(Editor’s Note.  In response to media and government reports that prices being paid by the government are excessive there has been a rash of guidelines being produced to ensure prices paid are reasonable.  In the midst of this proliferation, it seems that the pendulum is swinging away from basing contract prices on methods found in the commercial marketplace and instead returning to the older practices of basing contract prices on cost buildups. We briefly reported on a recent change to the Department of Defense (DOD) pricing guidelines in the last issue of the GCA REPORT and decided it was significant enough to detail here. The guidance we discuss is consistent with several recent actions we discuss below that are attempting to urge contracting officers to obtain “sufficient information” to support determinations that contract prices are “fair and reasonable.” The effect is to urge contractors to provide more data, including cost data and even judgmental data, to support these efforts.)

In a June 8 memo to the military services and defense agencies, Director of Defense Procurement and Acquisition Policy Shay Assad transmitted  May 31 revisions to the Procedures, Guidance and Instruction (PGI) that DOD uses as guidelines for implementing the FAR and the Defense FAR Supplement. The memo states the PGI changes came in response to several recent reports including a Sept 29, 2006 DOD Inspector General report finding the Air Force negotiating team used “questionable commercial item determinations” that exempted a large government contractor from submitting cost or pricing data on an $860 Million noncompetitive commercial contract for spare parts used on DOD weapons systems. Azad explained the revised PGI coverage:

• Emphasizes the requirement for COs to obtain cost or pricing data when a procurement is above the Truth in Negotiations Act (TINA) threshold – currently $650,000 – and none of the exemptions apply

•Emphasizes COs must obtain “whatever information or data is necessary”  to make sure the government’s contract prices are “fair and reasonable”
• Includes procedures and guidance pertaining to TINA waivers
• Includes guidance for determining when to perform price, cost and technical analyses.

The revised PGI addresses pricing policy, obtaining cost or pricing data, requiring information other than cost or pricing data and techniques for proposal analysis to ensure price reasonableness.

Pricing Policy (PGI 215.402)

1. When cost or pricing data are not required but the CO does not have sufficient data or information to determine price reasonableness, the memo reminds its readers that FAR 15.402(a)(2) requires offerors to provide whatever information or data COs need in order to determine fair and reasonable prices.
2.  Obtaining sufficient data or information from the offeror is particularly critical where an item is determined to be a commercial item as defined in FAR 2.101 and the contract is being awarded on a sole source basis.  In this case, the information should include commercial sales information on items sold in similar quantities and if such information is insufficient, cost data to support the proposed price.

3. The memo refers to PGI 215-404-1 for more detailed procedures for obtaining data or information needed to determine fair and reasonable prices.

Obtaining Cost or Pricing Data (PGI 215-403)

1.  Even when an exemption to TINA applies, the CO must still determine reasonableness of price. Under this circumstance, the CO may require “information other than cost or pricing data, including information related to prices and cost information that would otherwise be defined as cost or pricing data if certified.”  This provision definitely leaves the door wide open to base prices on cost buildups even when requirements under TINA are not met.
2. Under commercial item pricing, especially sole source situations, the CO must obtain some form of prior non-government sales data, or the fact the item was sold, leased, licensed or offered for sale.
3. The fact an item is a commercial item does not in itself prohibit the CO from requiring information other than cost or pricing data which may include cost information that would be considered cost or pricing data if certified. This again leaves the door open to seek cost or pricing data even on commercial item acquisitions.
4. An annual report on commercial item exceptions to TINA will be required from all DOD agencies where the contract number (including modification number), contractor name, total dollar amount of exception, brief explanation on the basis for determining the item is commercial and a brief explanation on the specific steps taken to ensure the price was reasonable.
5.  Waivers to TINA requirements are discussed.  For example:

     a. Under an exceptional case where a contractor refuses to provide cost or pricing data, the CO may waive the requirement when, for example, a particular  company is offering an item that is essential to DOD’s mission but is unavailable from other sources.  The intent of this waiver is not to relieve  companies that normally perform contracts subject to TINA to certify their cost or pricing data but rather those who do not. COs are encouraged to find other sources or alternative products when the waiver is granted. The CO will also provide input into the past performance system noting the offeror’s refusal to provide requested information. 

     b. A partial waiver may be granted when it is possible to clearly identify part of a cost proposal to which a waiver may apply that is distinct from the balance of the proposal. 

Requiring Information Other Than Cost or Pricing Data (PGI 215-4033)

The memo reminds readers that when cost or pricing data are not required and there is no other means for the CO to determine that prices are fair and reasonable, FAR 25.403  requires the offeror to submit “information other than cost or pricing data.” The PGI clarifies this requirement. 

1. The CO must obtain whatever information is necessary when cost or pricing data is not required. COs must obtain appropriate information on the prices at which the same or similar items have been sold previously. Sales data must be comparable to the quantities, capabilities, specification, etc. of the products or services proposed.  Sufficient steps must be taken to verify the integrity of the sales data and use of DCMA and DCAA is encouraged.
2. The CO must determine if the prior sales information is sufficient and if not, additional information “shall be obtained, including cost information if necessary.”
3. Before relying on prior price paid by the government, the CO must verify and document that sufficient analysis was performed to determine that the prior price itself was fair and reasonable. The memo points out that supplies and services may have been purchased without a price reasonableness analysis where the problem becomes magnified when the CO assumes the prices paid were adequately analyzed. Failure to verify a previous analysis was performed is a recurring problem requiring “extra attention” to verify previous prices were properly analyzed. At a minimum, the CO should discuss the basis for prior prices paid with the contracting organization that previously bought them.

Proposal Analysis (PGI 215.404)

The changes focus on proposal analysis for sole source commercial supplies and services.  The memo states FAR 15.402 sets forth the order of preference to be followed if the CO cannot determine price reasonableness without obtaining information or cost data.  At a minimum, the CO must obtain information on the price at which the same or similar items were previously sold (often it is previous sales information that formed the basis of determining whether the items were commercial).  If previous information is not sufficient then the CO must obtain “information other than cost or pricing data” and then, if necessary, perform a cost analysis. 

The memo sets forth the different types of analysis to be conducted on sole source commercial item procurements:

For a price analysis in accordance with FAR 15.404-1, the CO must first obtain and document sufficient information to confirm the previous prices paid by the government were based on a thorough price or cost analysis when the CO is relying on other sources than the offeror.  For example, it would not be sufficient to use prices from a database paid by another CO without understanding the type of analysis that was performed. This does not necessarily require another analysis but there should be coordination with the other office. When purchasing sole source commercial items the CO must request nongovernment sales data for quantities comparable to those in the solicitation. In addition, if there have not been any non-government sales, “information other than cost or pricing data” shall be obtained and a price or cost analysis will be performed as required. This might be the case when, for example, the office has determined an item is commercial but  the items have only been offered for sale with no prior commercial sales to rely on. Under this circumstance, the memo states the CO must require the offeror to submit whatever cost information is needed to determine price reasonableness.

Cost analysis. When the CO cannot obtain sufficient information to perform a price analysis a cost analysis is required. When the procurement is not subject to TINA and a cost analysis is required, the CO must clearly communicate to the offeror the cost information needed. Under this circumstance the CO should accept the cost data in a format consistent with the offeror’s records. The CO must always consider the need to obtain support from DCMA or DCAA.

Technical analysis. Technical assistance is particularly important when evaluating pricing related to items that are “similar to” items being purchased or commercial items that are “of a type” or require “minor modifications.”  Technical analysis can assist in pricing these types of items by identifying differences between the items and “similar to” items e.g. evaluating changes that are required to get the “similar to” items to those being solicited.

Other Recent Developments

The government has been particularly busy lately attempting to modify commercial item exemptions and require more circumstances when cost data needs to be submitted by contractors to make determinations of price reasonableness (some of which have been reported in the GCA REPORT).

1.  In a March 2 memo to all military services and DOD agencies, contracting officers are instructed to make sure that commercial item procedures for an acquisition exceeding $1 million must document in writing that the goods and services being acquired meet the FAR 2.101 definition of a commercial item. The memo states particular care must be taken to document determinations involving modifications of a type customarily available in the commercial marketplace and items only offered for sale, lease or license to the general public. When there is insufficient market pricing histories additional diligence must be given to ensure prices are fair and reasonable. This memo was considered a significant moderation over a previous DOD Inspector General report calling for more radical changes in the wake of revelations that $3.5 billion in commercial procurements were not supported by documentation justifying a commercial procurement. In that IG report, the IG recommended legislative change that would instruct COs to regard as commercial items only those with “sufficient commercial sales history to the general public” (thereby eliminating the current conditions for commercial item status where there are items “of a type” or items not sold but offered for sale or lease to the general public) and if not meeting this condition, a request for certified cost or pricing data must be made.

2. The DOD March 28 submitted to Congress a legislative proposal to amend the commercial item exemption under the Truth in Negotiations Act to permit the government to obtain certified cost or pricing data when (1) commercial sales data for the procurement of sole source items “is insufficient” to allow a CO to determine the price is fair and reasonable and (2) the contractor business segment has been required to submit certified cost or pricing data in connection with at least one contract award or modification.

3.  April 23 the FAR Council proposed changes to the FAR intended to resolve what the rule writers called “confusion” regarding the requirement the CO obtain contractor cost or pricing data to enable the government to determine whether a contract price was fair and reasonable. The intent of the proposed rules are to make clear the CO should be “free to ask for any information necessary.” When TINA certification is not required, the proposed rules would allow the CO to obtain more data than required by TINA, which focuses solely on “facts” at the exclusion of “judgmental” data. The proposed rule would amend the definitions at FAR 2.101 to add a new term “data other than certified cost or pricing data” which would mean “any data, including cost or pricing data and judgmental information.” The new term would replace the current term “information other than cost or pricing data.” The proposal would revise FAR Subpart 15.4 on contract pricing to clarify the need and authority of obtaining a detailed cost estimate, which includes cost or pricing data, when there is no other means to determine fair and reasonableness. 

4. May 11, the House website posted the house version of the 2008 defense authorization bill (the Senate and House versions are currently going through the process of being resolved) that includes two significant provisions affecting the ways to determine price reasonableness.

     a. Consistent with the DOD IG and others’ recommendation, the house bill would require a revision to the FAR that would remove words “of a type” from the definition of commercial services that may be procured under FAR Part 12. Invoking arguments from the IG report, the house bill is based on the notion that only when services are sold in the commercial marketplace does that marketplace ensure fair and reasonable pricing.   The bill would provide two options  when the services are “similar to commercial services” – (i) allow FAR Part 12 to govern but would allow the CO to request information on prices paid for the same or commercial items under comparable terms and condition and information regarding price or cost that may support the price offered such as wages,  subcontracts or material costs or (ii) base the procurement on FAR Part 15 procurement rules.

     b. Change the TINA commercial item exception to permit the government to obtain certified cost or pricing data when a contract, subcontract or modification for a commercial item is awarded noncompetitively or when the CO determines the commercial sales data is insufficient when a business unit submitted certified cost or pricing data on at least one of its contracts.

{TAG_FORM_TITLE}