Risk and Contingencies

[realquiet]

I am reviweing a price proposal where the supplier added about 35% to their unit prices to account for risk, associated with their suppliers. Is this allowable? They will not quantify the risk. Only describe that they have certain risk from their lower tiered suppliers. 

In my opinion, we challenge their proposal. However, I am being told to find a way to justify it. What is the proper thing to do? I thought according to FAR 31.205-7, this type of risk is unallowable.

Thoughts on how I can complete my PAR? We have PO history.

 

Thanks,

Realquiet

[here_2_help]

I'm thinking that the purpose of the PAR is to express an opinion on the supplier's proposed price, without breaking it down into individual elements of cost (which would be a CAR analysis). If so, can you simply reference your PO history and use that history to opinion on the reasonableness of the proposed price (ignoring the risk/contingency element)?

[Retreadfed]

Realquiet, since you reference a price proposal, I assume that the contemplated contract will be a fixed price contract.  If that is the case, you are really not worried about allowable and unallowable costs.  What you are worried about is whether the price agreed upon is fair and reasonable.  In reaching this determination, you can do a price analysis or cost analysis.  From what you have written, it appears you are doing a price analysis.  If that is true, why are you worried about the cost principles, particularly if you are dealing with a competitive procurement for a fixed price contract?

[joel hoffman]

“PAR”? Price analysis report?

[Don Mansfield]

6 hours ago, realquiet said:

I thought according to FAR 31.205-7, this type of risk is unallowable.

Did you read FAR 31.205-7? Specifically, paragraph (c)?

[joel hoffman]

Is this contingency associated with the costs or price  for supplies/goods/materials/equipment/etc.? 

Could be a provision for restocking fee or cancellation fee if ordered then returned or terminated. I’ve seen that often identified in purchase orders . 

But that wouldn’t be a cost on top of the cost of said goods. 

So probably not...

[joel hoffman]

15 hours ago, here_2_help said:

I'm thinking that the purpose of the PAR is to express an opinion on the supplier's proposed price, without breaking it down into individual elements of cost (which would be a CAR analysis). If so, can you simply reference your PO history and use that history to opinion on the reasonableness of the proposed price (ignoring the risk/contingency element)?

Concur with the question. If current pricing exceeds that history due to the identified contingency, I would challenge it and require the supplier to identify/explain/justify the basis for said factor. 

[joel hoffman]

Assuming that you are negotiating a proposal with a prime that contains the COST to the prime of a supplier purchase order, of which the prime has identified that the supplier’s price includes a 35% contingency for unidentified risks. Rremember that you don’t have to presume the reasonableness of the supplier’s price. The prime, thus the supplier, has to.

31.201-3 (a) says in part:

”No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer's representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.”

The supplier’s price and the contingency have been specifically identified as a COST to the prime as part of its price. 

Upon further reflection, not sure if your actual question only concerns how to prepare a “price analysis report”where a supplier has identified a contingency in a purchase order to you as prime or through prime to you as government.

You said that you have been told to justify it. If you are contractor, you have to justify it. If you are government, your contractor or prospective contractor has to justify it. Regardless, the supplier should identify what it is based upon. 

[Retreadfed]

FAR 31.102 states

The applicable subparts of Part 31 shall be used in the pricing of fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever

(a) cost analysis is performed, or

(b) a fixed-price contract clause requires the determination or negotiation of costs. However, application of cost principles to fixed-price contracts and subcontracts shall not be construed as a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price. The final price accepted by the parties reflects agreement only on the total price. Further, notwithstanding the mandatory use of cost principles, the objective will continue to be to negotiate prices that are fair and reasonable, cost and other factors considered.

Realquite, can you explain how this guidance applies here?

[Patrick Mathern]

Lots of good detail in the replies here. For the short and sweet (and actionable) version, here you go:

The only way to “justify” this in a PAR is to get additional fact-based information from the supplier and to include these in the price analysis. It’s common to be directed by management to justify a price...but it’s hard to do. I’ve been there and don’t envy you.

If these costs truly turn out to be contingency costs (which amounts to profit if they don’t come to fruition,) you’re going to have findings if this package is pulled in a CPSR. In this case, your best bet is to have a price adjustment clause in both your negotiated subcontract as well as your negotiated Prime contract. 

One last option if these are contingent costs is to write the PAR on the price you truly believe to be fair and reasonable (excluding contingent costs) and then having Management provide an authorization to agree to the price offered. Cite it as “best obtainable” and get a Management signature from someone with sufficient authority to make this call. It’s a CYA game at that point, but will generally be accepted in a CPSR. 

Patrick