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Fair and Reasonable Price Determination

ACON 029

DAU GLOSSARY DEFINITION

Alternate Definition
A fair and reasonable price determination is an assessment by the Government that an offeror’s proposed price for a supply or service can be considered “fair and reasonable” on the basis of applying one or more price analysis techniques. FAR Part 15 (Contracting by Negotiation) does not explicitly define the term “fair and reasonable.” The concept of a fair and reasonable price has elsewhere been described as the price that a prudent businessperson would pay for an item or service under competitive market conditions, given a reasonable knowledge of the marketplace. Regardless of the precise definition, the FAR clearly establishes the need for determining a price to be fair and reasonable price before a Government contracting officer or ordering officer may award contracts or place orders.
General Information

Background

 

Fair and reasonable price determinations are used for evaluating quotations, bids, and proposals for the source selection decision. They are also used during sole-source negotiations. The policy of the U.S. Government is to contract for supplies and services at fair and reasonable prices. While buyers in the private sector are also interested in paying fair and reasonable prices, it is particularly important in Government procurement because of the scrutiny that Congress and the general public places on Government procurement. The Government is also interested in fair and reasonable price determinations to promote a healthy and efficient competitive sourcing environment. The Federal Acquisition Streamlining Act (FASA) of 1994 established a preference for the types of information used to assess price reasonableness.

 

Techniques for Making a Fair and Reasonable Determination

 

FASA made submission of cost or pricing data the least preferred method of determining price reasonableness. FAR 15.404-1(b)(2) lists seven price analysis techniques by which the Government can make a fair and reasonable price determination.

 

  1. Comparison of proposed prices received in response to the solicitation. Normally, adequate price competition establishes price reasonableness. This is the most commonly used technique, as the majority of Government procurement actions attract two or more offers that are competing independently for award.
  2. Comparison of previously proposed prices and previous Government and commercial contract prices with current proposed prices for like items. Both the validity of the comparison and the reasonableness of the previous price(s) must be established.
  3. Use of parametric estimating methods/application of rough yardsticks to highlight significant inconsistencies that warrant additional pricing inquiry. Comparing the proposed price per square foot for a certain type of building construction against an established commercial standard is an example of this technique.
  4. Comparison with competitive published price lists, published market prices of commodities, similar indexes, and discount or rebate arrangements. The Government may be able to seek discounts from published price lists based on volume buying.
  5. Comparison of proposed prices with independent Government cost estimates. A contractor-developed cost estimate may not be used in lieu of a Government cost estimate.
  6. Comparison of proposed prices with prices obtained through market research for the same or similar items. Trade journals, newspapers, and economic indexes can provide useful comparative information.
  7. Analysis of pricing information provided by the offeror. This “catch-all” category includes information that does not fall into the other categories.

 

The FAR identifies the first two techniques above as the preferred methods. However, if there is a lack of adequate price competition (first technique) or the contracting officer determines that information on previous contract prices is insufficient to determine a price to be fair and reasonable (second technique), the contracting officer must use one or more other techniques appropriate to the circumstance. For example: In response to a solicitation for identical quantities of a standard item, the Government receives three price quotes -- $450; $1,100, and $2,500. These prices are widely dispersed and appear to bear little correlation to one another. As a result, the first method for making a fair and reasonable determination would be inadequate. One or more other techniques (along with additional information) would be needed.