About Contract Pricing

Ever have doubts about the pricing you submit on a contract opportunity?  Here are a few items to consider when you’re building your price.

The more you know the mindset of who you’re dealing with on the other end, the better able you are to negotiate the hazards and reach the best possible solution. Your bargaining point? You’re entitled to costs and reasonable profit—it says so in the FAR. But we wouldn’t recommend citing chapter and verse!

Start by understanding that contracting officers are required—yes, “required”—to determine that proposed contract prices are “fair and reasonable.” Sounds good, but what does that really mean? Some COs understand the principle of profit and are willing to negotiate in good faith, give a little, take a little. Others are like that pit bull and are single-mindedly committed to getting the lowest possible price they can, regardless of what it takes to do so.

The FAR doesn’t define ‘fair and reasonable,’ but generally it’s the price a prudent business person would pay for an item or service under like circumstances and competitive market conditions. You can see that by substituting “price” for “cost” in this excerpt from FAR 31.201-3—Determining reasonableness:

(a) A cost (price) is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business…. (Hey, didn’t we just say that?)

To determine what is “fair and reasonable,” COs use several techniques found at FAR 15.404-1 (b) through (g). The techniques are:

■ Price analysis
■ Cost analysis
■ Cost realism analysis
■ Technical analysis
■ Unit prices
■ Unbalanced pricing

Read up on it. There’ll be a pop quiz next week! Bottom line for now is this: You need to know your numbers inside and out, and better be able to justify them if you want to get your asking price or something close to it. Be willing to negotiate. But you need to be willing to walk away, too. You’re not in business to go broke or break even.