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bob7947

Why Is The Price Negotiation Memorandum (PNM) Important?

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During my career, which ended years ago, I reviewed thousands of contract files from one end of the country to the other end of the country--with at least one stop in Rock Island. I remember beginning my reviews with the Price Negotiation Memorandum, Business Clearance, Results of Negotiation, etc.  Sometimes there were pre and post versions of the document.  

We have active posters who are senior people in contracting with Heads of Contracting Activities here too.  If you go back to the Poll about the age of Wifcon Users, you will see a fairly even distribution of members' within the age group categories that I used.  This, of course, gives me an idea.  The Federal Acquisition Regulation (FAR) directs that a record of negotiations be prepared.  However, it may not discus the importance of documenting the negotiation completely--I did not look for explanations.  

Since the main purpose of this site is/was educational when/since I created it about 20 years ago, I think it may be helpful for the senior members to explain the importance of documenting the negotiation to the less senior members.  I'm sure this is part of your job and you have explained it before but this is an opportunity to reach a larger audience.   From your experience, why is the document important.  If you have examples from your career, that may drive home the significance of this document, please use them.  You will be enlightening others with your response--at least I am hope so.

I've posted the FAR requirement below:

Quote

15.406-3 Documenting the negotiation.

(a) The contracting officer shall document in the contract file the principal elements of the negotiated agreement. The documentation (e.g., price negotiation memorandum (PNM)) shall include the following:

(1) The purpose of the negotiation.

(2) A description of the acquisition, including appropriate identifying numbers (e.g., RFP No.).

(3) The name, position, and organization of each person representing the contractor and the Government in the negotiation.

(4) The current status of any contractor systems (e.g., purchasing, estimating, accounting, and compensation) to the extent they affected and were considered in the negotiation.

(5) If certified cost or pricing data were not required in the case of any price negotiation exceeding the certified cost or pricing data threshold, the exception used and the basis for it.

(6) If certified cost or pricing data were required, the extent to which the contracting officer—

(i) Relied on the certified cost or pricing data submitted and used them in negotiating the price;

(ii) Recognized as inaccurate, incomplete, or noncurrent any certified cost or pricing data submitted; the action taken by the contracting officer and the contractor as a result; and the effect of the defective data on the price negotiated; or

(iii) Determined that an exception applied after the data were submitted and, therefore, considered not to be certified cost or pricing data.

(7) A summary of the contractor’s proposal, any field pricing assistance recommendations, including the reasons for any pertinent variances from them, the Government’s negotiation objective, and the negotiated position. Where the determination of a fair and reasonable price is based on cost analysis, the summary shall address each major cost element. When determination of a fair and reasonable price is based on price analysis, the summary shall include the source and type of data used to support the determination.

(8) The most significant facts or considerations controlling the establishment of the prenegotiation objectives and the negotiated agreement including an explanation of any significant differences between the two positions.

(9) To the extent such direction has a significant effect on the action, a discussion and quantification of the impact of direction given by Congress, other agencies, and higher-level officials (i.e., officials who would not normally exercise authority during the award and review process for the instant contract action).

(10) The basis for the profit or fee prenegotiation objective and the profit or fee negotiated.

(11) Documentation of fair and reasonable pricing.

(b) Whenever field pricing assistance has been obtained, the contracting officer shall forward a copy of the negotiation documentation to the office(s) providing assistance. When appropriate, information on how advisory field support can be made more effective should be provided separately.

 

There are a number of knowledgeable contracting people here.

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The purpose of the PNM as described in FAR 15.406-3 is to document the basis for price agreement. However, that is not sufficient for sound contracting practice.

Sound contracting practice entails also: (a) documenting the technical and administrative questions asked and issues addressed, the answers and resolutions; identifying those questions and issues set-aside for post-award answer and resolution, and (b) stating the stances of the parties concerning those issues tabled at the moment of price agreement. The memo need not rehash agreements expressly stipulated in the contract, but it should include descriptions of presumptions of fact and understandings on which those express agreements were based if those presumptions and understandings were discussed during the negotiation. The documentation should identify the persons present during each negotiation session and their role(s) in the discussions. Naturally, a real pro will arrange to have minutes taken and a daily summary prepared of all negotiation sessions.

The memorandum should be written so that persons coming along weeks, months, or years after contract formation, with no personal knowledge of the solicitation and negotiation, will have the information they may need to address and resolve issues that may arise during and after contract performance.

Too many contracting practitioners think writing a PNM is a pain in the neck. In fact, the PNM is the record of the professional negotiator's practice of his or her art.

Not a word too few; not a word too many. Comprehensive, but concise and to the point.

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- The following apply not only to the PNM but to all documentation, such as technical, cost or price analysis, time analysis, scope determination, field pricing support, pre-negotiation objectives, etc. 

- Provides accountability through a paper trail. Provides basis for justifying the reason for action and results for others.:

- provides continuity for future pricing actions (mods, claims, new contracts, etc.), based upon the instant and previous actions. Allows for application of lessons learned. Useful for after action reviews and for self-critique  what did we do right, what could be improved, etc.?

- Provides a record for others to be able to examine and use. Record is essential in the event that multiple persons are administering or closing out the contract or when successor personnel assume administration of the contract. This should be obvious - but often doesn’t seem to be important or apparent to the person or persons documenting the action. They tend not to realize that documentation must be written for a person who doesn’t have the knowledge or perspective of the author. Witness many of the original posts in this Forum over the years. 

- Useful  to refresh the author’s memory in the normal course of contract administration, especially useful if  questions, disagreements or conflicts arise. 

-Essential for claims/REA/changes/mods/disagreement analysis and resolution. Useful for performance issues. Often necessary for litigation purposes. 

Etc., etc...

EDIt: I agree with everything that Vern said above , as of this point. 

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There was a recent thread in the forum, which questioned  if and why PNM is necessary for purchases under the SImplified Acquisition Threshold, if my memory serves me correctly. It was from a contracting person. At any rate, the question seemed puzzling to me, why a contracting person would ask that. 

EDIT: See: 

Upon refreshing my memory, some of the responses amazed me, too.  I do agree with those who differentiated between the term “PNM”, where guidance or procedures prescribe a specific format that may not be necessary for every level of price determination/negotiation, and some other means of documentation where applicable. Perhaps the person who “told” the OP that a “PNM” is always necessary could have elaborated. 

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Bob, yes.  Here is the general outline.  DCAA relies on what is in a PNM to determine if the government relied upon the cost or pricing data that was submitted.  In this case, the PNM clearly stated that the government relied upon the submitted cost or pricing data to determine that the price negotiated was fair and reasonable.  Based on this, DCAA issued an audit report finding that the contractor had submitted defective cost or pricing data.  The contracting officer adopted the audit findings and issued a claim against the contractor seeking to recover the alleged increased prices.  However, during discovery, the individuals involved in negotiating the contract stated that they had performed a "should cost analysis" to determine the price of the contract and had not actually relied upon the cost or pricing data submitted by the contractor.  In other words, the reliance language in the PNM was merely boilerplate that was included in every PNM and was not necessarily true.  Based on this, the government decided to bail on the claim.

A side note to this, because DCAA felt that it had been misled by the individual who stated that he relied upon the cost or pricing data, it explored whether it would be possible to have that individual pay for the cost of performing the audit.  Further, the DoDIG was somewhat supportive of this idea.

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Retreadfed:

Thank you.  That is what I wanted mentioned--reliance.  Your boilerplate example surprised me but stressed the point.  

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See the DOD Contract Pricing Reference Guides, Vol. 5, Ch. 4, Sec. 4.3, Identifying Documentation Requirements, which states, in part:

Quote

4.3 Identifying Documentation Requirements

Need for Documentation. Documentation must identify the significant facts and issues that affected the negotiated contract price. As a minimum, it should include:

  • The proposal and any related information submitted by the contractor;
  • The Price Negotiation Memorandum (PNM);
  • Copies or references to the location of any technical or audit analysis reports considered during the negotiation; and
  • A record of any request for additional contractor information to support the proposal and the contractor's response.

Price Negotiation Memorandum (FAR 15.406-3). At the close of each negotiation, you must promptly prepare a PNM outlining the principle elements of the contract negotiation and include a copy in the contract file. Formats vary, but the PNM must include the following information:

  • Purpose of the negotiation (new contract, final pricing, etc.)
  • Description of the acquisition, including appropriate identifying numbers (e.g., RFP number).
  • Name, position, and organization of each person representing the contractor and the Government in negotiations.
  • The current status of any contractor systems (e.g., purchasing, estimating, accounting, or compensation) to the extent that they affected and were considered in the negotiation.
  • If the offeror was not required to submit cost or pricing data to support any price negotiation over the cost or pricing data threshold, the exception used (e.g. acquisition of a commercial item) and the basis for using it.
  • If the offeror was required to submit cost or pricing data, the extent to which the contracting officer:
    • Relied on the cost or pricing data submitted and used in negotiating price;
    • Recognized any cost or pricing data submitted as inaccurate, incomplete, or noncurrent:
    • The action taken by the contracting officer as a result of that recognition;
    • The action taken by the contractor as a result of that recognition; and
    • The effect of the defective data on the price negotiated; or
    • Determined that an exception applied after the data were submitted and, therefore, did not consider the submission to be cost or pricing data.
  • A summary of the contractor's proposal, any field pricing assistance recommendations, including the reasons for any pertinent variances from them, the Government's negotiation objective, and the negotiated position.
    • When the determination of price reasonableness is based on cost analysis, the summary must address each major cost element.
    • When determination of price reasonableness is based on price analysis, the summary must include the source and type of data used to support the determination.
  • The most significant facts or considerations controlling the establishment of the prenegotiation objectives and the negotiated agreement including an explanation of any significant differences between the two positions.
  • To the extent such direction has a significant effect on the action, a discussion and quantification of the impact of direction given by Congress, other agencies, and higher-level officials (i.e., officials who would not normally exercise authority during the award and review process for the instant contract action).
  • The basis for the profit/fee prenegotiation objective and the profit/fee negotiated.
  • Documentation that the negotiated price is fair and reasonable.

Similar guidance has been in print since at least as early as 1975.

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18 hours ago, bob7947 said:

Has anyone been involved in a defective pricing case?  If so, was the PNM of any value?

Yes, at least four times and yes, duh.  It’s generally a useful, if not an essential element in establishing defective pricing.  It can show reliance on the proposed price or cost, timing of the proposal any discussions that may have occurred, etc. 

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The first link in this post takes you to a 2015 article on defective pricing called Litigation & Proof in Defective Pricing Cases.  The PNM is discussed on p. 6.  The Defense Contract Audit Manual is mentioned on p. 6 and it leads to footnote 47 which is:  DCAA Contract Audit Manual ¶ 14-115a (Feb. 12, 2015).  The footnote is to a 2015 edition and the link I provided is to the December 2017 edition.

It isn't my intent to make this a defective pricing topic but to show an aspect of the importance of the PNM.

 

 

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18 hours ago, bob7947 said:

Your boilerplate example surprised me but stressed the point.  

Bob, many PNMs that I have seen seem to use boilerplate language in regard to reliance.  If you read the entire PNM you will see that there was only partial reliance or other factors were used in determining a fair and reasonable price.  This indicates the importance of PNMs being accurate and truthful.  They should not be viewed as just another item to check off in awarding a contract.

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