Tuesday, December 22, 2015

Buying-in is Risky but Not Prohibited by FAR

The term "buying-in" is defined in FAR 3.501-1 as "...submitting an offer below anticipated costs, expecting to increase the contract amount after award (e.g. through unnecessary or excessively priced change orders) or (2) receive follow-on contracts at artificially high prices to recover losses incurred on the buy-in contract.

Although that definition falls under a section entitled "Other Improper Business Practices", FAR does not expressly prohibit buying-in. Rather, FAR instructs contracting officers to take appropriate action to ensure buying-in losses are not subsequently recovered by the contractor through change orders or follow-on contracts subject to cost analysis.

There are two general risks to the Government associated with contractors who are buying-in. First, it is generally felt that the practice decreases competition. Second, buying-in could, and often does result in poor contract performance as contractors try to shave expenses to minimize losses.

Contracting officers are instructed to decrease the Government's risk associated with buying-in. One method is to seek a "price commitment" covering as much of the entire program concerned as is practical. For example, in a multi-year procurement, contract for the requirements for all years, not just the first year while leaving subsequent years open for pricing. To illustrate, the Air Force estimated that it needed 186 cranes. Concerned about a buy-in, notified bidders that quantities in excess of its best estimate of 186 cranes would be procured under a new competitive action. This precluded the winning bidder from the opportunity of receiving follow-on contracts at artificially higher prices.

Buying-in applies only to fixed price contracts. In the case of cost type contracts, the Government will be performing cost realism analyses because it needs realistic estimates of its potential expenditures.

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