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In this episode we break down the techniques and tools the government uses to determine fair and reasonable pricing.
Come for a peek behind the federal acquisition curtain as we gain insights from acquisition professionals at the US Department of Veterans Affairs and dissect varying relevant topics. In this five-episode series we will explore topics such as proposal evaluations, innovation, debriefs, and more!
TAC Talks is premiering Tuesday, September 29th!
The Department of Veterans Affairs does not endorse or officially sanction any entities that may be discussed in this podcast, nor any media, products or services they may provide.
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Charles Ross (CR): Welcome to the Technology Acquisition Center Podcast, which we affectionately call TAC Talks. Join us as we discuss highly relevant and compelling acquisition topics with highly esteemed industry professionals and attempt to share information with you, the 1102 workforce, program officials and our contractor friends. We hope that you find these topics and discussions helpful. So, turn up the volume on your ear buds and get ready for TAC Talks.
CR: Thank you for joining us today for this episode of TAC Talks. My name is Chuck Ross, a service director at the VA Technology Acquisition Center. We have a great discussion lined up for you today and hope you'll find it informative regarding contracting officers' responsibility for evaluating offered prices and determining the price is fair and reasonable in accordance with FAR 15 and FAR 13 procedures. For those listening today who might not be familiar with the regulation, FAR 15 and FAR 13 require contracting officers to purchase goods and services from responsible sources at a fair and reasonable price. Meaning the price that a prudent businessperson or even you or I would pay for an item or service under competitive market conditions with reasonable knowledge of the marketplace. This is a behind the scenes analysis that we do for every contract action and we utilize a number of proposal analysis techniques and procedures defined by regulation. The price reasonableness determination is then documented through written evidence and signed by a contracting officer to support that the price paid is fair and reasonable. This is particularly important and required in government contracting because we are stewards of taxpayer dollars. So with that backdrop, I want to introduce our TAC Talks panel for today's discussion. I'm pleased to have joining me today Desiree DiCorcia and Tara Nash from the VA Office of General Counsel, along with TAC contracting officers Den-el Opuszynski and Matt Newell. Thanks for being here today with me.
CR: Let's jump in. The preferred price analysis technique is to compare proposed prices received as a result of adequate price competition. What does that really mean and what determines whether the government has received adequate price competition? Matt let's start with you.
Matt Newell (MN): OK, so adequate competition as defined by the FAR is when you receive two or more competitive proposals from responsible offerors that are deemed, you know, to meet the government's requirements or are deemed uh, technically acceptable. Now that's adequate price competition, but the FAR specifically states that adequate competition normally determines fair and reasonable price uh, and we have to apply critical thinking. And we have to apply common sense, whether this adequate competition has determined fair and reasonable price.
CR: Right, so I think what you're saying, Matt, is in order to have adequate price competition, we need to have received at least two or more acceptable technical proposals, but Desiree, is there any caution that should be exercised if the best value offered is also the highest price?
Desiree DiCorcia (DD): Sure Chuck, that's correct. Under the FAR we need to make sure that this price isn't too high or unreasonable. If we're using adequate price competition, we need to do an analysis or comparison of the proposed prices, and what this means is looking at the proposed prices to determine if the high price is consistent with the other prices and if they are in line with each other. Just because it's a higher price, um it still could be in line with the other prices, especially if it's not that much higher. If not, if there is a wide disparity, then we need to take a closer look. Um a recent case from GAO, Technatomy, which was issued in 2018, is instructive on this point. There, the agency received 35 offers. So it had ample competition, but it also had a wide disparity in prices. At the high end the prices were two to two and a half times greater than the prices on the low end. What the contracting officer did there was looked, and said we have adequate competition, my prices are therefore fair and reasonable. And GAO said wait, going back to Matt's point, normally adequate competition establishes uh, reasonableness and here you have a wide disparity of proposals and you can't just say per se that these prices are fair and reasonable. You need to do an analysis and take a closer look, especially here where you had this huge disparity at what's driving it. So Technatomy is important. Um, it drives home the point that we always need to do a comparison of those proposed prices, we're not just stuck with using this technique alone, we can use the other FAR techniques as well for doing analysis. We can look at the IGCE. Uh, previous historic prices to determine whether the price is fair and reasonable. And it's also important to note that when GAO looks at our fair and reasonableness determinations, it gives the government a lot of discretion here. It won't disturb our findings, unless they're unreasonable, as long as they're reasonable, in accordance with the FAR and the solicitation. So, I'll hand it off to you, Tara?
Tara Nash (TN): Sure, thank you Desiree. Yes, it's that, that Technatomy case is super instructive and, perhaps even an agency took notes of that. And another recent GAO case that just occurred in January of this year, in 2021. It really shows, really, what you talked about, which is there, there was this great disparity. But the agency didn't really address that disparity, and so therefore they did it wrong. Now this is showing the opposite of like, OK, there could be a great disparity. There could be a much higher percentage in price when the awardee is concerned compared to the other offerors. And yet that price is still found to be fair and reasonable. And in this case the protester that came in had a price that was far below that of the awardee. The awardee was 91% higher, however, the GAO found that this was OK. Many reasons attributed to this. First of all, the solicitation laid out various price analysis techniques that the agency said it would employ in order to find a fair and reasonable price. And the agency did employ those techniques, many of them, not just one. They looked at a comparison of the quoted prices calculating the mean. They looked at historical pricing. They looked at an IGCE. And, this was all done in the context of the total price. And one thing I would like to note is that typically fair and reasonable looks at the total evaluated price, to say okay, that total price, is that a reasonable price that the government is going to be paying? Could we save money here? However, if you are looking at that evaluated price, sometimes you could look at individual prices such as rates, as long as you're saying so in your solicitation and you have a fair way to do it. In this case, these companies had GSA rates that were already determined fair and reasonable. Therefore, the agency was able to take the proposed rates and compare them to those rates and just give that as yet another factor that would drive whether their prices were reasonable. And in looking at all of this, and also very importantly looking at where the weightings of the factors were, if you have technical is significantly more important than price, for example, which often is the case then somebody that's at a much higher technical could be found with a higher price to still be fair and reasonable. I'd like to just quote what the court said in that sense, Although still a higher cost, it's justifiable based on the identified management and technical benefits offered by the awardee as it relates to performance and the different approach that they provided. So there was value there. Just like if you're quoting some jobs to get done around the house. If you see an extra added value to something you may say hey, because of this, that they're going to give me this, I think that it's you know, worth a bit more of that price.
CR: I think I think that's important also. You touched on a key point there because sometimes the disparity in pricing uh, can be attributed to contractors having the latitude or ability to propose creative solutions in performance-based contracting. You know an offeror might have one approach and another offeror might have another one, and it doesn't necessarily equate to an apples to apples comparison, with regard to pricing. I think the challenge sometimes though, too, is if we, we want to make sure that the disparity in pricing isn't the result of confusing or vague requirements. Would you agree?
TN: Yes, absolutely and that's where all these layers of analysis are important and then that falls back onto the agency to ensure that the requirements are very clear and that we are making an apples to apples comparison when we are looking at the prices.
CR: Very good. So, Den-el, in addition to using competition as a way of determining a fair and reasonable price there's other techniques that are allowable in the FAR. Ahh, so what are some of the other techniques that you have used for determining fair and reasonable price?
Den-el Opuszynski (DO): Thanks Chuck. There's definitely several techniques that we could use but, we're not limited to them. Of course, just touched upon was the comparison of proposed prices from responsible offerors. One that I like to use a lot is the proposed prices compared to historical prices paid on previous or current contracts. Whether that was contracts awarded by the government or other than the government. We also have our independent government cost estimate and we also have published price lists like our best in class contracts like NASA SEWP and GSA. Their prices on their schedules have already been established to be determined fair and reasonable. However, as the Government, we are encouraged and sometimes mandated to seek additional discounts in addition to the discounts already applied for those fair and reasonable contract prices.
CR: Very good. I know, in my own personal experience I always like to get multiple quotes when I'm doing a home improvement project. And uh, you know I always want to pay a reasonable price for that, that work. But I also want to ensure that the lowest price I received, if I want to go with that one, is realistic. Meaning that the contractor is going to be able to do the job for what they say they're going to do it for and not walk off and leave me with a uh an unfinished project. So, Tara, what are your thoughts on the differences between price reasonableness and price realism?
TN: So, the major, major difference is that when you're thinking about reasonableness, you're really looking to see if the price is too high. You know, as you mentioned earlier, we are stewards of taxpayer dollars. So, this is very important to ensure that we're not paying an unreasonably high price for a product we could get at a, at a more fair or more reasonable price. When you're talking about price realism you want to ensure that the price you're looking at, the prices being too low. And the risk there, which is exactly what you just mentioned. You know you're getting a range of prices. I think a lot of us, when we're looking at something for our house, we think I don't really want the highest, but I don't think I want the lowest either. Because saving money doesn't necessarily mean I'm going to have a good product come out of that. So, there's a risk. Same thing in Government contracts. There's going to be a risk that you might have some poor performance and that's why there is a low price. Um, part of that could be that the rates that they're offering to employees are too low. And that they're not going to be to attract better performing employees and therefore, the contract could kind of fall apart and they may not be able to meet the requirements of that contract. Desiree, did you have anything to add there?
DD: Uh, sure Tara, I think, um, uh uh, you know, a big difference like Tara was saying is you know, price reasonableness, we're looking at whether price is too high, realism is whether it's too low, and um another important difference is we always have to do uh, uh, a fair and reasonableness check per the FAR, but in a firm fixed price environment in order to do a realism check we need to put contractors on notice. Normally contractors bear the risk, of their prices proposed, so if the government um, undertakes a realism analysis in this environment then it needs to put that it's going to do so notice in the solicitation. So, it's important to always look at the solicitation um, to see whether the government is going to do a price realism analysis. If not, if the notice isn't in the solicitation then um, we're just looking at reasonableness and that doesn't include a check to see if the prices are too low.
CR: And when the government does put that language in the solicitation that they're going to do price realism, could essentially lead to discussions and that discussion with the offeror might be that we don't think your price is realistic so to speak. I guess if you're a vendor and you get that kind of discussion or question, do you have to be careful that you don't react or overreact by getting yourself out of the competitive range?
DD: Yeah, I mean I, I, think that's um something we definitely have to be attuned to and to take seriously, that, that if, the government has concerns that your, your, price or your rates are too low, it's certainly something that needs to be taken seriously and needs to be addressed to give the government confidence that you you, can do the work. Usually that can be either justifying how, you, you know, you can meet the requirements um, at the prices. Sometimes um, increasing the price itself. So yes, but it, eh, I think it needs to be taken very seriously.
CR: Right, and I, I think we touched on it earlier, Den-el did, when she talked about catalog pricing. But, as you know, under category management strategic sourcing the governments encouraged to use best in class contracts which normally have catalog pricing. So eh, some of those catalogs include uh NASA SEWP, GSA schedules, etc. And if a vendor proposes against one of those contracts and matches their list price can you automatically determine that to be a fair and reasonable price, Matt?
MN: Catalog and list pricing is certainly useful as a tool, for determining fair and reasonable price, but, the FAR eh, encourages and at times requires that we receive discounts from a catalog or list pricing. So, catalog or list pricing is a good baseline to look after but, we really need to seek further discounts and we have to use reasonable comparison. Saying is this list price really what the government should be paying? In many cases a list price is, a price that you would pay for getting a single unit of a piece of software, piece of hardware. If we're buying hundreds or thousands of that software or hardware, is, is it really reasonable to pay the list price for that, or should we be getting a quantity discount or even further discounts you know using our government spend?
CR: That's interesting Matt, I appreciate that. I know FAR Part 13 also has other reasonable basis-es that can be used for determining fair and reasonable price and one of my favorites is, that you could use any other reasonable basis to do so. That's, I think, the last technique listed and uh, Matt, I know you've had some creative contracts recently where you've had to utilize some of these other reasonable approaches. Can you elaborate on what some of those might be?
MN: Yeah, there's a lot of other tools we can apply in concert to the sections in FAR Part 15 for determining fair and reasonable price, and these are just supplemental. They help us understand the fair and reasonable pricing better and there's just really simple tools that we can use and just apply to any particular range of quotes we received from a competitive proposal. What's important when we use these tools is that, and Desiree and Tara discussed it earlier, is we just want to make sure that we're comparing prices that we've received competitively against each other. And the methods that we use are reasonable as a prudent buyer would eh, would utilize. Some of the tools I like to use when comparing quotes that I've received competitively are a simple mean and standard deviation. You know those are simple functions we can use in Excel and you know, you get a grouping of quotes, it compares all of those quotes against each other. And what I like about a mean and the standard deviation, is it really kind of gives you a market center and lets you know how much a variance you have between the quotes that you've received. So, you get a good idea of where the marketplace is. And you know with any individual quote, if they're one standard deviation away you say, oh well, they're right in line with uh the marketplace, or if they are two or more standard deviations away, you say hey, this might be worth looking into a little bit more 'cause this is kind of diverging away from the marketplace. One tool that we've used in recent history and has actually been put to the test through GAO is the Tukey test. It's the Tukey test for outliers, very similar to mean and standard deviation. It kind of aggregates all the quotes and compares them against each other. And the Tukey test basically sets the interquartile range for the quotes you've received, and then you add 1.5 of the interquartile range to the first quartile, and 1.5 to the interquartile range to the third quartile, and that gives you a range. And, anything outside of that range would be an outlier. So, that kind of sets the basis of what quote is kind of within the range of the marketplace. What I like about the Tukey test is we can actually create a box and whisker plot off of that. And that's a good way, just kind of for a contracting officer's reference to visualize the data, you can really see where the meat of the quotes are and where each quote falls within there. And it's a good way to understand the marketplace. But with these tools it's very situational you have to use critical thinking when you're applying these uh tools. These tools are really great for when you receive a good amount of quotes and you can kind of set a good sample size. Frequently we have competitive acquisitions that we put out that we only receive one, uh two, or three quotes. Obviously, the tools that I just discussed, the statistical tools aren't going to be as useful because the sample size is so small. So, where do we go after that? Like, I would stress over and over again you know, just apply critical thinking, um we talked about it a little bit before. We talk about looking at the technical proposals. Really getting into the weeds on the technical proposals can enlighten the pricing that you've received and it can help you rationalize your fair and reasonable determination. A good example might be redundancy. Frequently in best value uh, solicitations we have risk mitigation as a technical factor and maybe one offeror says, hey, I have a redundant site or I have redundant servers, and that mitigates risk. That might be one of the price drivers that makes differences between competitive offerors. So getting into the different elements and getting into the details kind of helps you uh, draft out your fair and reasonable price determination. Other things you can do is just do additional research with the quotes you've received. At the TAC we have a large repertoire of previous contracts we can look to see if there's anything similar. You can always look on the Internet. You can always look on GSA. Doing additional research can provide critical insights onto what might drive a fair and reasonable price. And what I would encourage every contract professional to do is to challenge when you're in doubt. The contracting officer always has the right to request additional cost and pricing data. This doesn't change the offerors bid but it can help us determine fair and reasonable price by giving us that extra information we require to better understand the offeror's proposal and better determine a fair and reasonable price. I mean, uh we discussed earlier cost realism and what happens if we get a low bid. This is always a concern I have when I'm doing a best value - is what if I have a low bid and what I'm really afraid of is what if the contractor misunderstood my requirement. So requesting an additional clarification or additional cost and price data could help flesh that out. Or if need be, I could really enter discussions and make sure that a contractor truly understands my requirements and they're not pricing in too much of things that I don't need, or they're not underestimating what I really do need. You know, this is where the government has its biggest risks, I believe, is you know, just eh an incongruity with the understanding of what came out with our solicitation and what the offeror priced in their bid. So, gathering that uh extra information is really critical, not only to fair and reasonable pricing, but to your contract's overall success.
CR: That makes perfect sense and also the vendors you know if they have questions during that phase, it's important for them if they're basing their pricing on uh assumptions to make sure that they're known as well.
MN: Yes, yes, um that's another important thing to look at, and potentially follow up on is, the vendor may have cost assumptions in their price proposal, and you want to look at those very carefully. And like I said, make sure there's just clear understanding between the offerors and the government about uh what may or may not be required.
CR: Well, I think that gives a good illustration of what goes on behind the scenes um to determine a fair and reasonable price, and I think we ah, had a very good discussion today and provided a good summary of what it takes uh, for the government to do that determination to protect the taxpayer and make sure that ah, you know we are in fact documenting and paying that fair and reasonable price. I want to thank our panel members today Desiree, Tara, Den-el, and Matt for the great conversation and also thanks to our listeners out there. Ah, we really appreciate ah the the, feedback as well. So, please continue to, uh, provide feedback to me at charles.ross@va.gov. And remember if you're passionate about government acquisition or a continuous learner, enjoy fruitful dialogue, then you're in the right place. Keep tuning into TAC Talks.
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CR: As always, we must remind you the Department of Veteran's Affairs does not endorse or officially sanction any entities that may be discussed in this podcast, nor any media, products, or services that they may be providing. We thank you for listening to this episode of TAC Talks and hope you found it helpful as well as enjoyable. You may direct any questions or feedback to me, Chuck Ross at charles.ross@va.gov. And remember, if you are passionate about government acquisition, are a continuous learner and enjoy fruitful dialogue then keep tuning into TAC Talks.
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