Materiality Thresholds for Source Decisions and Fair-and-Reasonable Price Analyses

[Drew]

We have a prime contract (IDIQ Task Order) that includes the Competition in Subcontracting clause (FAR 52.244-5).  We do not yet have an "approved" purchasing system (that is, one reviewed in a CPSR and found to be without material weaknesses), but we strive to have an "acceptable" purchasing system, in compliance with DFARS 252.244-7001, Contractor Purchasing System Administration.  We are writing and following policies accordingly. 

In the meantime, while awaiting a CPSR, all subcontracts (purchases) on this TO for materials like software licenses are subject to a consent-to-purchase from the CO.  For our client we have procured software licenses for an engineering CAD application.  We made this original purchase from the "OEM," the software publisher, and not from a reseller.  The licenses are now up for renewal, and another purchase must be made.  We obtained a quote from the OEM for another year's license.  There is a published price for this software from a reseller that is available on the DoD's Enterprise Software Initiative Blanket Purchase Agreement (https://www.esi.mil/).  (A point of confusion may have come into this discussion because both the publisher and the reseller are listed on this ESI BPA.)

The publisher's price quote was exactly 20¢ higher per license than the reseller's price on the ESI BPA.  We attributed this to a rounding difference, the OEM's pricing tool having had values entered for discounts, list prices, dates, etc. as of today's prices, and the reseller's ESI listing having been produced by their (different) pricing tool a number of years ago.  The net difference in the total price was less than $4.00 out of a $70,000 purchase.  (Yes, that's a 0.0057% difference.)  We deemed it to be not material.

In addition, we were aware of the publisher's policy against cancel-rebuy actions (or, "rip and replace").  This prohibits their ecosystem of resellers from cannibalizing each other's business.  No reseller can undercut pricing from another reseller, or from the publisher, for a license renewal.  This is in fairness to each reseller, who expects to recoup their sales costs over time with the renewal revenue, and also to the OEM as it prevents downward pressure on their pricing.

Given what we had in hand (the publisher's quote, the ESI BPA list pricing from the reseller, and knowledge of market dynamics), we submitted the CTP with a price analysis for a fair-and-reasonable determination that pointed to the ESI BPA, an existing, active contract with the Government for this product.  Without citing the clauses, we were relying on the rationales in:

* FAR 13.106-3 (a)(2)(ii) ("Comparison of the proposed price with prices found reasonable on previous purchases"),

* FAR 15.404-1 (a)(2)(ii) ("Comparison of the proposed prices to historical prices paid), and

* ...(vi) ("Comparison of proposed prices with prices obtained through market research for the same or similar item").

We made the determination that the 20-cent difference was not material to the sourcing decision, nor was it material to a fair-and-reasonable determination.  The comparison showed a non-material difference from historical prices, market research, and previous purchases.  We also made a determination that further effort to obtain a lower price was unlikely to be successful, given the differences in systems that produced the quoted and comparison prices; and that further effort was not warranted because the cost of pursuing a $4 reduction was not worth the expenditure of time and energy, either our effort or the publisher's.  (Since the rip-and-replace policy would've prohibited us from going to the reseller anyway!). 

Yet the CO chose to not accept this reasoning, and still insisted on getting those four bucks.  The CO refused to consent to the purchase until we offered a discount to get the total price down to match a purchase made off of the ESI pricing.

1) What did we miss?  

2) Is a policy that establishes thresholds for materiality, in sourcing or F&R determinations, acceptable?

3) Can anyone provide a citation (CPSR finding? Policy and Procedures manual? Administrative decision or case law?) that shows (when) it is acceptable for non-material differences to be ignored?

4) If we're following our policies for making sourcing and F&R determinations, and they include these materiality thresholds, can a CO insist on further efforts or further reductions beyond what our policies say we have to do?

This scenario is the kind of thing that just cries out for acquisition reform - spending hundreds of dollars in time and energy for savings that won't even buy a good cup of coffee.  Thoughts, anyone?

 

 

[C Culham]

I do not think you have missed anything, but rather the CO has missed the ideal put forth in FAR 44.202 with that ideal being to that consent should be consistent with  "sound business judgment".

 

[here_2_help]

Your CO is unreasonable but what can you do? Nothing. Just keep following your procedures, trying to do the "right thing". Document your CO's direction. Then move on.

 

Yes, this situation is pretty much exactly what contractors complain about: COs who are so risk-averse they reject consent over $4.00, causing the contractor to spend hundreds more dollars redoing the package. Or COs who claim victory when they save the taxpayers $4.00 while causing hundreds of dollars of extra spend. So what? The game is rigged against you but you have still chosen to play. Keep on playing, especially if your product or service helps the country in a significant way.

[Neil Roberts]

5 hours ago, Drew said:

In the meantime, while awaiting a CPSR, all subcontracts (purchases) on this TO for materials like software licenses are subject to a consent-to-purchase from the CO. 

@Drew how did you decide this relative to FAR 52.244-2, if included in your prime contract?

[Drew]

Sorry, Neil, are you asking how we decided to award the subk?  We honored the rip-and-replace / cancel-rebuy constraint of the OEM publisher and "awarded" the license renewal to them.  But that's where the CO choked and would not consent to that decision until we knocked the price down and gave them their $4.

Or are you asking how we decided that these purchases are subject to CTPs?  That has been the standing practice for all 40 TOs awarded under this IDIQ, and use of the CTP process is explicitly called out in the TO solicitation.  Our Task Order does include the Subcontracts clause (FAR 52.244-2).  These purchases are on separate cost-reimbursable CLins, and so we agree and accept that 52.244-2 (c) (1) applies: 

"If the Contractor does not have an approved purchasing system, consent to subcontract is required for any subcontract that- (1) Is of the cost-reimbursement...type."

[Neil Roberts]

My experience in the contractor world and my interpretation of 52.244-2 is that prime contract CLINS alone, do not determine what if any consent applies to the subcontract. The overarching prime contract estimated cost and contract type, and the subcontract dollar value and contract type, are needed to apply the requirements therein. If the overarching prime contract type is cost type, my view is that the $70,000 fixed price subcontract is subject to consent only if it exceeds the greater of the simplified acquisition threshold or 5% of the prime contract total estimated cost. When you have time, take another look at 52.244-2 and maybe give this your consideration.  

[Drew]

@Neil Roberts: Oh how I wish!  Yes, we've considered this closely over the years.

Our primary CLins are FFP for labor, but the ODC and travel CLins are reimbursed-at-cost + a de minimis material handling fee (for ODCs), or just at-cost (for travel).  We have been managing ODC purchases (and travel authorizations) with our clients and GSA contracting officers this way for more than five years now.  Even if your interpretation could be applicable to these CLins - and I see how one could reason that way - the practical way of managing these is with some sort of CTP process.  Our company, the CO, and our client all need to make sure that ceiling, awarded, and funded amounts on an ODC line item are sufficient for the required purchase.  And the client has a technical approval step in there that precedes final CTP approval, so that we know purchases are directly fulfilling their requirements, and that the procurement derives from, extends, or completes the originating Phase I SBIRs that underlie this Phase III contract.  

Given all these practical reasons for having some kind of consent process, is there still any way you can see that 52.244-2 wouldn't apply?

[Neil Roberts]

@Drew, the structure of your prime contract and the language in 52.244-2 does raise some questions. I think I would wind up saying that at a minimum, you are required to submit for consent fixed price procurements that are charged to a cost reimbursement ODC that exceed the greater of the simplified acquisition threshold or 5% of the total ODC estimated cost for all such fixed price procurements thereunder. As a result, I would discuss that interpretation with the customer. It seems to have turned out that you and the customer wish to have more oversight than that. As a result, I would seek some way to obtain something in writing from the customer that your business is comfortable to rely on to protect your business. Protecting from what risk? My experience is that you may be in technical breach of the contract requirements in submitting all such fixed price procurements. The well known major prime contractor I was with was accused by the government audit function of causing the government to waste time and money in reviewing consent submittals that were not required by the contract requirements. It is good to have something in writing to back it up, even if it is not an actual language change to the clause itself, even if you have great government program and government contracting function relations. Your choice as to the risk level.  

[Drew]

Thanks for the caution, Neil.  I don't think we have risk of causing them extra work - it's more the reverse situation, like I describe in the original post above!  I believe we do have enough supporting language, in the original solicitation and in the resulting contract which incorporates that, to document that this is the procedure we ought to follow. In fact, GSA has rejected our invoices when they included items that have not had prior consent.  There might be some casualness when we say "this FAR clause requires us to do this or that clause requires us to do that" - it could be that it's not these clauses but other contract language that forces the actual practices.  But we refer to the FAR clauses to understand the practices, because they provide a good model of well-executed / contractually-mandated processes.   (Did I really write that last sentence?  )

Just to re-iterate one of my practical questions above: 

3) Can anyone provide a citation (CPSR finding? Policy and Procedures manual? Administrative decision or case law?) that shows (when) it is acceptable for non-material differences to be ignored?

[Neil Roberts]

52 minutes ago, Drew said:

3) Can anyone provide a citation (CPSR finding? Policy and Procedures manual? Administrative decision or case law?) that shows (when) it is acceptable for non-material differences to be ignored?

In court actions, De Minimis. https://thelawdictionary.org/de-minimis/.

 

[C Culham]

At the hazard of rolling eyes.....I already did.

On 2/13/2025 at 7:56 AM, C Culham said:

I do not think you have missed anything, but rather the CO has missed the ideal put forth in FAR 44.202 with that ideal being to that consent should be consistent with  "sound business judgment".

 

And for further support I offer this (emphasis in the format not added by me).   And heck I might even consider submitting a REA for the extra effort being beyond the bounds of Federal procurement guiding principles just to get their attention but that is just me!

 

FAR 1.102 Statement of guiding principles for the Federal Acquisition System.

(d) The role of each member of the Acquisition Team is to exercise personal initiative and sound business judgment in providing the best value product or service to meet the customer’s needs. In exercising initiative, Government members of the Acquisition Team may assume if a specific strategy, practice, policy or procedure is in the best interests of the Government and is not addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, that the strategy, practice, policy or procedure is a permissible exercise of authority.

 

[Drew]

THANKS TO ALL!!!