I have multiple questions regarding this topic:
1) I would like to know if allowances must be associated with evaluated unit prices. If not, how are we able to justify the use of unevaluated-allowances in light of the full and open competition requirements of FAR 6.101?
2) How does the use of allowances play into the Bonafide Need rules?
3) When should allowances be used?
4) how should allowances be priced?
Thank you for your assistance on this topic.
Offerors may include unpriced allowances in their proposals if not specifically prohibited by the Government's solicitation. Allowances reflect work that cannot be adequately priced at the outset due to uncertainties associated with the work in question. They should never constitute a major part of a proposal's costs. If the overall nature of the requirement is difficult to define, a more suitable contract type, such as a cost reimbursement contract, should be used to reflect those uncertainties.
Open full Question Details
The contract should reflect a maximum amount for any allowance in order to minimize the cost risk of the Government. The contractor must submit a proper claim for all final costs associated with any allowances in the contract. Allowances may be for items not directly associated with evaluated unit prices. The cost risk they present to the Government should be evaluated against any allowances in competing proposals to maximize competition. There is no special link between allowances and the Bona Fide Need Rule that doesn't already exist between any other cost item and the Bona Fide Need Rule— namely that any contract funding for allowances must be tied to the fiscal year for which the funding is available for obligation.
Generally speaking, allowances should be avoided when possible because of the cost risk to the Government. However, sometimes they must be accommodated given the uncertain nature of part of the Government's requirement or other conditions. Fixed-price with economic price adjustment contracts (see FAR 16.203) are essentially fixed-priced contracts that have allowances built in to allow the contractor to recoup additional costs incurred due to uncertain economic conditions.
The article at this link is not authoritative, but it provides an easy-to-understand description of allowances in contracts.