Thursday, September 27, 2012

Prenegotiation Objectives

"Prenegotiation objectives" establishes the Government's initial negotiation position. These objectives assist in the contracting officer's determination of fair and reasonable prices. They take into account the results of the contracting officer's analysis of the offeror's proposal including all pertinent information (e.g. field pricing assistance, audit reports, and technical evaluations, fact-finding results, the independent Government cost estimate if there is one, and price histories). They also include profit objectives when cost analysis is required.

FAR 15.406-1 requires the contracting officer to establish prenegotiation objectives before the negotiation of any pricing action but allows discretion to the extent that the scope and depth of the analysis supporting the objectives be commensurate with the dollar value, importance, and complexity of the pricing action. These prenegotiation objectives are always in writing and in most cases, approved by a supervisor or manager before negotiations commence. The written memorandum is often referred to as a POM (Prenegotiation Objective Memorandum).

Most Governmental procuring agencies have specific instructions or manuals guiding the preparation of the POM. Most of these contain detailed instructions that go beyond the generalities of FAR 15.406 but are entirely consistent with those basic requirements.

POMs are never shared with contractors before negotiations and rarely afterwards. In some cases, contractors are able to acquire them in connection with appeals or litigation.

POMs include both factual matters and judgmental factors. Generally speaking, the more judgment involved, the more flexible the negotiating position becomes. Price/cost analysis reports and audit reports are usually pretty factual. Labor rates and material costs are usually based on contractor history so the only thing to discuss in negotiation is escalation percentages. Quantities (e.g. hours per assembly) are sometimes based on history but could include judgmental aspects as well (e.g. complexity factors).

Contractors also develop prenegotiation strategies, though for small companies, there is not a lot of formality to it. Contractors have the advantage of having prepared the proposal and will usually have a better grasp of the inherent facts and judgments than would the Government. Contractors must ensure that they do not run afoul of the Truth in Negotiations Act (TINA) when negotiating contracts. Penalties for violating TINA can be severe.

When you are sitting at the table negotiating a contract, you should be alert for positions proffered by contracting officers that are not factual or realistic. While these positions may be part of his/her negotiation objective, they may not always be practical, viable, reasonable, or realistic. In a recent negotiation, it became obvious to us that the Government had made a significant error in calculating the hourly rate for one of the proposed labor categories. Bringing that fact up to the negotiator, allowed him to revise his negotiation strategy and ultimately it expedited the negotiation process.

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