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Complexity of Pricing in the Commercial Marketplace
Presenter(s):Robert E. Jones, CFCM, CCCM, MS, PHR Contracts Manager, Pole/Zero Corporation
Date: April 11, 2013Time: 12:00pm-1:30pm Eastern
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Agenda
•What is a “commercial item?”•History of commercial item acquisitions•How to establish pricing•What is “price reasonableness?”•What kind of price support is required?•Discounts and negotiated prices•Current regulatory environment
Why is Commercial Pricing Complex?
•Wide variance of interpretation of “Commercial Item”•Cost or pricing data to support reasonableness•Use of industry standards and practices
– Commercial Terms & Conditions (including financing & deposits)– Quality control systems vs Source Inspection
•Flow-down clauses•FFP or T&M contracts only
– Unclear requirements– Poor SOW, SPEC– Agency needs not clearly defined
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Why Government Should Buy Commercial•Advantages
– Reduced administrative burden– Fewer compliance obligations– Less complexity and cost
•Challenges– Items primarily having military application– Prime contractors selling non-commercial items
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FAR 2.101 “Commercial Item”
• “Commercial item” means --• (1) Any item, other than real property, that is of a type
customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and--– (i) Has been sold, leased, or licensed to the general public; or,– (ii) Has been offered for sale, lease, or license to the general public;
• (2) Any item that evolved from an item described in paragraph (1) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation;
FAR 2.101 “Commercial Item” cont.
• (3) Any item that would satisfy a criterion expressed in paragraphs (1) or (2) of this definition, but for --– (i) Modifications of a type customarily available in the commercial marketplace;
or
– (ii) Minor modifications of a type not customarily available in the commercial marketplace made to meet Federal Government requirements. Minor modifications means modifications that do not significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process. Factors to be considered in determining whether a modification is minor include the value and size of the modification and the comparative value and size of the final product. Dollar values and percentages may be used as guideposts, but are not conclusive evidence that a modification is minor;
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FAR 2.101 “Commercial Item” cont.
• (4) Any combination of items meeting the requirements of paragraphs (1), (2), (3), or (5) of this definition that are of a type customarily combined and sold in combination to the general public;
• (5) Installation services, maintenance services, repair services, training services, and other services if--– (i) Such services are procured for support of an item referred to in paragraph (1), (2),
(3), or (4) of this definition, regardless of whether such services are provided by the same source or at the same time as the item; and
– (ii) The source of such services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government;
– Practice Note: I have successfully argued that CDRLs, SDRLs, Test Data, Program Management, and other “NRE” activities in support of a commercial item are in themselves commercial items.
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FAR 2.101 “Commercial Item” cont.
• (6) Services of a type offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard commercial terms and conditions. For purposes of these services—– (i) “Catalog price” means a price included in a catalog, price list, schedule, or
other form that is regularly maintained by the manufacturer or vendor, is either published or otherwise available for inspection by customers, and states prices at which sales are currently, or were last, made to a significant number of buyers constituting the general public; and
– (ii) “Market prices” means current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated through competition or from sources independent of the offerors.
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FAR 2.101 “Commercial Item” cont.
• (7) Any item, combination of items, or service referred to in paragraphs (1) through (6) of this definition, notwithstanding the fact that the item, combination of items, or service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor; or
• (8) A nondevelopmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments.
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Three Little Words
•“…of a type…”
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COTS & Non-Developmental Items
•“COTS” is not the same as “commercial item”•“Non-Developmental Items” qualify for same
treatment as “commercial items”
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History & Resources
•Federal Acquisition Streamlining Act (1994)– https://dap.dau.mil/policy/Documents/Policy/Federal%20Acq
uisition%20Streamlining%20Act.doc
•FAR 12 – Acquisition of Commercial Items•Commercial Pricing Information Guide
– https://dap.dau.mil/policy/Documents/Policy/030EVDOC.doc
•Commercial Item Handbook– www.acq.osd.mil/dpap/Docs/cihandbook.pdf Version 1, Nov
2001– www.acq.osd.mil/dpap/cpic/
draftcihandbook08012011.docx Version 2, Aug 201112
History & Resources
•Contract Pricing Reference Guides– https://acc.dau.mil/CommunityBrowser.aspx?
id=406579&lang=en-US
•FAR Part 2 – definitions and thresholds•FAR Part 13 – Simplified Acquisition Procedures•FAR Part 15 – Contracting by Negotiation•FAR Part 10 – Market Research•FAR 52.212-1 Instructions to Offerors•FAR 52.212-4 Contract Terms and Conditions
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Subcontracts for Commercial Items
•FAR 15.404-3(c)(2)– “The contracting officer should require the contractor or
subcontractor to submit to the Government (or cause submission of) subcontractor certified cost or pricing data below the thresholds in paragraph (c)(1) of this subsection and data other than certified cost or pricing data that the contracting officer considers necessary for adequately pricing the prime contract.”
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How to Establish Pricing
•Commercial FFP vs Government Cost-Plus• If truly commercial, pricing could/should be
established by the market – supply & demand, competition, previous sales, etc.
• If truly a governmental item, pricing will be cost-plus in nature.
•This is the problem in selling to the government – they expect to see cost information and commercial contractors never want to share cost information!
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How to Establish Pricing
•Commercial prices should be catalog-based, in a price list (does not have to be published)
•Quantity price breaks•Discounts
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Price Reasonableness
•FAR 13.106-3 (a)– “Before making award, the contracting officer must determine
that the proposed price is fair and reasonable.”
•FAR 15.402– “Contracting officers shall—(a) Purchase supplies and services
from responsible sources at fair and reasonable prices.”
•FAR 15.405 (b)– “The contracting officer’s primary concern…a price that is fair
and reasonable to both the Government and the contractor.”
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Pricing Information
•None, if based on adequate competition• Information other than cost or pricing data
– Prices available within the agency or organization– Prices information obtained from other sources than the
offeror– If necessary, price information obtained from the offeror
•After a written determination, cost or pricing data as a last resort!
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Commercial Exemption to “Certified” Data•FAR 15.403-1(c)(3)
– “(i) Any acquisition of an item that the contracting officer determines meets the commercial item definition in 2.101 …is exempt from the requirement for certified cost or pricing data. If the contracting officer determines that an item claimed to be commercial is, in fact, not commercial and that no other exception or waiver applies,… the contracting officer shall require submission of certified cost or pricing data.”
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“Other” than certified cost or pricing data•FAR 15.403-3 (a)(1)
– In those acquisitions that do not require certified cost or pricing data, the contracting officer shall—• (i) Obtain whatever data are available from Government or other
secondary sources and use that data in determining a fair and reasonable price;
• (ii) Require submission of data other than certified cost or pricing data, as defined in 2.101, from the offeror to the extent necessary to determine a fair and reasonable price (10 U.S.C. 2306a(d)(1) and 41 U.S.C. 254b(d)(1)) if the contracting officer determines that adequate data from sources other than the offeror are not available. This includes requiring data from an offeror to support a cost realism analysis;
•
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“Other” than certified cost or pricing data
• (iii) Consider whether cost data are necessary to determine a fair and reasonable price when there is not adequate price competition
• (iv) Require that the data submitted by the offeror include, at a minimum, appropriate data on the prices at which the same item or similar items have previously been sold, adequate for determining the reasonableness of the price unless an exception under 15.403-1(b)(1) or (2) applies; and
• (v) Consider the guidance in section 3.3, chapter 3, volume I, or the Contract Pricing Reference Guide cited at 15.404-1(a)(7) to determine the data an offeror shall be required to submit.
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Providing Cost Information
•FAR 15.403-1(c)(3)(ii)(C)– If the contracting officer determines that the information
described in paragraph (c)(3)(ii)(B) of this section is not sufficient to determine the reasonableness of price, other relevant information regarding the basis for price or cost, including information on labor costs, material costs and overhead rates may be requested.
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What data must I provide?
•No definitive list of what is required, though contractor format is acceptable. (FAR 15.403-3 (a)(2))
•Examples:– Sales history of the same or similar item; copies of POs– Basis of Estimate – may include hours by task and labor
category (FAR 15.408 Table 15-2)– May be cost data (though not required to be certified) FAR
2.101
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FAR 2.101 “Data other than certified…”•Data other than certified cost or pricing data”
means pricing data, cost data, and judgmental information necessary for the contracting officer to determine a fair and reasonable price or to determine cost realism. Such data may include the identical types of data as certified cost or pricing data, consistent with Table 15-2 of 15.408, but without the certification.
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FAR 2.101 “Data other than certified…”•The data may also include, for example, sales data
and any information reasonably required to explain the offeror’s estimating process, including, but not limited to—
•(1) The judgmental factors applied and the mathematical or other methods used in the estimate, including those used in projecting from known data; and
•(2) The nature and amount of any contingencies included in the proposed price.
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Thresholds & Definitions of Data
•Some COs and Primes will try to force the “substantial” sales aspect – not true.
•Some will say it has to be at least 51% commercial – not true.
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Discounts & Negotiated Prices
•Quantity price breaks•Discounts for:
– Schedule flexibility– Performance Based Payments or other contract financing– Delivery terms or other T&C
•Be sure to offer same discounts to all customers under the same or similar circumstances!
•Negotiated prices are OK – negotiation implies consideration given and received (document this).
•No preferred customer pricing!
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Current Regulatory Environment
•DCAA Guidance Memo September 29, 2011– http://www.dcaa.mil/mmr/11-PSP-017.pdf
•FAR 15.4 updated October 1, 2010 – expands the CO’s ability to obtain cost or price-related data for all contracts, including commercial-item contracts.
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Best Practices
•Publish your price list – if only internally and well-documented.– Have it notarized, digitally signed, encrypted, etc.– Include information on quantity price breaks and other
discounts
•Publish your catalog and have it online•“We offer the same or similar products to all
customers, government and commercial, for the same or similar prices under the same or similar circumstances.” (FAR 15.403-1(c)(3)(ii)(B)
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Best Practices
•Develop your own commercial item determination checklist using the definition at FAR 2.101
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QUESTIONS?
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END
Thank you for participating in today’s program.
