Understanding Price Fair and Reasonable | The Government's Perspective

When the U.S. government engages in procurement, it makes sure that the prices it pays for goods and services are fair and reasonable. This principle is found in FAR 15.404-1 of the Federal Acquisition Regulation (FAR).

The federal government must ensure they pay a reasonable price.

What Does "Price Fair and Reasonable" Mean?

A price is considered fair and reasonable when it is consistent with what someone would pay in the open market under competitive conditions. This ensures that the government, and the taxpayers, get the best value.

Techniques for Proposal Analysis

FAR 15.404-1 specifies the techniques contracting officers can use to analyze proposals and ensure prices are fair and reasonable. These techniques include:

Comparison of Proposed Prices Received in Response to the Solicitation:

Adequate price competition typically establishes a fair and reasonable price. When multiple bids are received, comparing these proposals can help ensure the government is paying a competitive rate. This is by far one of the best methods used. Having multiple proposals gives government agencies an idea of where the market currently is.

1. Comparison to Historical Prices:

Comparison to historical prices paid by the government or others for the same or similar items:

This method is effective for commercial products or services, even those requiring minor modifications.

• Valid Basis for Comparison: The prior price must be valid, considering factors such as the time elapsed since the last purchase, differences in terms and conditions, and market changes.

• Adjustments for Differences: The prior price must be adjusted for any material differences in terms, conditions, quantities, and market factors.

• Expert Technical Advice: Technical experts may be consulted to understand the changes needed and to assist in pricing these changes appropriately.

2. Parametric Estimating Methods:

Using rough yardsticks (e.g., dollars per pound or horsepower) can highlight inconsistencies in pricing that may require further investigation.

3. Comparison with Published Price Lists and Market Prices:

• Published price lists, market prices of commodities, similar indexes, and discount or rebate arrangements provide benchmarks for comparing proposed prices.

4. Comparison with Independent Government Cost Estimates:

• Comparing proposed prices with estimates independently developed by the government helps validate the reasonableness of the proposals. The federal government creates an IGCE (Independent Government Cost Estimate). This IGCE is used to compare proposals that come in and determine if this is fair pricing compared to the government estimate.

5. Market Research Comparisons:

• Prices obtained through thorough market research for the same or similar items. They may reach out to the market and obtain independent quotes to justify the pricing.

6. Analysis of Data Other than Certified Cost or Pricing Data:

• Contracting officers can analyze data provided by the offeror that is not certified cost or pricing data to make informed judgments about price reasonableness.

Ensuring that the government pays a fair and reasonable price is an important responsibility of contracting officers. They use the techniques outlined in FAR 15.404-1 to support their determination. The government must evaluate proposals and make procurement decisions that provide the best value to the taxpayer. Whether through competition, historical comparisons, market research, or other methods, these tools help maintain integrity and efficiency in government contracting.