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5 Contract Pricing

5.1 Price Evaluation

5.1.1 General

5.1.1.a Use. This section provides internal guidelines for evaluating initial contract and subcontract prices, and for pricing contract modifications.

5.1.1.b Responsibilities

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.

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5.1.2 Analyzing Proposals

5.1.2.a Price Analysis

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.

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5.1.2.b Adequate Price Competition

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.

5.1.2.c Cost Analysis

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.

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5.1.2.e Cost or Pricing Data

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.

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5.1.2.f Profit

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.

5.1.2.g Defective Cost or Pricing Data

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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