What Is the Purpose of Price Reasonableness?

Price and Cost

The discussion below is a study determining price reasonableness and what the basic difference actually is between price and cost analysis. There shall also be an overview of how each is utilized today. In regards to sorting out this subject, the 2009 work by Paula B. Compton known as Federal Acquisition shall be looked at.

Purpose for Determining Price Reasonableness

There has been some struggle in various agencies concerning fair and reasonable price determinations in their energy savings performance contracts (ESPCs) predominantly since this financing vehicle is rather rare and new in the federal sector. Every branch of the government has skill in executing appropriations- funded contracts, and there are several effectual techniques to guarantee price reasonableness in these contracts. However, the execution of an ESPC basically varies from the procedures utilized in more conventional methods of contracting (Shonder and Atkin, 2005). Specifically, the techniques of determining price reasonableness most common to the federal contracting officers are usually inapplicable to ESPCs. The majority of the federal ESPC projects are executed as delivery orders under one of the energy or defense department's indefinite-quantity, indefinite-delivery (IDIQ) ESPCs in the absence of a real price competition. Hence at the contractor selection phase, competition cannot be utilized to assure price reasonableness. ESPC projects are comparable to design-build contracts, only that the energy services company (ESCO) basically comes up with a firm-fixed price plan at a point when the ESCO-developed design is just around 30% from completion. Missing total cost information, it is not easy for the government to conduct traditional cost evaluation or come up with an independent cost approximation to relate with the ESCO's plan

Federal Acquisition: Key Issues and Guidance

This is an important guide to comprehension and working in the complicated world of federal government contracting. It provides short but detailed explanations of the main stages and important duties in the contracting procedure. Put down in plain and easy style to comprehend, this resource offers the best basis for developing a comprehensive comprehension of federal contracting (Compton, 2009). Federal agencies are obliged to treat their suppliers in a just manner in addition to paying reasonable and just prices for the supplies. Paula Compton concentrates on the very difficult sections of federal contracting, emphasizing on the shortages mentioned frequently by the Government Accountability Office (GAO) and Inspector General (IG) reports and audits, for instance (Compton, 2009):

Insufficient cost or price analysis

Not conducting market research

Inadequate work reports

Insufficient independent government cost approximations

Breach of the bona fide needs rule

A good cost analysis can assist agencies in making the correct determination with respect to price reasonableness (Compton, 2009). Hence, when it all comes down to it, the aim for determining price reasonableness is to make sure that the federal government pays just and reasonable prices.

Difference between Price and Cost Analysis and Use

The Federal Acquisition Regulations System (FARWs) is developed for the publication and codification of standardized rules and procedures for possession by every government agency. The Federal Acquisition Regulations System comprises of the Federal Acquisition Regulation (FAR), which is the major document, and agency acquisition rules that execute the FAR. The FAR system, however, does not contain internal agency guidance of the kind illustrated in 1.301 (a) (2).

The dream for the Federal Acquisition System is to provide the finest value service or product to the customer, at the same time upholding the trust of the public in accomplishing public policy aims (Federal Acquisition Regulation). Those taking part in the acquisition procedure are meant to observe teamwork and have empowerment to make decisions within their region of accountability.

(b) The Federal Acquisition System shall (Federal Acquisition Regulation):

(1) Please the client in terms of price, quality and punctuality of the delivered service or product, for instance

(i) Exploit the utilization of commercial services and products

(ii) Employing suppliers who possess a history of flourishing past performance or who display a current greater performance ability

(iii) Promotion of competition

(2) Reduce organizational working cost.

(3) Carry out business with integrity, equality and openness.

(4) Accomplish public policy aims.

(c) The Acquisition Team comprises of every participant in government acquisition excluding the representatives of supply, procurement and technical societies and the clients and suppliers associated with them.

(d) The duty of every member of the acquisition team is to implement individual initiative and positive business judgment in offering the finest value goods or services to satisfy the customer's needs. In implementing initiatives, Government members of the acquisition team might presume certain practice, approach, process or policy is in the interest of the government and is not spoken about in the FAR, nor forbidden by law, Executive order or further regulation, that the practice, approach, process or policy is an allowable employment of authority (Federal Acquisition Regulation).

The typical procedure followed in a competitive condition and in conditions where the items being acquired are vended in the commercial marketplace to the public is "price analysis." This is an assessment of the seller's price relative to the prices being provided by other sellers and the price being by the public for similar items (FTA- Third Party Procurement). The vital features that must present so as to make a "price analysis" are:

The item must be a "commercial product." Price analysis would not be appropriate for development or research items, or for one-of-kind items which possess no comparison basis.

Competing items do not essentially have to be similar to the item being provided, but the item's abilities and their respective cost variations taking into account those differing abilities should be comparable. Such contrasts allow one to make value judgments that a certain item's performance abilities merit a lower or higher cost than a competing item.

A "cost analysis" will be needed in cases where a price analysis cannot be conducted. It comprises the evaluation of the separate cost elements and the suggested profit of an offeror's price suggestion. A cost analysis is suitable in the following situations (FTA-Third Party Procurement):