PGI 15.402-92 Acquisitions for Sole-Source Items Subject to Limited Competition. [CH20]

Contracting officers shall use the following guidelines in making the determination required by 15.402-92(a):

(a)  Assessing "Extent of Competition." In acquisitions for sole-source items that are subject to limited competition, a major factor that must be considered is whether the OEM exerts control over the competitors in the procurement, especially with regard to pricing, or whether the nature of the business relationship otherwise results in the OEM's competitors' pricing being directly dependent on the OEM's pricing without significant independent pricing decisions by the competitors. For example, if the OEM exerts control over dealers or distributors by controlling the resale prices that dealers or distributors may charge, adequate price competition does not exist. If, however, the dealers and distributors have access to adequate supplies of the OEM's product and may set their own prices (even if those prices, by virtue of economic exigencies, vary very little from one dealer or distributor to another), then adequate price competition may be found to exist for TINA purposes and for buys where TINA would not apply.

(1)  OEM strategies. There are a variety of different alternatives employed by OEMs for selling/distributing products, including:

(i)  selling directly to all customers;

(ii)  selling through their own financially-affiliated network of dealers/distributors;

(iii)  selling to multiple independent (not financially affiliated)  dealers/distributors; and/or

(iv)  entering into a sole dealer/distributor relationships (often found to lack transparency not conducive to independence and is often characterized by both parties refusing to make available the OEM's cost data to substantiate atypical rapid growth in prices to the Government over time).

(2)  OEM Control. The assessment should examine whether there is a financial (organizational)  relationship under common ownership or control, or other business relationship not conducive to dealer/distributor independence and objectivity because the OEM exerts control over dealers or distributors. OEMs in situations involving competition with independent dealers/distributors may disclose cost details of their price.

(i)  If the OEM does not provide a detailed breakdown of direct material, direct labor, overhead, along with General and Administrative costs (G&A)  to dealers/distributors, this could be an indication of OEM control over the dealer(s)/distributor(s). In this type of situation the contracting officer may not have enough information to determine price reasonableness of the item being purchased.

(ii)  Dealers/distributors should generally:

1.  conduct appropriate cost or price analysis on the OEM (that may be acting as a subcontractor to the dealer/distributor)  to establish the reasonableness of the proposed price (DFARS PGI 15.404-3); and

2.  include the results of this analysis in its price proposal.

(iii)  In instances when the OEM is unwilling to furnish data required for this analysis to the dealer/distributor, higher tier subcontractor/contractor, or directly to the Government; or if the dealer/distributor is unable or unwilling to perform the analysis, this could be considered an indication of control by the OEM and a sign that adequate price competition does not exist.

(iv)  The unwillingness to provide, or unavailability of, a written contract/agreement documenting an OEM's business relationship with a dealer/distributor may also provide further evidence indicating the absence of an arm's-length business relationship, which in turn may be indicative of a lack of a competitive market for sole-source parts offered by the dealer(s)/distributor(s).

(b)  Determining Price Reasonableness. In situations where sole-source items are subject to limited competition, consider the low offerer's price in comparison to historical prices paid, along with the need for information on the offeror's systems, which may be useful indicators of price realism and/or reasonableness.

(1)  Historical Price Comparison. An explanation of the basis and frequency of the OEM's price increases to dealers/distributors should be requested and considered when the contracting officer is basing a price reasonableness determination on a price comparison to previous prices. A pattern of frequent/substantial price increases since the inception of a dealer/distributor relationship may indicate the absence of an arm's-length business relationship. For example, if a dealer/distributor increases prices by 20 percent annually, but the applicable producer price index (PPI)  or cost indexes for material and labor increased at a significantly lower rate, this should be investigated. Where available, price increase information for both the dealer/distributor and OEM (that may be acting as a subcontractor)  should be evaluated to determine the reasonableness of proposed price increases. If the OEM is proposing price increases significantly higher than the applicable independent measure(s)  of cost/price growth by the dealer/distributor, and if the OEM refuses to provide appropriate documentation to support its proposed costs to the dealer/distributor, this could be viewed as an indication of OEM control over the dealer(s)/distributor(s)  and indicate that adequate price competition may not exist.

(2)  Contractor Purchasing System. For acquisitions involving sole-source items subject to limited competition that exceed the TINA threshold, the contracting officer should consider:

i.  obtaining current Contractor Purchasing System Review (CPSR)  status information from the Cost and Price office/analyst (see 15.404-1(a)(90)(5)), or direct from the cognizant Defense Contract Management Agency Administrative Contracting Officer of the most recent completed/pending/planned review; and

ii.  If the contractor does not have an approved purchasing system, or if the system has not been reviewed, consider requesting that the ACO evaluate whether the OEM's projected sales to Government during the next 12 months meet the FAR 44.302 criteria, to determine if a CPSR should be performed.

iii.  If a CPSR should be performed, the contracting officer should request that the ACO perform this review so that the information is available to the contracting officer.

iv.  Documentation related to the CPSR status, any request for a CPSR review or eligibility assessment, and the CPSR report shall be included in the contract file supporting the award, and a copy furnished the cognizant local pricing office that is responsible for providing support for the acquisition.

(3)  Contractor Estimating System Review (CESR). For acquisitions of sole-source items subject to limited competition that exceed the TINA threshold and will result in an award to a large business, the contracting officer should consider obtaining current CESR status information of the proposed large business awardee from the Cost and Price office/analyst or direct from the cognizant Defense Contract Management Agency Administrative Contracting Officer (DFARS 215.407-5). This information shall be documented in the contract award file supporting the award.