that goes on an aging aircraft.  I wish we could allow the marketplace to redevelop this item but due to data restrictions and the Special Programs Office (SPO) desire not to reverse engineer this we are left with one vendor.  So I understand that the contractor has leverage and can offer whatever price they want.  It is still my responsibility to determine the price fair and reasonable (i.e. maybe we pay a premium because of the risk, or because the contractor is going out of there way to supply the item, but the fact still remains I need to understand why we are paying that price). My main concern is with the NRE as I feel I can support the production costs.  I have looked to see if I could separate the NRE out as Non-commercial as stated in the above posts but upon reflection and consideration of the regs I don't believe the NRE efforts can be considered non-commercial.   The more I have looked into this and talked with others in my office I believe the contractor is trying to hide the fact they have some exorbitant overheads and profit built in. Vern - I liked the idea about sending a letter to a Sr. Executive.  At this point I believe that is all I can do. Thanks again to all of you!  

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By any remote chance, is the Class Deviation DARS 2018-O0009 applicable to your situation?

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Think about determining price reasonableness through value analysis (a form of price analysis) rather than cost analysis. Ask the SPO how important the requirement is and then determine if the amount requested is reasonable in light of the importance of the need. The determination is subjective, but if you are creative you can write a PNM that justifies the buy. See the Contract Pricing Reference Guides, Vol. 1., Sec. 6.1.5, which I quote in part:

Quote

Special Considerations for Using Value Analysis. You may apply the techniques of value analysis to any product, regardless of its complexity. However, generally consider only those products offering potential cost reductions that merit the time and cost of the analysis required.

Value analysis provides information on product value in comparison with possible substitutes. It is particularly useful when:

  • The Independent Government Estimate is the only price analysis technique base available; or
  • The product does not seem to be worth the price quoted.

To be effective, value analysis must be performed by individuals familiar with the product, or product material differences, and its use by the Government. Actual analysis should follow a 5-step process:

Determine acquisition costs based on current proposal or other estimates.

Assure Government requirement documents reflect the minimum needs of the Government.

Identify alternative products or methods of meeting the minimum needs of the Government. This is typically the key step in the analysis. The following are examples of questions you should consider:

  • Can any part of the product be eliminated?
  • Can a standard part replace a special part?
  • Can a lower cost material or method be used?
  • Can paperwork requirements be reduced?
  • Can the product be packaged more economically?

Estimate the costs associated with alternative products or methods that would meet the minimum needs of the Government.

Document the reasonableness of the current prices or recommend appropriate changes. Assure that the process and results of the value analysis are clearly documented and include a copy of the documentation in the contract file. When you are satisfied that the value received supports the offered price, use that information to support your determination of price reasonableness. When you are not satisfied, use the information to document efforts to bring price in line with perceived value.

For example: Suppose you are purchasing a pair of shoes. Shoes are used to walk in, to protect the feet, to keep the feet warm, and to enhance appearance. If shoes are to be attractive, they must be made of certain types and quality of material. If appearance is not important to the Government, a less attractive, less expensive, but possibly more durable material can be used. By changing the quality of material required, price will change.

Consider the function of the item and its importance. Consider the NRE costs in light of the cost of the item itself and the nature of the modification that's needed. Confer with the SPO. Are they willing to pay that much? Why do they think it's worth it? Consider what else could be bought with that much money. Consider what it might cost to buy a replacement item.

Come on, use some imagination. Be an artist! 

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