1. Contracting Officer Podcast Slides Knowledge & Insights From Contracting Officers 1

2. Episode 071 What is Price Reasonableness? Original Air Date: 20 March 2016 Hosts: Kevin Jans & Paul Schauer 2

3. Formatting notes Hyperlinks: Blue font indicates hyperlinks – presentation must be in ‘Slide Show’ mode to activate the linkBlue Red bold font indicates a point of emphasis Green bold font indicates CO’s personal comment or perspective 3

4. Introduction The purpose of this podcast is to explain Price Reasonableness Price always matters Whether awarding through competition or sole source, price matters There are three ways price is assessed in RFPs. Is it: 1. Reasonable? 2. Realistic? 3. Complete? 4

5. When does Price Reasonableness happen? Acquisition Time Zones (from Podcast Episode 003)Episode 003 Requirements Zone Market Research Zone RFP Zone Source Selection Zone (or sole source) Execution Zones: Kick Off, Transition (Ramp Up), Performance, Re-compete 5

6. Why is Price Reasonableness important? Price matters. Always. What is the ”right” price? Is this too much, too little? Depends on whom you ask This can be contentious: Government says: “We don’t think this is reasonable.” Industry says: “How do you know?” The fight is on! 6

7. What is ‘cost or price analysis?’ FAR 4 - Administrative Matters, requires it in the contract file: 4.803(a)(19)4.803(a)(19) FAR 16 - Contract Types, says it is a factor in choosing contract type: 16.104(b) and (c)16.104(b) and (c) FAR 15 - Contract by Negotiations, says it may (or shall) be used to determine to determine reasonable price: 15.40215.402 However, it is not clearly defined (at least not in FAR Part 2)FAR Part 2 It is not black and white (ironically, since numbers are so finite) It is more art than science: ”I’ll know it when I see it” 7

8. What is ‘cost or price analysis?’ The goal is to determine the ‘right’ price Yes, that is subjective “Every decision divides,” so no matter what, someone thinks they paid too much or they sold for too little… If you get to a deal, both sides can “live with” the price as “fair” The good news: There are lots of ways to do it. The goal is to make sure the price is ‘right’ 8

9. FAR 31.201-3FAR 31.201-3: Determining “reasonableness” (a) A cost 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. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor (ouch!) If an initial review of the facts results in a challenge of a specific cost by the CO or COR, the burden of proof shall be upon the contractor to establish that such cost is reasonable 9

10. FAR 31.201-3: Determining “reasonableness” (b) What is reasonable depends upon a variety of considerations and circumstances, including - (1) the type of cost generally recognized as ordinary and necessary for the company or performance (desks, offices, employees, materials, whatever) (2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations (health insurance, overhead, quality control, proposal costs) There are more, but let’s keep it tight. 10

11. Where else does this apply? Proposal Evaluation: FAR 8 (GSA) mentions itFAR 8 FAR 13 (SAP) mentions it (See Podcast Episode 051 on SAP)FAR 13SAP FAR 15 (Contract by Negotiations) mentions it Bottom line: If it’s competed, it’s 99% reasonable 11

12. Where else does this apply? FAR 15.305 -- Proposal Evaluation (1) Cost or price evaluation. Normally, competition establishes price reasonableness. Therefore… comparison of the proposed prices will usually satisfy the requirement to perform a price analysis (and a cost analysis is not needed) However, in limited situations, a cost analysis may be appropriate to establish reasonableness of the otherwise successful offeror’s price. For example, when using cost-reimbursement, cost “realism” kicks in 12

13. Where else does this apply? Proposed costs are realistic … Based on the offeror’s understanding of the work, AND The offeror’s ability to perform the contract. 13

14. Why Should Government Care? Price matters. Always. Reasonableness is a fuzzy term. Don’t hide behind it. Your judgement is what makes it reasonable. Make the case Hint: you can BORROW the knowledge from others (in fact, you should) Reasonableness is in the eye of the beholder: Don't forget market forces, this is capitalism after all. The law of Supply and Demand is real, and impacts price. 14

15. Why Should Government Care? If you're buying something that is in high demand, or limited supply, or of unique capability or quality, EXPECT TO PAY A PREMIUM PRICE You can say "that's not reasonable so I'm not paying it", but vendors don't have to sell it to you if the price isn't reasonable to them too Patriotism only goes so far... The war for talent is a real thing There is a cap on the price and quality 15

16. Why Should Industry Care? Price matters. Profit matters. “Cash is like oxygen, without it, you die.” (Barry Shevlin) Reasonableness is something you need to explain If it’s not reasonable to them, it’s on you to make it so. Sorry, but those are the facts That is the "price" you pay for access to the largest market 16

17. Why Should Industry Care? Be clear. Be explicit. Tell the story of why it’s reasonable. Go to Apple’s website and you immediately see they don’t offer the lowest end Intel processor. They are telling you their story It’s not a price objection, it’s a belief objection. They don’t believe it’s reasonable. Help them believe 17

18. Summary REASONABLENESS IS IN THE EYE OF THE BEHOLDER What if the price is "too low?” This is where "realistic" comes into play Ever heard of the term "loss leader?” A company may make a conscious decision to lose money on a sale for strategic reasons. This gets us into much deeper issues... 18

19. Summary Government Find ways to determine the price reasonable through the examples we gave Use your judgement and ask for specific examples You’ll learn much more (and teach your customers and proposal writers what you expect to see) “I’ll know it when I see it” is a waste of their time (and yours) 19

20. Summary Industry Don’t be offended. Objections are a sign of interest…if they don’t ask for justification it means they don’t want to give you the contract. “Objections are the gateway to the sale” (Gittomer) Tell your story. That’s why the Pricing Volume often has no page limit. Don’t give them numbers they don’t understand They need ‘context’ to determine the price is reasonable Give them ‘content’ 20

21. Contact us We are on LinkedIn, Twitter and FacebookLinkedInTwitterFacebook We also started the Government Contracting Network Group on Facebook. Join us there! Send your topics to paul@Contractingofficerpodcast.compaul@Contractingofficerpodcast.com For Community support, contact Shelley Hall at shelley.hall@skywayacquisition.com shelley.hall@skywayacquisition.com 21