Pilot Program to Accelerate Contracting and Pricing Processes

Section 890 of the 2019 NDAA (National Defense Authorization Act) authorized the Defense Department to conduct a pilot program with contracts in excess of $50 million (excluding those that are part of a major defense acquisition program) by

• Basing price reasonableness determinations on actual cost and pricing data for purchases of the same or similar products for the DoD and
• Reducing the cost and pricing data to be submitted.

The Defense Department sees this as an opportunity in a pilot setting to assess the impact of the efficiencies achieved under this pilot program including reducing contractor proposal costs and the time required to award contracts greater than $50 million.

As a condition of participating in this pilot program, the Contractor shall submit verifiable data documenting any savings (time and money) achieved as a result of the pilot program within three months after award.

The Defense Department is not waiting around for its FAR supplement (DFARS) to be amended through the regulatory process. It has issued a class deviation making the authorization effective immediately. Participation into the program must be approved by the Principal Director, Defense Pricing and Contracting.

Contracting officers using this authority to negotiate contracts are still required to determine that the costs are fair and reasonable for the Government. Now they can find means other than requiring cost or pricing data, to assist in making that determination.

This waiver applies, of course, to negotiated contracts and has no bearing on competitive awards or commercial item procurement. No word on how long the pilot program is to last.

Be Prepared When You Go In To Negotiations With The Government

No one has a good count on the number of Government contractors. By one estimate, over 50,000 companies contract with the Department of Defense and there are many Governmental agencies besides DoD. Whatever the number, there are a lot of Government contractors but relatively few of them have had to go through the process of actually negotiating a contract price under FAR Part 15 procedures, Contracting by Negotiations.

Negotiating a fair and reasonable price is a complex process involving consideration of many factors including

• actual costs and completion estimates
• the amount of profit or fee in relation to the total cost, the complexity of the work, quality, efficiency, and ingenuity of the contractor's performance and the technical and financial risk assumed, and
• the competitiveness of the end price.

Costs constitute an important factor in the contract price negotiation and the discussion between the contractor and the contracting officer include the objective of arriving at a definitive agreement, to the maximum extent possible, on the amount of costs to be considered in the price.

Definitive agreement on each element of cost however may not always be possible because of honest differences of opinion or other considerations between the negotiating parties. As a result, negotiation involves a give and take proposition and the contracting officer usually cannot negotiate a price which includes cost considerations exactly in accordance with his/her "pre-negotiation objective" (PNO). Contracting officers develop their PNOs based on all available data and information including the contractor's certified cost proposal, the results of technical evaluations, and either audits or cost analyses performed by DCMA  (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency).

In some instances, a total end price may be negotiated without specific monetary resolution of all of the individual cost elements or other pricing factors involved. When this happens, the Government's "view" of negotiations can differ markedly from the contractor's "view".

Sometimes, the profit rate the Government is willing to pay is a hindrance to a speedy end to negotiating sessions. Cost or pricing data is typically based on factual matters. For example, a contractor solicits two quotes for a proposed material item and selects the lower of the two. But profit considerations largely rely on judgment. How does one measure "complexity of work", "ingenuity of contractor's performance", or "technical risk".

A Single Offer Can Be Considered "Adequate Price Competition" in Some Cases

Under the Federal Acquisition Regulations (FAR), requiring offerors to furnish certified cost or pricing data is generally considered the least desirable method to contract. In fact, it is usually a last resort after competition, commercial item, or prices based on law or regulation techniques fail. Concerning competition, contracting officers are prohibited from requiring certified cost or pricing data when prices agreed upon are based on adequate price competition.

So, what is "adequate price competition"?

There are two standards in FAR for adequate price competition, one fairly obvious and the other, not so intuitive.

First the common-sense standard. A price is based on adequate price competition if two or more responsible offerors, competing independently, submit priced offers that satisfy the Government's expressed requirement and if award will be made to the offeror whose proposal represents the best value where price is a substantial factor in source selection and there is no finding that the price of the otherwise successful offer is unreasonable (see FAR 15.403-1(c)(1)(ii)).

The foregoing standard is straight forward - two or more responsible offerors and no shenanigans.

The second standard says that if you can't get two bidders, maybe one will do - but we'll still call it adequate price competition. The standard reads: A price is based on adequate price competition if there was a reasonable expectation, based on market research or other assessment, that two or more responsible offerors, competing independently, would submit priced offers in response to the solicitation's expressed requirement, even though only one offer is received from a responsible offeror and if based on the offer received, the contracting officer can reasonable conclude that the offer was submitted with the expectation of competition. For example, circumstances indicate that the offeror believed that at least one other offeror was capable of submitting a meaningful offer, and the offeror had no reason to believe that other potential offerors did not intend to submit an offer. Additionally, there must be a determination that the price is otherwise reasonable and the determination must be approved at a level above the contracting officer (see FAR 15.403-1(c)(1)(iii)).

Here are some rather obvious questions.

• How is the contracting officer going to reasonably conclude that the one offer was submitted with the expectation that other offers would be submitted? What kind of documentation is available to support this determination?
• How is the contracting officer going to document that the one offeror had no reason to believe that other potential offerors did not intend to submit offers?
• How is the contracting officer going to document that the one offeror believed that at least one other offeror was capable of submitting a meaningful offer?
• How is the contracting officer going to document that the one offer was otherwise reasonable?

Prime contractors should be thinking about these questions as they pertain to their subcontracting policies, procedures, and practices. Many prime contractors have based their own subcontracting methods on what FAR requires of the Government contracting.