Commercial Items - How the Government Determines Price Reasonableness

The DoD Director of Defense Pricing issued guidance (actually a reminder of existing policy) to contracting officers and those empowered to bind the Government in contracting matters, pertaining to (i) commercial items and (ii) the determination of reasonableness of price for commercial items.

DoD spent $60 billion on commercial items last year. The concept behind the commercial items pricing exception to TINA (the Truth in Negotiations Act), is that the item, its value, and its price, are results of supply and demand in a commercial marketplace where buyers and sellers have other commercial alternatives which compete with the commercial item(s) being purchased.

At the end of the day, contracting officers have to ask themselves whether they are paying a fair and reasonable price. There are several ways to approach that question. When acquiring commercial items, the preference is to use market-based pricing when determining a fair and reasonable price. If market based pricing is not available however, FAR Part 12 provides the flexibility to use a variety of pricing techniques to include, but not limited to cost/price analyses, parametric estimating, should-cost techniques and/or analogous pricing of similar items in determining whether the Government is paying a fair and reasonable price.

If market based pricing is not available, a Contracting Officer may use cost-based analysis.  That doesn't mean the contracting officer should require certified cost or pricing data. FAR 15.403 recognizes that there are times when other than certified cost and/or pricing data is needed to determine a fair and reasonable price. "Other than certified cost or pricing data" takes many forms and in certain instances, the only difference between "certified cost and pricing data" and "other than certified cost and pricing data" can be the fact that the data is certified.

The primary purpose of obtaining "other than certified cost or pricing data" is to support the justification that the Government is paying a fair and reasonable price for the item being purchased. The FAR preference is for contracting officers to seek information through market research and other Governmental sources. In cases where items have minimal or no sales history to non-governmental entities, market research by the contracting officer is difficult and often fruitless. In these instances, the contractor should be asked to provide information on why the price it wishes to pay is fair and reasonable. The statute and the regulations provide that contracting officers shall require "appropriate information on the prices at which the same or similar items have been previously sold that is adequate for evaluating the reasonableness of the price.

The standard used by the contracting officer to determine price reasonableness is whether a reasonable businessman or business woman reviewing the data would conclude that it is sufficient to demonstrate that the taxpayers are paying a fair and reasonable price for the item.

You can read the full memorandum here.