a. Relationship Between Adequate Price Competition and Determination of Fair and Reasonable Price
FAR references:
Current coverage at FAR 15.403-1(c) provides three circumstances in which a price is based on adequate price competition, for the purpose of deciding whether there is an exemption to the requirement for certified cost or pricing data:
In the first circumstance, two or more responsible offerors, competing independently, submit priced offers that satisfy the Government's expressed requirement, if award will be made to the offeror whose proposal represents the best value where price is a substantial factor in source selection, and there is no finding that the price of the otherwise successful offeror is unreasonable. In this circumstance, there is a presumption of price reasonableness. Any finding that the price is unreasonable must be supported by a statement of the facts and approved at a level above the contracting officer.
In the second circumstance, there was a reasonable expectation, based on market research, that two or more responsible offerors, competing independently, would submit priced offers in response to the solicitation's expressed requirement, even though only one offer is received from a responsible offeror; and the determination that the proposed price is based on adequate price competition and is reasonable, must be approved at a level above the contracting officer. This standard for adequate price competition was added to the two pre-existing standards in the FAR in October 1995 (FAC 90-32) as a result of sections 1202 and 1251 of the Federal Acquisition Streamlining Act of 1994 (Pub. L. 105-355). These sections required the FAR to provide clear standards for application of the exceptions to the requirement for submission of cost or pricing data (including adequate price competition).
In the third circumstance, price analysis clearly demonstrates that the proposed price is reasonable in comparison with current or recent prices for the same or similar items, adjusted to reflect changes in market conditions under contracts that resulted from adequate price competition. Note that the requirement that price analysis be based on contracts that resulted from adequate price competition does not cover buys in which the price is determined fair and reasonable based on certified cost or pricing data from previous production buys. This standard has been in the regulations since May 1964, when adequate price competition was first addressed in the Armed Services Procurement Regulation (3-807.1(b)).
Comment: One respondent fully supported DoD's proposal that 30-day solicitations that produce only one offer should trigger a price or cost analysis. This respondent stated that it has long advocated the position that adequate price competition does not exist whereonly one offer is received pursuant to a competitive solicitation.
Other respondents wanted to preserve the exception at FAR 15.403-1(c)(1)(ii) as a valid exemption from the requirement for certified cost or pricing data, while some acknowledged the need for better enforcement of FAR 15.403-1(c)(1)(ii)(B), i.e., the need to determine at a level above the contracting officer that the price is reasonable.
One respondent had reservations about the apparent elimination of agency discretion to find adequate price competition when a single offer is received, following the expectation of multiple offers. The respondent expressed concern that because the FAR does not reflect the same approach, there is a risk of confusion in the acquisition community. This respondent cited a GAO 2010 study, which recommended case-by-case analysis of single offers, not elimination of the discretion to find adequate price competition when a single offer is received. This respondent also quoted a 2009 DoD statement that "the receipt of a single offer does not necessarily indicate a lack of competition (DoD's 2009 Competition Report).
Several respondents stated that the current FAR reflects the processes required of the contracting officer to protect DoD's interests in a fair and reasonable price in those situations where competition was expected, but, for whatever reason, is not achieved.
Another respondent considered that the requirement at FAR 15.403-1(c)(1)(ii) has been misused, because contracting officers confuse the adequate price competition definition of expected competition in the exception as also covering the adequate price competition pricing method of comparing proposals in FAR 15.404-1(b)(2)(i). FAR 15.404-1(b)(2)(i) states that one price analysis technique is "Comparison of proposed prices received in response to the solicitation. Normally, adequate price competition establishes a fair and reasonable price (see FAR 15.403-1(c)(1))." The respondent recommended that we clarify the need for separate price analysis before concluding that the standard for adequate price competition has been met.
Similarly, another respondent recommended more rigorous enforcement of the existing price reasonableness test in FAR 15.403-1(c)(1)(ii) and (iii) for adequate price competition, without further regulatory change to prohibit DoD contracting officers from using the exception. Another respondent concurred that the problem is not the tool but the improper use of the tool. The respondent recommended maintaining the standards at FAR 15.403-1(c)(1)(ii). A third respondent stated that current methods are adequate to attain the desired benefit, but without "completely undercutting the existing acquisition process."
Response: In response to public comments, DoD has reassessed the proposed statement of policy at DFARS 215.371 in order to better reflect the fundamental purpose of the rule. The policy statement at DFARS 215.371-1 has been revised to clarify that if only one offer is received in response to a competitive solicitation, it is DoD policy-
To take the required actions to promote competition; and
To ensure, if the steps to promote competition still do not result in more than one offer, a fair and reasonable price and compliance with the statutory requirements for certified cost or pricing data, unless an exception applies.
The proposed rule statement that the circumstance of "reasonable expectation * * * that two or more offerors, competing independently, would submit priced offers," as further described at FAR 15.403-1(c)(1)(ii), does not constitute adequate price competition if only one offer is received" is not included in the final rule. The second element in the statement of policy, which reflects one of the ultimate goals of the proposed rule, shifts the focus from determining the existence of "adequate price competition" to achieving a "fair and reasonable price."
There are two citations in the FAR that have contributed to the confusion regarding the relationship between the determination that adequate price competition exists and the determination that a price is fair and reasonable.
Until a recent technical amendment, FAR 15.403-1(c)(1)(ii), which addresses "only one offer," included as a standard for adequate price competition the requirement that "The determination that the proposed price is based on adequate price competition, is reasonable, and is approved at a level above the contracting officer;". The technical amendment restored the original wording, which had become inadvertently unclear in the process of a major rewrite of FAR part 15, to read as follows:
"The determination that the proposed price is based on adequate price competition and is reasonable has been approved at a level above the contracting officer;"
This makes it unambiguous that it is the price that must be reasonable, not the determination, and that this determination of reasonable price is an essential part of the determination that adequate price competition exists.
However, FAR 15.404-1(b)(2)(i) makes the statement that "Normally, adequate price competition establishes a fair and reasonable price (see FAR 15.403-1(c)(1))." This statement is overly broad. Although "adequate price competition" and "fair and reasonable price" are inextricably linked, only adequate price competition as described at FAR 15.403-1(c)(1)(i) can be used as the basis to determine that the price is fair and reasonable. FAR 15.403-1(c)(1)(i) involves the receipt of offers from two or more responsible sources, competing independently. That this is what was intended at FAR 15.404-1(b)(2)(i) is clear from the lead-in sentence, which addresses the comparison of proposed prices received in response to the solicitation as a price analysis technique.
The perception that "based on adequate price competition" can be used as sufficient basis to determine that a price is fair and reasonable is clearly untenable for the standards in FAR 15.403-1(c)(1)(ii) and (iii), both of which require a determination of price reasonableness as part of the determination that adequate price competition exists. Since there is no adequate price competition under FAR 15.403-1(c)(1)(ii) until a level above the contracting officer has found the price to be "reasonable," the determination that the price is fair and reasonable in the case of only one offer cannot be based on "adequate price competition," as in the case when multiple offers are received, but must be based on another type of cost or price analysis. The cost or price analysis in the case of paragraph (ii) is not subject to the particular restrictions imposed in paragraph (iii).
The respondents, therefore, have a point when they state that the problem with the determination that "only one offer" can constitute adequate price competition lies primarily in the misuse of that determination as a basis to assume that the price is fair and reasonable.
Therefore, DoD has revised the final rule to emphasize that, although FAR 15.403-1(c)(1)(ii) may be used to determine that adequate price competition exists for purposes of an exemption from the requirement to obtain certified cost or pricing data, that determination of adequate price competition can only be made in conjunction with the determination that the price is fair and reasonable, based on cost or price analysis, not just relying on "adequate price competition." If the price can be determined to be fair and reasonable based on cost or price analysis and the appropriate determination is approved at one level above the contracting officer that the other criteria for adequate price competition have been met, or another exception to the requirement for certified cost or pricing data applies, then there is no need for any additional cost or pricing data.
Comment: One respondent expressed serious concerns that full and open competition is no longer the model to determine a fair and reasonable price when single offers are received, and that a price achieved through full and open competition is only a starting point for further negotiation.
Response: As already stated, "full and open competition" (i.e., adequate price competition) cannot be the basis for determining a fair and reasonable price when only one offer is received, because the determination that adequate price competition exists cannot be made until a separate determination has been made that the price is fair and reasonable.
Comment: One respondent considered it "inexplicable" that the proposed rule does not recognize the requirements of FAR 15.403-1(c)(1)(iii) to perform price analysis as contributing to the informed contracting officer decision about adequate price competition and price reasonableness.
Response: Although a prior memorandum of November 24, 2010, from the Director, Defense Procurement and Acquisition Policy (DPAP), included a restriction of reliance on the standard at FAR 14.303-1(c)(1)(iii) for determining adequate price competition, the subsequent DPAP memorandum of April 27, 2011, and the proposed rule only restricted reliance on the exception at FAR 15.403-1(c)(1)(ii). Therefore, FAR 15.403-1(c)(1)(iii) could still be relied upon to determine adequate price competition, if the criteria can be met. Note that this exception only applies if the prices of the prior contracts resulted from adequate price competition.
Comment: One respondent questioned the lack of empirical data to back up the statement in the September 14, 2010, Carter memo that DoD contracting officers were not performing cost or price analysis on single bid offers.
Response: Although DoD does not have extensive data, there is concern based on anecdotal evidence that when there was an expectation of competition but only one offer was received, in too many instances there was not a serious independent cost or price analysis to determine that the price was fair and reasonable. The GAO Report of July 2010 (GAO-10-833, Federal Contracting: Opportunities Exist to Increase Competition and Assess Reasons When Only One Offer Is Received), found that some contracting approaches (about 10 percent of sample reviewed) did not reflect sound procurement or management practices, including some with very limited documentation of the reasonableness of proposed prices.