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Myth-Information: Price Analysis is Always Required


Don Mansfield

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There seems to be a closely held belief by some in the Federal contracting community that the FAR requires the contracting officer to perform a price analysis before awarding any contract. CON 111 used to contain the following statements:

You must use price analysis to ensure that the overall price is fair and reasonable. Even when an offeror is required to provide the most in depth type of proposal data ? data known as "cost or pricing data" -- you will still need to use price analysis to ensure that the overall price is fair and reasonable. Point: You'll always, always, always use price analysis!

A number of my colleagues, both practitioners and instructors, would agree with those statements. Further, I have had a number of students pre-programmed by their contracting offices to believe that price analysis is always required.

What does the FAR say?

Subparagraphs a(2) and a(3) of FAR 15.404-1 discuss the requirements for the performance of price and cost analysis:

(2) Price analysis shall be used when cost or pricing data are not required (see paragraph (B) of this subsection and 15.404-3).

(3) Cost analysis shall be used to evaluate the reasonableness of individual cost elements when cost or pricing data are required. Price analysis should be used to verify that the overall price offered is fair and reasonable.

Note that a(2) qualifies the requirement for price analysis with the language "when cost or pricing data are not required." To interpret a(2) to mean that price analysis is always required would render meaningless the qualifying language in the statement ("when cost or pricing data are not required"). Such an interpretation would be inconsistent with the fundamental principle that statutes and regulations must be read and interpreted as a whole, thereby giving effect to all provisions. See Waste Mgmt. of North Am., B-225551, B-225553, Apr. 24, 1987, 87-1 CPD ? 435 at 5.

Subparagraph a(3) sets forth the requirement for performing cost analysis (i.e., when cost or pricing data are required) and contains the statement that "Price analysis should be used to verify that the overall price offered is fair and reasonable." Does this statement require price analysis when cost or pricing data are required? To answer this, we need to review the definitions of "should" and "shall" in FAR 2.101:

"Should" means an expected course of action or policy that is to be followed unless inappropriate for a particular circumstance.

"Shall" means the imperative.

Thus, when cost or pricing data are required, the contracting officer is 1) required to perform cost analysis and 2) expected to perform price analysis unless it's inappropriate for a particular circumstance. That's different than stating that the contracting officer must perform both price and cost analysis when cost or pricing data are required. The implicit acknowledgement that price analysis could be inappropriate in a particular circumstance (and thus, not required) contradicts the assertion that price analysis is always required.

Why the Confusion?

I'm not sure why some folks think that price analysis is always required. Perhaps they haven't read the FAR carefully. I recently had my students read subparagraphs a(2) and a(3) and asked them whether it was true or false that price analysis was always required. They were split about 50% true 50% false. When I had the students who answered "False" re-read a(2) and a(3), I was able to get the split to about 15% true 80% false and 5% I don't know. I can live with that.

A more likely reason behind the existence of this myth is that an uncomfortably large number of people in our field do not know what the FAR says because they do not read it. Instead, they are guided by, and they repeat, rumors.

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Guest Vern Edwards

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If your point is that FAR does not expressly require (shall or must) a price analysis in every acquisition, then there is nothing to argue with you about. But that should not be your point. A better point would be that you must perform price analysis in every acquisition in order to determine price (or cost and fee) reasonableness, whether FAR says so or not. That's because cost analysis, by definition, focuses on individual cost elements and profit, not the bottom line, but it's the bottom line that the government pays. Cost analysis tells you whether a contractor has made a reasonable estimate of its costs. It does not tell you whether it would be reasonable to pay those costs. Only price analysis can tell you that. What do I care that $200,000 is a reasonable estimate of Offeror X's costs to make a product and that a 5 percent profit is reasonable, when comparable products are available on the market for prices ranging from $150,000 to $160,000?

Maybe some folks think price analysis is always required because they can't think when it would make sense not to do a price analysis.

Hanging your hat on the difference between shall and should is a little thin in this case.

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My point is that FAR does not require a price analysis in every acquisition. Whether or not it's a good idea to perform price analysis in every acquisition is another matter. When cost or pricing data are required, I think that one should perform price analysis for the reasons you cited (and because the FAR says so). However, we need to recognize that there may be situations where we simply do not have information adequate to perform a price analysis. In such situations, the FAR permits the contracting officer to forego price analysis.

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DoN,

Always enjoy your blog, but I'd argue that FAR most definitely requires price analysis for every acquisition governed by the procedures of Part 12, 13, 14 and 15.

In support of this interpretation, I note:

FAR 12.209 stating that "...the contracting officer must establish price reasonableness in accordance with FAR 13.106-3, 14.408-2 or Subpart 15.4"

FAR 13.106-3(a) stating that "Before making award, the contracting officer must determine that the proposed price is fair and reasonable".

FAR 14.408-2(a) stating that "the contracting officer shall determine that...the prices offered are reasonable before awarding the contract".

FAR 15.402(a) requiring that contracting officers "purchase supplies and services from responsible sources at fair and reasonable prices".

How else would one determine a price to be fair and reasonable besides "analyzing" or "examining" or "evaluating" it (FAR 15.404-1(B)(1))?

My point, I suppose, is that fair and reasonable price determination by any other name is still price analysis.

Other than a question, perhaps, of semantics, what point exactly are you trying to make with your discussion?

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Hi, NavyKGuy,

Thanks for commenting.

Your argument fails to address two key questions: If the FAR required price analysis always, then 1) why would it qualify the price analysis requirement at FAR 15.404-1(a)(2) with "when cost or pricing data are not required" and 2) why the use of "should" at FAR 15.404-1(a)(3)?

In order to perform a price analysis, you need some basis of comparison. However, there can be situations where such information is not available because the supply or service being purchased is so unique. In such situations, the contracting officer would have to rely on cost analysis alone to determine a fair and reasonable price.

My point is simply that, despite what many people think, the FAR does not require price analysis for all acquisitions. If this blog entry caused some people to open up the FAR and rethink what they had been told or taught about the FAR, then perhaps they will be less likely to take what they are told or taught at face value. In general, I don't think that we (members of the Federal contracting community) do a good job at scrutinizing information--we tend to believe what we hear if it sounds reasonable or if it is spoken or written by someone of "experience." This is why our field is so rich with misinformation. While this is fun to write about, it's also somewhat disheartening. I'd prefer having less material.

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I am one of "those" contracting folks that once believed price analysis was always required. I guess I was very impressionable because I had an excellent mentor and viewed his "should" statements in his world to be "shall" statements as I was new to the field. Years later, it was pointed out to me.

Agree absolutely that if price analysis could be done, then it should be done.

To take this "should" one step farther, let's look at FAR 15.404-1(B)(2)(i) & (ii):

"(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 established price reasonableness (see 15.403-1©(1)).

(ii) Comparison of previously proposed prices and previous Government and commercial contract prices with current proposed prices for the same or similar items, if both the validity of the comparison and the reasonableness of the previous price(s) can be established."

Five price analysis techniques are subsequently identified but FAR 15.404-1(B)(3) states that the 1st two (identified above) "are the preferred techniques".

For competitive proposals, many folks simply state that adequate price competition automatically establishes price reasonableness and simply state that as the basis of price analysis. Note the FAR says [b]"Normally"[/i] . It is not automatic by default. I was trained that whenever the 2nd preferred technique can used in competitive situations, one should use it. If the 2nd preferred technique results in a significant difference from the proposal prices and one cannot explain it via changes differing market conditions or specifications, then one needs to double-check that there were no unintended mistakes in the Govt.'s term and conditions or specifications that could have cause the price analysis differential. If your price analysis indicates $300,000 for a widget and the proposal prices all come in about $150,000 for the same widget and there is no known different market conditions, it is prudent to go over your solicitation (including specifications) with a fine-toothed comb before executing the contract and obligating our taxpaying dollars.

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I am one of "those" contracting folks that once believed price analysis was always required. I guess I was very impressionable because I had an excellent mentor and viewed his "should" statements in his world to be "shall" statements as I was new to the field. Years later, it was pointed out to me.

Agree absolutely that if price analysis could be done, then it should be done.

To take this "should" one step farther, let's look at FAR 15.404-1(B)(2)(i) & (ii):

"(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 established price reasonableness (see 15.403-1©(1)).

(ii) Comparison of previously proposed prices and previous Government and commercial contract prices with current proposed prices for the same or similar items, if both the validity of the comparison and the reasonableness of the previous price(s) can be established."

Five price analysis techniques are subsequently identified but FAR 15.404-1(B)(3) states that the 1st two (identified above) "are the preferred techniques".

For competitive proposals, many folks simply state that adequate price competition automatically establishes price reasonableness and simply state that as the basis of price analysis. Note the FAR says [b]"Normally"[/i] . It is not automatic by default. I was trained that whenever the 2nd preferred technique can used in competitive situations, one should use it. If the 2nd preferred technique results in a significant difference from the proposal prices and one cannot explain it via changes differing market conditions or specifications, then one needs to double-check that there were no unintended mistakes in the Govt.'s term and conditions or specifications that could have cause the price analysis differential. If your price analysis indicates $300,000 for a widget and the proposal prices all come in about $150,000 for the same widget and there is no known different market conditions, it is prudent to go over your solicitation (including specifications) with a fine-toothed comb before executing the contract and obligating our taxpaying dollars.

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