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Interim Internal Purchasing Guidelines > 5 Contract Pricing
5.1.1.a Use. This section provides internal guidelines for evaluating initial contract
and subcontract prices, and for pricing contract modifications.
1. The purchase team must ensure that contract prices are fair and
reasonable by:
(a) Evaluating proposed prices using the methods of price analysis or
cost analysis as described in this section;
(b) Pricing each contract separately and independently, and not
considering proposed price reductions, profits, or losses under
other contracts; and
(c) Excluding amounts for specified contingencies in contracts if they
provide for price adjustments based on the contingency.
2. The contracting officer represents the purchase team in dealings with
suppliers and offerors and serves as the pricing expert on the purchase
team. Consequently, the contracting officer has the ultimate authority
for pricing decisions. Depending on the complexity and dollar value of
the purchase, however, the purchase team should also seek pricing
advice and assistance from specialists in contracting, finance, law,
contract auditing, quality assurance, engineering, traffic management,
and contract pricing. If specialized assistance is not available, contact
the Inspection Service or the Office of Inspector General, as
appropriate. The purchase team should have the appropriate
specialists attend negotiations when matters of significance involving
complex problems will be addressed.
1. Price analysis is the process of examining and evaluating a proposed
price without evaluating its separate cost elements and profit. It is the
preferred method of proposal analysis.
2. Price is cost plus any fee or profit applicable to the type of contract.
3. Price analysis must always be performed, and should be relied on
entirely in all but a few situations.
4. One or more of the following pricing techniques may be used:
(a) Comparing proposed prices received in response to a solicitation.
(b) Comparing previously proposed prices and contract prices with
current proposed prices for the same or similar items in
comparable quantities.
(c) Applying rough yardsticks (such as dollars per pound or per
horsepower) to highlight significant inconsistencies that warrant
additional price analysis.
(d) Comparing proposed prices with prices in published catalogs or
lists, market prices, indexes, and discount or rebate
arrangements.
(e) Comparing proposed prices with independent Postal Service cost
estimates (see 2.1.3.b).
(f) Ascertaining that the price is set by law or regulation.
(g) Comparing proposed prices with prices for the same or similar
items obtained through market research.
5. Whenever adequate price competition has been obtained, comparing
proposed prices with Postal Service estimates will ordinarily suffice to
meet price-analysis requirements.
1. Price competition exists if two or more independent and capable
suppliers submit priced proposals meeting the solicitation's
requirements.
2. If price competition exists, it is presumed adequate, unless:
(a) The low offeror has such a decided market advantage that it is
practically immune from competition; or
(b) The purchase team determines that the lowest price is not fair
and reasonable.
1. Cost analysis is the process of examining the separate elements of cost
and profit in an offeror's or supplier's cost or pricing data, to form an
opinion about the degree to which they represent what the contract
should cost.
2. Cost analysis is normally done only when there is not adequate price
competition and no method of price analysis will ensure that prices are
fair and reasonable. It should be limited to cost elements needing close
analysis to protect the Postal Service's interest. When a limited number
of cost elements will provide a reasonable analysis, the contracting
officer should obtain only the data needed to support such an analysis.
3. Cost analysis involves, as appropriate:
(a) Verifying cost or pricing data and evaluating cost elements,
including:
(1) The necessity for and reasonableness of proposed costs,
including allowances for contingencies;
(2) Projecting the offeror's cost trends, on the basis of current
and historical cost or pricing data;
(3) A technical analysis of the estimated labor, material, tooling,
and facilities required and the reasonableness of scrap and
spoilage factors; and
(4) Applying audited or negotiated indirect-cost rates and labor
rates.
(b) Evaluating the effect of the offeror's current practices on future
costs. In conducting this evaluation, the purchase team must
ensure that the effects of inefficient or uneconomical past
practices are not projected into the future. In pricing production of
recently developed, complex equipment, the purchase team
should make a trend analysis of basic labor and materials even in
periods of relative price stability.
(c) Comparing costs proposed by the offeror for individual cost
elements with:
(1) Actual costs previously incurred by the same offeror;
(2) Previous cost estimates from the offeror or from other
offerors for the same or similar items; and
(3) Independent Postal Service cost estimates.
(d) Analyzing supplier make-or-buy decisions in evaluating
subcontract costs.
(e) Verifying that the offeror's cost submissions are in accordance
with the cost principles in 5.2.
(f) Reviewing submissions to ensure that data needed to make the
supplier's proposal accurate, complete, and current has not been
submitted or identified in writing. If there is such data, the
contracting officer must attempt to obtain it. If it cannot be
obtained, satisfactory allowance for the incomplete data must be
negotiated.
5.1.2.d Technical Analysis. Technical analysis is the process of examining proposals
to determine the need for and reasonableness of resources proposed under
a contract. Technical analysis should be performed by engineering,
management, or specialists as necessary to assist in price analysis or cost
analysis. Technical analysis of proposals may range from evaluating technical
proposals according to evaluation factors in a solicitation, to extensive
analysis of materials, labor hours and labor mix, special tooling and facilities,
and other cost factors.
1. Cost or pricing data includes more than historical accounting data. It
includes all the facts affecting cost estimates and costs incurred that
can be expected to significantly affect price negotiations. Cost or pricing
data may also include:
(a) Supplier quotations;
(b) Nonrecurring costs;
(c) Information on changes in production methods and in production
or purchasing volume;
(d) Data supporting business projections, objectives, and related
operating costs;
(e) Unit-cost trends such as those associated with labor efficiency;
(f) Make-or-buy decisions;
(g) Resource estimates to meet business goals;
(h) Information on management decisions that could have a
significant bearing on costs; and
(i) Historical costs for the same or similar items.
2. Cost or pricing data must be obtained before awarding a
noncompetitive contract or modification whenever price analysis is
insufficient to determine reasonableness of price. Only the data needed
to make the determination should be obtained. Before agreeing on
price, the contracting officer must have the supplier update the data to
the latest dates for which data is reasonably available.
3. The contracting officer must have offerors or suppliers obtain cost or
pricing data for proposed subcontracts or subcontract modifications
when needed to determine the reasonableness of a proposed contract
or subcontract price (including negotiated final pricing actions such as
termination settlements and total final price agreements for fixed-price
incentive contracts). The offeror or supplier is responsible for doing the
price or cost analysis for subcontracts, and including the results as part
of its cost or pricing data. In unusual circumstances, to ensure that
analysis is adequate, the contracting officer may require the offeror or
supplier to submit the subcontract data along with its own data. This
does not reduce the offeror's or supplier's responsibility to do the
subcontract cost or price analysis and negotiate fair and reasonable
subcontract prices.
4. If cost or pricing data is needed and the offeror or supplier refuses to
provide the necessary data in spite of a repeated request, the
contracting officer must withhold award or modification and consult the
next level of management. The ultimate disposition must be
documented.
1. Do not use predetermined percentages or limitations on profit.
2. Do not analyze profit when there is adequate price competition, or
where price analysis will ensure that prices are fair and reasonable.
3. When cost analysis is required for price negotiations, profit must be
analyzed. Profit should be analyzed with the objective of rewarding
suppliers for financial and other risks they assume; resources they use;
and the organizational, performance, and management capabilities
they employ. The complexity of materials required, the extent of
subcontracting, the ratio of indirect costs to direct costs, and the
contribution of capital investments to contract performance should also
be considered.
4. If pricing is for a change or modification that requires essentially the
same type and mix of work as the basic contract, and the dollar value is
relatively small compared to the total contract amount, the profit or fee
may be based on the basic contract's rate.
1. If, before agreeing on price, the purchase team learns that any cost or
pricing data is inaccurate, incomplete, or not current, the contracting
officer must immediately notify the offeror or supplier, regardless of
whether the defective data increases or decreases the contract price.
The contracting officer must then negotiate using any new data
submitted or making allowance for the incorrect data, documenting the
file accordingly.
2. If, after award, cost or pricing data is found to be inaccurate,
incomplete, or not current as of the date of final agreement on price,
the Postal Service is entitled to a price adjustment, including profit or
fee, for any significant amount by which the price increased due to
defective data. This is ensured by the clauses in 5.1.2.h. To arrive at a
price adjustment, the purchase team must consider:
(a) When the cost or pricing data became reasonably available to the
supplier;
(b) The extent to which the Postal Service relied on defective data;
and
(c) Any understated cost or pricing data submitted to support price
negotiations, up to the amount of the Postal Service's claim
against the initial pricing of the same contract or change order
(however, it need not be in the same cost categories such as
materials, direct labor, or indirect costs).
3. If, after award, the purchase team learns or suspects that the data
furnished was not accurate, complete, or current, the contracting officer
must have an audit conducted and immediately contact the Office of
Inspector General. The purchase team may not reprice the contract
solely because profit was greater than forecast or because a specified
contingency failed to materialize.
4. Whenever a postaward audit indicates defective pricing, the purchase
team must determine if the data submitted was defective and the
purchase team relied on it. Before making such a determination, the
contracting officer should give the supplier an opportunity to support the
accuracy, completeness, and currency of data in question. The
contracting officer must prepare a memorandum indicating the
purchase team's determination concerning whether the submitted data
was accurate, complete, and current as of the date of final agreement
on price, if the purchase team relied on the data, and the results of any
contractual action taken. The contracting officer must send one copy of
the memorandum to the Office of Inspector General, one copy to the
auditor if the audit was not performed by the Office of Inspector
General, and one copy to the supplier.
5. If both a supplier and subcontractor submitted cost or pricing data, the
Postal Service has the right, under the clauses in 5.1.2.h, to reduce the
prime contract price if it was significantly increased because a
subcontractor submitted defective data. This right applies whether the
data supported subcontract cost estimates or supported firm
agreements between subcontractor and supplier.
6. If an audit discloses defective subcontractor cost or pricing data, the
information necessary to support a reduction in prime contract and
subcontract prices may be available only from within the Postal Service.
To the extent necessary to secure a prime contract price reduction, the
contracting officer should make this information available to the supplier
or appropriate subcontractor upon request. If releasing the information
would compromise Postal Service security or disclose trade secrets or
confidential business information, the contracting officer may release it
only under conditions that will protect it from improper disclosure. The
information made available must be limited to information used as the
basis for reducing the price of the prime contract. To provide an
opportunity for the supplier to take corrective action, the contracting
officer should give the supplier reasonable advance notice before
deciding to reduce the price of the prime contract.
(a) When a supplier uses defective subcontract data in arriving at the
price but later awards the subcontract to a lower-priced
subcontractor (or does not subcontract for the work), any
adjustment to the price of the prime contract due to defective
subcontract data is limited to the difference (plus applicable
indirect cost and profit markups) between the subcontract price
used for pricing the prime contract and either the actual
subcontract price or the actual cost to the supplier, if not
subcontracted, providing the data on which the actual subcontract
price is based is not itself defective.
(b) Under cost-reimbursement contracts and fixed-price incentive
contracts, the basis for not allowing or recognizing costs under
the clauses in 5.1.2.h will be that payments to subcontractors are
higher than they would have been if the subcontractor data had
not been defective.
5.1.2.h Clauses. Whenever cost or pricing data may be required in negotiating a
contract, or the subsequent modification of a contract, the contract must
include:
1. Clause 5-1, Price Reduction for Defective Cost or Pricing Data.
2. Clause 5-2, Subcontractor Cost or Pricing Data.
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