10.6.1 The competitive process is the normal way to establish best value and price. However, it may be set aside and price established by other means.
10.6.2 The pricing of a requirement depends on how accurately it is defined. To demand an unduly firm price, in a situation where costs cannot be known accurately in advance, is to invite excess profit or loss to the contractor. Correspondingly, an unduly flexible price, for a requirement that may be defined accurately, removes some of the advantages of competition and could encourage inefficiency in contractors at government expense. It is equally important to good contract pricing:
• that the requirements definition be as complete as circumstances permit;
• that the price basis chosen be appropriate to that level of completeness; and
• that a bid price not consistent with historical norms or the majority of the bids received, be verified with the bidder prior to accepting that bid.
10.6.3 The following methods all accommodate competition:
• fixed lump sum,
• target price, ceiling price and incentive fee formula,
• target price and incentive fee formula without ceiling price, and
10.6.4 If it is other than a fixed lump sum, the price should clearly state whether a ceiling price is intended. Where applicable, the contract should state the limit beyond which the contractor must not spend without prior approval through a contract amendment. Ambiguity about whether a ceiling or a limitation of expenditure applies is a frequent cause of dispute.
10.6.5 If defining the requirement is so difficult that competition would not be meaningful, it may be necessary to use cost-plus-a-fixed-fee or cost-plus-a-percentage-of-cost as a basis of price. The latter should be avoided if at all possible and negotiation should continue until the contracting authority is sure that a satisfactory basis for contracting has been achieved.
10.6.6 When negotiating with more than one firm, care should be taken that all are treated fairly and impartially. The negotiations should not become an auction of the contract, as firms progressively improve their proposals in the light of information about the position of other firms. The confidentiality of each firm's negotiating position is to be assured.
10.6.7 Occasionally, a contract may be awarded with the price to be negotiated later when certain requisite information becomes available. The information may comprise important elements of the requirements definition that cannot be completed in time, or the cost of the first part of the order is needed as a basis for negotiating a firm price for the balance. This form of contract should be considered as a substitute for a cost-plus-fixed-fee contract when there is a definite prospect that the price basis can be improved as the work proceeds.
10.6.8 The competitive process is usually a reliable method because a contractor will include in the bid elements representing costs, overhead, profit and contingencies. However, in some situations such as unstable market conditions, one or more elements may be subject to such extreme fluctuations in price that neither buyer nor seller would be confident in accepting a fixed price over an extended period of time. While some commodities are subject to continuing price fluctuations, contracting specialists usually know what these commodities are and have developed standard techniques to mitigate the risks.
10.6.9 If the price of normally stable commodities and services begin to fluctuate, the contracting authority should try to reduce the risk while minimizing the erosion of fixed prices by:
1. postponing the procurement;
2. using substitute materiel;
3. giving contractors advance information on requirements in order to benefit from their ability to control costs by planning and making full use of the commodity futures market in appropriate circumstances;
4. reducing the period of term contracts, or the quantities ordered on production contracts;
5. increasing production rates to compress the duration of contracts;
6. reducing the administrative time allowed in the procurement process (solicitation, award decision, issuance of contract and authority to commence work);
7. procuring the unstable element separately (in the construction industry this technique is known as pre-tendering.); and
8. isolating the unstable element and providing for price adjustment according to a reliable, predetermined formula such as an established economic index.
10.6.10 Multi year/phase contracts. All contracts should specify the rate(s) of payment or unit price(s) for the entire period and/or quantity required, including all phases and specified option periods or quantities. When this is not possible, as with some multi-phase, multi-year or renewable (option year) contracts, payments for each year or phase should be based on a pre-agreed rate or formula that is spelled out in the "terms of payment". In addition, measures should be included to ensure the contractor performs in accordance with the contract and to avoid disputes. Appropriate increases for time periods or quantities that cannot be established when the contract is signed should be defined in the terms of payment using a rate or formula that may depend on data that can be established only through audits, rate negotiations or limited escalation clauses based on appropriate indices.
10.6.11 Federal taxes. Contracts and requests for bids or proposals should require the bidder or contractor to include an allowance for all applicable taxes, permits and fees. It may also be wise to include a provision to cover tax rebates (i.e., where taxes, allowed in the price, were not paid, owing to the grant of a tax rebate).
10.6.12 The request for bids or proposals should provide for tax increases or decreases arising from changes in the appropriate legislation that are announced after a bid has been submitted. This will allow changes to the cost elements to be reflected in the actual contract. Tax increases or decreases which are announced and put into effect after the contract is awarded may be handled by an amendment to the contract.
10.6.13 Provincial and municipal taxes and fees. Agreements have been reached between the federal government and several provincial governments to implement a reciprocal taxation program. The Comptrollership volume of the Treasury Board Manual describes the relevant administrative procedures.
10.6.14 Foreign taxes. The circumstances surrounding the payment of foreign taxes are variable and complicated. Whenever this possibility arises, contracting authorities should seek the advice of the Department of Justice before a contract is signed in order to avoid difficulties later. Bidding documents, requests for proposal sand contracts should require the tenderer or contractor to include in the price an allowance for all applicable taxes, permits and fees.
10.6.15 Where applicable, bidders should make provision for appropriate travel and living expenses related to the proposed contract. These travel and living expenses should follow the contractor's established policy. However, as stated in article 4.2, Related requirements, under no circumstances may the amounts paid exceed the maximum permitted in the Treasury Board Travel Policy. Travel and living expenses are part of the total cost of the contract.
10.6.16 Contracting authorities shall not structure a procurement, select a valuation method, or divide procurement requirements in order to avoid the obligations of the North American Free Trade Agreement, the World Trade Organization - Agreement on Government Procurement and the Agreement on Internal Trade.
10.6.17 In determining the value of a contract under the North American Free Trade Agreement, the World Trade Organization - Agreement on Government Procurement and the Agreement on Internal Trade, the valuation shall take into account all forms of remuneration, including premiums, fees, commissions, taxes and interest receivable.
10.6.18 Under the North American Free Trade Agreement and the World Trade Organization - Agreement on Government Procurement, if an individual requirement for a procurement results in the award of more than one contract or a contract awarded in separate parts, the basis of valuation shall be either:
1. the actual value of similar recurring contracts concluded over the previous fiscal year or 12 months adjusted, where possible, for anticipated changes in quantity and value over the subsequent 12 months; or
2. the estimated value of the recurring contracts in the fiscal year or 12 months subsequent to the initial contract.
10.6.19 Under NAFTA and WTO-AGP, in cases of contracts for lease, rental or hire purchase of products or services, or in the case of contracts that do not specify a total price, the basis for valuation shall be:
1. in the case of fixed-term contracts, where their term is 12 months or less, the total contract value for their duration, or, where their term exceeds 12 months, their total value including the estimated residual value; and
2. in the case of contracts for an indefinite period, the monthly instalment multiplied by 48.
10.6.20 The value of the requisition including the Goods and Services Tax is to be used when determining whether or not a procurement is subject to a national or international trade agreement. For purposes of determining coverage, a procurement is considered to be one for goods, services, or construction, based on which represents more than 50 per cent of the estimated value of the requisition.