Are You Getting A Fair Price With The Government?

Negotiation is much like a game of tug-of-war, with both parties pushing and pulling until a reasonable price is agreed upon.

What Exactly Is a Reasonable Price?

For a business owner, a reasonable price might mean maximizing profit margins to the fullest extent possible. However, the government has a different definition of what constitutes a "reasonable price."

A contract occurs when both parties agree to the terms

Price Fair & Reasonable

Before the government awards a contract, they must ensure that the price they are about to pay is both fair and reasonable. This is not just a formality—it’s a key responsibility in ensuring that taxpayer money is spent wisely. When the government contracts with a company for a project worth millions of dollars, they need to justify that expenditure to the American people.

To do this, they create a document known as a "Price Fair and Reasonable" (PFR) determination. This document is a crucial part of the procurement process, where Contracting Officers (COs) assess whether the proposed price is appropriate for the government to pay. The PFR ensures that the government isn’t overpaying or underpaying, maintaining fairness and integrity in the use of public funds.

For contractors, understanding this process is vital because a well-supported PFR can significantly influence your chances of winning a contract. If a CO cannot determine that your price is fair and reasonable, your proposal may be rejected or require further negotiation.

How Does the Government Determine a Fair Price?

The government uses several methods to determine what a fair price is:

1. Government Estimate: They develop an estimate based on current market conditions.

2. Competition: They compare your price to those in the competitive market.

3. Previous Purchases: They review prices paid in past purchases.

4. Previous Experience: They consider their experience with similar purchases.

Detailed Proposals Matter

As a contractor, you should provide thorough documentation to justify your pricing. This includes offering a cost breakdown. However, it’s crucial not to give more information than necessary—your price is your price. If the government wants additional information, they have the right to request it.

This approach is somewhat akin to dealing with law enforcement: it’s not your responsibility to assist them with their investigation, just as it’s not your responsibility to ensure that the price is fair and reasonable in their eyes.

For example, suppose a government agency is purchasing 500 laptops, and you propose a price of $620 per laptop. To support this, you could provide a cost breakdown showing your expenses. This is where the government will scrutinize your proposal to see if you've ‘padded’ your costs. Avoid adding unnecessary costs or ‘fluff’—if your product is premium, charge a premium price, but don’t try to sneak in extra costs thinking you’ll get away with it.

The Biggest Takeaway

The importance of detailed PFR documentation cannot be overstated. By including a thorough justification of costs, market comparisons, and references to past contracts, contractors can help COs quickly and confidently determine that their price is fair and reasonable. This not only speeds up the procurement process but also enhances your credibility and chances of securing the contract.

Understanding and effectively navigating the PFR process is, therefore, a key aspect of successful government contracting.