FAR 15.404-1( b )(3) states that "The first two techniques [price analysis] af FAR 15.404-1( b )(2) are the preferred techniques." But nowhere can I find the answer to WHY these are preferred. OK, the #1 Adequate price competiton is obvious, but what of #2 Comparison to historical prices paid? Why would that be preferred over any of the other methods such as competitively published price lists or market research?

At first I thought maybe #2 was an attempt at streamlining the analysis process (a time saver) but when one has to evaluate the changes in market conditions and such, it can be more time consuming that searching the Internet for same or similar items or looking at a price list. Any ideas?

[W]hat of #2 Comparison to historical prices paid? Why would that be preferred over any of the other methods such as competitively published price lists or market research?

Historical prices paid would reflect the results of negotiations and discounts from price lists. Price lists are just what the seller tells suckers to pay. Market research usually reveals nothing more than pre-negotiation prices.

I saw an IL that came out a week or so ago at my agency, and it suggests that if we use historical prices, the previous prices must have been determined fair and reasonable based on adequate competiiton from two or more offerors. Attached were six one year contracts, all were for the same service and determined to be fair and reasonable based on historical prices. when you get down to the first contract that was awarded in 2008, even in FPDS you cant find the contract it references for historical prices. Maybe a paper copy is available in someones desk, but i'd guess it has been destoryed by this point.

Not sure if that helps with your question, and may not be relevant at your agency, but i found it interesting.

FAR 15.404-1( b )(3) states that "The first two techniques [price analysis] af FAR 15.404-1( b )(2) are the preferred techniques." But nowhere can I find the answer to WHY these are preferred. OK, the #1 Adequate price competiton is obvious, but what of #2 Comparison to historical prices paid? Why would that be preferred over any of the other methods such as competitively published price lists or market research?

At first I thought maybe #2 was an attempt at streamlining the analysis process (a time saver) but when one has to evaluate the changes in market conditions and such, it can be more time consuming that searching the Internet for same or similar items or looking at a price list. Any ideas?

Relying on published price lists to determine a negotiation objective or to determine that a price is fair and reasonable is like paying the list price for an automobile. Vern hit the nail on the head in post #2. Vendors like Grainger and many supply house have nice fat catalogs but typically offer contractors and other customers sizable discounts from their list prices, even without direct competition for orders. Heck, I even get at least a 10% discount off most list prices at Lowes and some other vendors and supply houses for personal purchases.

Here is a quote from page 9 of the 3.24.14 edition of "Federal Times", in an article entitled "GSA tightens rules on Supply Schedules prices" "Shedding light on discounts".

"...Whether the Price Reductions Clause applies in a given case or not, the government customer is is unlikely to pay the listed prices, Lane [Hope Lane, a partner at consulting firm Aronson, LLC], added. 'Anyone who's going by the price list prices isn't doing acquisition anyway,' she said. 'We know competition goes on at the task order level.' "

True Story:

There was this widget-maker who had been making the same widget for, quite literally, decades. The widget was a in every drawing on every military system in the particular service. Source controlled drawings. Sole source awards. Same widget. Over and over again for years. Not a big ticket item, not a sexy item, but bigger than a breadbox and pricier than the Simplified Acquisition Threshold.

Each time a government buyer called the discussion involved price reasonableness. The widget-maker always had the same answer: "Last time we sold to your command, it was quantity x and delivery terms y. The price was determined to be fair and reasonable at that time. Now, with your quantity and terms, all we want was what you paid last time plus inflation at the CPI for our industry. That's it. Nothing more." And so the price was determined to be fair and reasonable once again.

Nobody ever asked about costs. Had anybody ever asked about costs, they would have learned that the widget-maker had changed production methods, streamlined and automated ... in its new production facility located in a foreign country. Labor costs were but a fraction of what they had been a few years ago.

But nobody ever asked and so the widget-maker kept selling the widgets at a price that only changed by the inflation index. That widget-maker made a killing in terms of profit per widget.

That sounds like a story from the spare parts pricing scandal of the mid-1980s.

Vern, nope. I came across it about a decade ago (early 2000's). As I indicated, it had been going on for some time and, as far as I know, still goes on today.

I say "as far as I know" because I felt uncomfortable enough with the situation to have the entity get a lawyer involved--and they did. But afterwards we parted ways.

H2H

Then the problem arises when the historical prices paid would reflect the standard price list cost. There is no guarantee that the previous buyer negotiated anything, yet it is a historical price and therefore considered reasonable. Mind you, this is not my practice, but I've seen it done far too often.

sjst1, you're right, historical prices are not automatically fair and reasonable, although far too often they are treated that way.

It's necessary in reading these bits and pieces of the FAR to read them all, including guidance "... if the reasonableness of the prior price is uncertain..." and "... information on the competitive proposed prices or previous contract prices is not available or is insufficient to determine that the price is fair and reasonable...". This tells me you gotta check the old file.

I have always required in the documentation for the present purchase, the order number and date of the previous purchase and the basis for its reasonableness determination. If it was competitive and for the same item (most of our buys being COTS), include the names and prices of the competing potential sources, so the file stands on its own and you won't send an auditor on a big paper chase. If it was not competitive, a convincing write-up based on FAR principles is needed before I will sign.

We don't need to chase fresh competition for the same thing we competed last week or last month, but part of my sermon is you can't build a new purchase on an old foundation unless you make sure the old foundation is solid.

True Story:

There was this widget-maker who had been making the same widget for, quite literally, decades. The widget was a in every drawing on every military system in the particular service. Source controlled drawings. Sole source awards. Same widget. Over and over again for years. Not a big ticket item, not a sexy item, but bigger than a breadbox and pricier than the Simplified Acquisition Threshold.

Each time a government buyer called the discussion involved price reasonableness. The widget-maker always had the same answer: "Last time we sold to your command, it was quantity x and delivery terms y. The price was determined to be fair and reasonable at that time. Now, with your quantity and terms, all we want was what you paid last time plus inflation at the CPI for our industry. That's it. Nothing more." And so the price was determined to be fair and reasonable once again.

Nobody ever asked about costs. Had anybody ever asked about costs, they would have learned that the widget-maker had changed production methods, streamlined and automated ... in its new production facility located in a foreign country. Labor costs were but a fraction of what they had been a few years ago.

But nobody ever asked and so the widget-maker kept selling the widgets at a price that only changed by the inflation index. That widget-maker made a killing in terms of profit per widget.

That is a great example, H2H that everyone ought to take to heart. Regarding "catalog price lists", I have seen some steep discounts of 40-60% over the years for such things as electrical materials and devices.

Another example is the standard manuals that mechanics use to price auto maintenance and repairs. If one knows anything about the actual repairs being performed, often the procedures overlap with one or more steps not required for one repair because it is already part of the other repair going on simultaneously. I have been able to negotiate labor hours down when I am familiar with the actual procedures.