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5 hours ago, uva383 said:

IMO the real question is, if the KO found the price to be reasonable, on what grounds did the auditor make their decision and what information did the auditors have that the KOs didn’t.  I read the IG report but not reading the BCM or P/NM it’s hard to really see how the price was determined reasonable other than yeah this is what we paid last time and it’s in line, a little more, or a little less now than it was then…
 

Yes, we all know we have an issue with Professionalism in the series and the training is less that stellar and many KOs just want to satisfy the PM and the incentive for the PM is to spend the money to get it off their books, which in itself is a perverse incentive. Until the goal is to not bankrupt yourself at the end of every FY and KOs take the approach that they are spending their own money rather than meet my milestone, award the thing and get the PM off my back,  whatever congress passes won’t change the outcome.

I guess congress could pass a law that gives them the ability to clawback money that someone determines, within a reasonable period, they overpaid for the items. But then again, who would do business with the Govt with such a clawback in the contract and who would determine whether or not the overpayment exists? Clearly the KO or the KO’s next level thought the price was fair because often the alternative is to get nothing, and in the SS environment the KTR has you over a barrel,  but that exists in any environment, until new competitors enter the market and drive prices lower. 

I thought it has been explained in the audit report and in at least two examples that relying only on previous sales pricing doesn’t necessarily produce a fair and reasonable price. It covers the KO’s ass  to justify why they paid a proposed price. 

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3 hours ago, Vern Edwards said:

If the government wants better prices, it must do better requirements planning, market analysis, and strategizing, and it must educate and train a cadre of first rate price negotiators.

…It will do no good to give more cost data to people who lack market savvy, a long-term strategy, and negotiation table know-how. It will only overwhelm and confuse them.

As William Munny told Little Bill, "Deserve's got nothin' to do with it."

I agree. 

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There is another possible view. If a contractor can get away with outrageous prices on sole source acquisitions, KO’s who take the easy route to justify what they are paying and poor negotiators or worse, those that don’t negotiate, why wouldn’t they keep doing it? 
 

Nothing compels a firm to sell to the government but I’ll bet that a firm would rather sell products at lower than outrageous prices than sell little or nothing. 

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From the Transdigm response:

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The report presents profit percentages in a misleading and provocative manner.  This includes computing profit as a percentage of cost rather than as a percentage of revenue—the internationally recognized method and business standard

When you see a report with "findings" that look more like statistical outliers you have to question the entire methodology - and this report was used as the basis for proposed legislation.  Gosh; it's almost as if the people we sent to Washington will use anything to justify using the power of government to punish their enemies and gain the support of the most fanatical and febrile zealots among us.

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15 hours ago, joel hoffman said:

I thought it has been explained in the audit report and in at least two examples that relying only on previous sales pricing doesn’t necessarily produce a fair and reasonable price. It covers the KO’s ass  to justify why they paid a proposed price. 

Nor does a clumsy attempt at calculating cost & profit necessarily produce a fair and reasonable price.  COs and CSs are not auditors.

I negotiated a 'reverse' deal whereby the Navy was selling GFM/GFP from the losing contractor to Hughes after a down-select.  Hughes' offer was based on their total costs to buy and rehab the GFM/GFP, not the price the Navy paid when they bought the GFM/GFP.  Hughes was willing to walk away at the cost for them to buy new material.  The biggest hurdle I faced was getting my leadership to understand that C&P data was irrelevant and market conditions were the primary driver of the negotiated price.

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On 1/21/2022 at 4:52 AM, REA'n Maker said:

Gosh; it's almost as if the people we sent to Washington will use anything to justify using the power of government to punish their enemies and gain the support of the most fanatical and febrile zealots among us.

Outrage is fashionable in Congress, and elsewhere.

Maybe, instead of focusing on the contracting process, Congress should ask why the government buys and uses things that will need hard-to-get and pricey spare parts in a few years.

How much longer are we going to need manned "fighter" aircraft and strategic bombers? ("Dogfight" means firing a missile at a plane that's still over the horizon.) How long will aircraft carriers last in a war with a major nation armed with hypersonic missiles? (Like China.) Do we still need airborne infantry divisions? (To make mass drops behind enemy lines? Really? Like Market-Garden in WWII, that great success?)

How many of our "needs" are driven by necessity and how many by a desire for cultural preservation? Nostalgia?

 

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I forget where I first found this, but here is a quote by Henry Ford on prices/costs that I often share when I hear/see similar debates as this one:

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"Our policy is to reduce the price, extend the operations, and improve the article. You will notice that the reduction of price comes first. We have never considered any costs as fixed. Therefore, we first reduce the price to the point where we believe more sales will result. Then we go ahead and try to make the prices. We do not bother about the costs. The new price forces the costs down. The more usual way is to take the costs and then determine the price; and although that method may be scientific in the narrow sense, it is not scientific in the broad sense because what earthly use is it to know the cost if it tells you that you cannot manufacture at a price at which the article can be sold? But more to the point is the fact that although one may calculate what a cost is, and of course all of our costs are carefully calculated, no one knows what a cost ought to be. One of the ways of discovering it...is to name a price so low as to force everybody to dig for profits. We make more discoveries concerning manufacturing and selling under this forced method than by any method of leisurely investigation." - Henry Ford

 

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5 hours ago, REA'n Maker said:

Nor does a clumsy attempt at calculating cost & profit necessarily produce a fair and reasonable price.  COs and CSs are not auditors.

I negotiated a 'reverse' deal whereby the Navy was selling GFM/GFP from the losing contractor to Hughes after a down-select.  Hughes' offer was based on their total costs to buy and rehab the GFM/GFP, not the price the Navy paid when they bought the GFM/GFP.  Hughes was willing to walk away at the cost for them to buy new material.  The biggest hurdle I faced was getting my leadership to understand that C&P data was irrelevant and market conditions were the primary driver of the negotiated price.

That’s great. Now, please show how a part that allegedly cost $128 to produce and sold for over $7000 is a fair and reasonable price buying it from the manufacturer, not a dealer. I’m assuming that the KO or CS justified the priced based upon historical prices for that item. Perhaps I am assuming too much.

 

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1 hour ago, joel hoffman said:

Now, please show how a part that allegedly cost $128 to produce and sold for over $7000 is a fair and reasonable price buying it from the manufacturer, not a dealer.

I'm not following your point about manufacturer vs. a dealer.   

If you see a pair of these vacuum tubes that cost less than $128 to produce selling for $7000, buy them quick because you can flip them and make some serious bucks. Or would that be corrupt?

NOS Western Electric 300B, Black Plate, 1964 & 1966, Matched Pair | TubeDepot.com

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On 1/20/2022 at 8:03 AM, Vern Edwards said:

The chair of the House Committee on Oversight and Reform is proposing a new law, the "Fair Pricing with Cost Transparency Act.

What do you think? Will a new law and more regulation fix the problem? If not, what would?

I looked through the IG report.  Maybe this recommendation has the most merit to me

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  • establish a team of functional experts to analyze data reported as a result of the revised and updated memorandum. The team of functional experts should assess parts and contractors deemed to be at high risk for unreasonable pricing and identify trends and perform price analysis and cost analysis of high-risk parts to identify lower cost alternatives or fair and reasonable pricing for future procurements.

If an agency is buying something needed, they ought to have knowledgable functional experts that at least can say what’s a reasonable price/cost.  COs can leverage that expertise for negotiating. 

The way most COs are trained combined with limited experience, they can’t really benefit from cost or pricing data or other price/cost information.  Sure auditors are available but the process of using them is cumbersome and time consuming.  When a CO finally gets the audit findings, contractors can bring up lots of new information during negotiations.  Then often the CO is lost for lack of understanding and assistance.  It’s either wing it or go back again to the auditor.

Here’s a question - how many government negotiators understand accounting and specifically cost accounting?
 

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Or look at buying a new vehicle today, especially those in demand.  A $50,000 MSRP Ford Bronco is selling some places at $30,000 over sticker.  Wonder what cost or pricing data from Ford shows as the cost?

Just like lots of contracting areas, we don’t need more policy, procedures, regulations or laws.  We need better and trained people who are held accountable for results and rewarded accordingly for good performance.

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I honestly don’t know how much manufacturers normally mark up their products. I do know that a friend of mine is related to a family who still owns one of the original Ford dealers in Montana or Idaho. FMC would sell the dealer one vehicle per year at a deeply discounted price. The family let my friend buy a new 1997 Ford F-150 under that program. The dealer sticker price was about $23,000. He paid $13,000 for it including shipping from the factory.  Of course that doesn’t necessarily represent the FMC cost. But the dealer cost at the time would have been much closer to $19,000- $20,000.

I can’t speak for the present but in the late 60’s to early 70’s, the Air Force Academy Cadet Store sold everything to Cadets at cost with no markup. The store sold a wide variety of goods like a smaller Base Exchange Store. Most everything cost about 50% of suggested or pre-tagged retail prices. It seemed to me at the time, comparing prices between other stores and the Cadet Store, that retail store prices ran about 100% of a store’s cost from a manufacturer or wholesale supply. Of course that also included all of a retail store’s costs plus profit margins.

So, yes - I can see that normal retail markups on supplier prices for their internal costs plus profit can be substantial and I don’t have a clue what normal manufacturer markups in a competitive market are.

I say competitive because the FAR cites    a competitive market in the description of “fair and reasonable price”. 

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13 minutes ago, joel hoffman said:

I honestly don’t know how much manufacturers normally mark up their products.

Is the product sold in a competitive market?

If so, maybe there are two questions: Not how much they can mark it up, but (1) how much can they sell it for and (2) how little can they make it for.

See Car: A Drama of the American Workplace (1999), by Mary Walton. One of the best business books I've ever read. In fact, THE best.

 

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1 minute ago, Vern Edwards said:

Is the product sold in a competitive market?

If so, maybe there are two question: Not how much they can mark it up, but (1) how much they can sell it for and (2) how little they can make it for.

See Car: A Drama of the American Workplace (1999), by Mary Walton. One of the best business books I've ever read.

 

Yes competitive. I was editing my post to add that while you posted.🤠

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12 hours ago, Vern Edwards said:

See Car: A Drama of the American Workplace (1999), by Mary Walton. One of the best business books I've ever read. In fact, THE best.

 

I’ve read summaries and reader reviews. Looks fascinating and reminds me of one of my favorite recent movies, “Ford vs. Ferrari”. 

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Modern textbooks on product and service pricing describe three basic pricing strategies: cost-based, market-based, and value-based.

The Contract Pricing Reference Guides describe cost-based and market-based pricing in Volume 1, Price Analysis, but do not describe value-based pricing. The choice of strategy is up to the seller.

FAR Subpart 15.4 reflects a cost-based strategy, as does the DODIG attack on TransDigm. The DODIG has asserted that profit in excess of 15 percent of costs is "excessive".

  1. Is there any legal requirement that companies selling to the government take a cost-based pricing approach to product pricing and price negotiation?
  2. Is there any moral imperative that companies take a different approach to pricing when dealing with the government than with other customers?
  3. If no to Questions 1 and 2, is the government's application of policies grounded in cost-based pricing (e.g., TINA) overly broad?
  4. If so, when if ever should the government demand a cost-based approach?
  5. Is it possible that the government's cost-based pricing apparatus (requiring detailed cost proposals, TINA, proposal "audits," etc.) costs more than it's worth, as perhaps demonstrated by the outcome of the 10-year United Technologies defective pricing litigation?

https://www.wiley.law/alert-3531

https://www.crowell.com/files/20190401-Defective-Pricing-and-FCA.pdf

https://www.crowell.com/pdf/newsroom/GovtContractor_Bodenheimer_Oct06.pdf

https://www.opn.ca6.uscourts.gov/opinions.pdf/15a0062p-06.pdf

 

 

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@Vern Edwards  My responses:  
 

  1. Is there any legal requirement that companies selling to the government take a cost-based pricing approach to product pricing and price negotiation?  No
  2. Is there any moral imperative that companies take a different approach to pricing when dealing with the government than with other customers? No
  3. If no to Questions 1 and 2, is the government's application of policies grounded in cost-based pricing (e.g., TINA) overly broad? Yes
  4. If so, when if ever should the government demand a cost-based approach? In limited circumstances, yes.  The government is a unique buyer for some things and a cost-based approach can be the only reasonable method.  But the exceptions are very few. 
  5. Is it possible that the government's cost-based pricing apparatus (requiring detailed cost proposals, TINA, proposal "audits," etc.) costs more than it's worth, as perhaps demonstrated by the outcome of the 10-year United Technologies defective pricing litigation?  Certainly.  In most situations, the government should have a sound understanding of a fair price.  Cost-based pricing tools are often used just because policies say they are required but may not add value.  


I especially liked the defective pricing litigation statement that the government wasn’t injured because it got what it paid for.

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On 1/21/2022 at 2:52 PM, joel hoffman said:

That’s great. Now, please show how a part that allegedly cost $128 to produce and sold for over $7000 is a fair and reasonable price buying it from the manufacturer, not a dealer.

 

As Vern points out, cost of production is only one way to analyze whether a price is fair and reasonable.

Consider this: if more than 15% profit is "unreasonable" I expect the DODIG to investigate the COVID vaccine contracts next. The vaccine reportedly costs approximately $1.20 per dose to produce, yet the US Government paid anywhere from $15-$20 per dose...that's a "profit" of over 1,000%! 😳

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3 hours ago, Matthew Fleharty said:

Consider this: if more than 15% profit is "unreasonable" I expect the DODIG to investigate the COVID vaccine contracts next. The vaccine reportedly costs approximately $1.20 per dose to produce, yet the US Government paid anywhere from $15-$20 per dose...that's a "profit" of over 1,000%! 😳

Lots of luck with that DoDIG.  The majority of the contracting work was done by HHS.  I also don’t think any cost data was involved.  Even though sources claim production cost is $1.20 per dose, it’s just speculative and there’s no real basis for that.  This is one of those instances where suppliers have everyone over a barrel.  We don’t want to pay that?  Suppliers respond with “We will sell it elsewhere.”

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4 hours ago, formerfed said:

Lots of luck with that DoDIG.  The majority of the contracting work was done by HHS.  I also don’t think any cost data was involved.  Even though sources claim production cost is $1.20 per dose, it’s just speculative and there’s no real basis for that.  This is one of those instances where suppliers have everyone over a barrel.  We don’t want to pay that?  Suppliers respond with “We will sell it elsewhere.”

I think the Army awarded the contracts for the original round of COVID vaccines. Nevertheless, I wasn't being serious - just trying to establish the absurdity of using an arbitrary 15% markup brightline with a product that is relevant in all of our lives

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