Unreasonable Price

Is $10.00 an unreasonable price for a bottle of water?

In a grocery store in the U.S., where all the competitors are selling their bottles for around $1.00, it might seem that the $10.00 bottle is unreasonably priced.  Someone might buy it if it has a prestige label, I suppose -- if the glitterati are willing to pay that price for the prestige label, maybe $10.00 is unreasonable after all.

In the desert, if your bus breaks down and a cart comes along seven hours later with bottles of water, and the vendor offers to sell a bottle to each passenger at $10.00 per bottle, well, that might be a reasonable price -- after all, he and his donkey walked seven hours to get the water to your bus -- you might buy two for yourself and one for your cash-strapped neighbor.

A price that might be unreasonable to one person might be reasonable to someone else.  A price that is unreasonable to a contracting officer, after "the contracting officer has taken all the authorized actions . . . without success," might be reasonable to someone at a level above the contracting officer.

Contracts for expert witnesses run into that kind of stuff all the time: $700 an hour for 1 FTE sounds crazy, until you realize that this SME is the only one who can provide the required expertise, and the  government is otherwise at risk of a bajillion-dollar judgement against it.  "What a bargain!"

Jamaal,

I'm not seeing the inconsistency.  I don't read FAR 15.405(d) as authorizing or instructing anyone to award a contract at an unreasonable price.  It merely states that the unsuccessful contracting officer "shall refer the contract action to a level above the contracting officer.  Disposition of the action should be documented."  Nowhere does that reference (or any other that I am aware of) give anyone, including the individual one level above the contracting officer, authority to award at an unreasonable price.

While not my precise thoughts on the matter, I presume this may be why the FAR says what it says:

On ‎5‎/‎12‎/‎2017 at 5:16 AM, ji20874 said:

A price that might be unreasonable to one person might be reasonable to someone else.  A price that is unreasonable to a contracting officer, after "the contracting officer has taken all the authorized actions . . . without success," might be reasonable to someone at a level above the contracting officer.

That individual one level above the contracting officer may also have more experience, skills, knowledge, etc. to resolve the situation - I believe the FAR is just instructing lower level CO's on what to do when they reach an impasse.

Matthew, I agree and believe it is a viable candidate for removal from FAR. I read it the way you read it, but if someone has a differing argument I'd like to hear it. What I was saying was inconsistent were the interpretations I have heard, in classes and offices, about the level-above requirement.

I know it's not much but, this type of tutorial information can be removed in its entirety.

15.305(a)(1) provides that "Normally, competition establishes price reasonableness." 

15.403-1(b)(1) then states that obtaining certified cost and pricing data is prohibited when there is adequate price competition.  The last sentence of paragraph (c)(1)(i)(B) is addressing the unusual situation where despite competition, the contracting officer finds the prices to be unreasonable.  In such a case, the contracting officer must document the determination that the price is unreasonable and have that determination approved at a level above himself/herself.

In other words, the higher level approval is not to permit award of a contract at an unreasonable price.  Rather, it is to permit a contracting officer to find a price unreasonable despite the existence of otherwise adequate price competition.

Refer to FAR 15.402 "Pricing Policy" (emphasis added below):

Quote

Contracting officers shall—

(a) Purchase supplies and services from responsible sources at fair and reasonable prices. In establishing the reasonableness of the offered prices, the contracting officer--

  (1) Shall obtain certified cost or pricing data when required by 15.403-4, along with data other than certified cost or pricing data as necessary to establish a fair and reasonable price; or

  (2) When certified cost or pricing data are not required by 15.403-4, shall obtain data other than certified cost or pricing data as necessary to establish a fair and reasonable price, generally using the following order of preference in determining the type of data required:

  (3) Obtain the type and quantity of data necessary to establish a fair and reasonable price, but not more data than is necessary. Requesting unnecessary data can lead to increased proposal preparation costs, generally extend acquisition lead time, and consume additional contractor and Government resources. Use techniques such as, but not limited to, price analysis, cost analysis, and/or cost realism analysis to establish a fair and reasonable price. If a fair and reasonable price cannot be established by the contracting officer from the analyses of the data obtained or submitted to date, the contracting officer shall require the submission of additional data sufficient for the contracting officer to support the determination of the fair and reasonable price.

• (i) No additional data from the offeror, if the price is based on adequate price competition, except as provided by 15.403-3(b).

  (ii) Data other than certified cost or pricing data such as—

  • (A) Data related to prices (e.g., established catalog or market prices, sales to non-governmental and governmental entities), relying first on data available within the Government; second, on data obtained from sources other than the offeror; and, if necessary, on data obtained from the offeror. When obtaining data from the offeror is necessary, unless an exception under 15.403-1(b)(1) or (2) applies, such data submitted by the offeror shall include, at a minimum, appropriate data on the prices at which the same or similar items have been sold previously, adequate for evaluating the reasonableness of the price.

    (B) Cost data to the extent necessary for the contracting officer to determine a fair and reasonable price.

(b) Price each contract separately and independently and not --

  (1) Use proposed price reductions under other contracts as an evaluation factor; or

  (2) Consider losses or profits realized or anticipated under other contracts.

(c) Not include in a contract price any amount for a specified contingency to the extent that the contract provides for a price adjustment based upon the occurrence of that contingency.

That policy couldn't be clearer and I do not see any exception to it there or in FAR 15.405.  Short of an approved deviation, I'm not aware of any authority for a Contracting Officer (or even individuals one level above) to make or authorize purchases at unreasonable prices.

Matthew Fleharty said:

Huh?  The portion of the FAR you're referencing has to do with Prohibitions on Obtaining Certified Cost or Pricing Data...

The portion I'm referencing is the exact portion that Jamaal asked about in the original question:

On 5/12/2017 at 1:01 PM, Jamaal Valentine said:

What is meant by passages such as FAR 15.403-1( c )(1)(i)(B)

I was explaining what that passage meant.  You know, actually answering the question asked.

I never said it authorized making a purchase at an unreasonable price.  In fact, I said just the opposite:

Lionel Hutz said:

the higher level approval is not to permit award of a contract at an unreasonable price

Lionel Hutz said:

The portion I'm referencing is the exact portion that Jamaal asked about in the original question:

I was explaining what that passage meant.  You know, actually answering the question asked.

I never said it authorized making a purchase at an unreasonable price.  In fact, I said just the opposite:

My apologies Lionel - I read in haste - I'll edit my post accordingly.

Why do you think FAR 15.405(d) tells COs to refer the matter to higher authority? Is it just so higher authority can say, Yes, the price is unreasonable or No, the price is reasonable? Or is it to authorize purchase even though the price is too high. It is astonishing to read people say that at a level above the contracting officer a government official cannot authorize purchase at an unreasonable price even if there is a valid need, no other choice and no other source. Prepare a memo explaining the situation and what will be done to avoid having to be in the same position in the future then get on with the purchase. Really, what if you just have to have it? What if mission or lives depend upon it and the only source won't reduce its price? To think that higher authority cannot determine that the government will pay the price demanded though unreasonable is to render higher authority helpless in the face of dire need. When the government wanted to avoid the circumstance in the past it resorted to price controls and price renegotiation. We no longer have those laws. The government ordinarily doesn't tell people what they can charge. And it can't tell people in foreign countries what they can charge. What would you prefer, a lie that a price is fair and reasonable when it's not or a memo to file saying we got stuck this time but we're going to take steps to avoid getting stuck in the future? Is this kind of thinking common out in contracting offices?

Seeker:

Not sure who this was directed to, but it is essentially what I have heard repeated by instructors, trainers, leaders, contract specialists, and contracting officers, etc. I understand the argument, but do not see how it comports with FAR.

Seeker said:

Why do you think FAR 15.405(d) tells COs to refer the matter to higher authority? Is it just so higher authority can say, Yes, the price is unreasonable or No, the price is reasonable? Or is it to authorize purchase even though the price is too high. It is astonishing to read people say that at a level above the contracting officer a government official cannot authorize purchase at an unreasonable price even if there is a valid need, no other choice and no other source. Prepare a memo explaining the situation and what will be done to avoid having to be in the same position in the future then get on with the purchase. Really, what if you just have to have it? What if mission or lives depend upon it and the only source won't reduce its price? To think that higher authority cannot determine that the government will pay the price demanded though unreasonable is to render higher authority helpless in the face of dire need. When the government wanted to avoid the circumstance in the past it resorted to price controls and price renegotiation. We no longer have those laws. The government ordinarily doesn't tell people what they can charge. And it can't tell people in foreign countries what they can charge. What would you prefer, a lie that a price is fair and reasonable when it's not or a memo to file saying we got stuck this time but we're going to take steps to avoid getting stuck in the future? Is this kind of thinking common out in contracting offices?

Jamaal Valentine said:

Seeker:

Not sure who this was directed to, but it is essentially what I have heard repeated by instructors, trainers, leaders, contract specialists, and contracting officers, etc. I understand the argument, but do not see how it comports with FAR.

Jamaal,

It was likely directed at me - Seeker sent me a few PMs laced with ad hominems labeling me an "awful bureaucrat" amongst other things.  I'll no longer be engaging with Seeker on these forums as a result.  Maybe you'll have better luck getting a response that is supported by facts or references to the law/policy/regulation, but I doubt it.

I'm confused...

Did @ji20874 not provide the answer in the first response?

Deleted.

Seeker said:

I have looked and found nothing that says that the higher official cannot approve a contract award in that circumstance.

Is this "higher official" a contracting officer as well?

Not necessarily. FAR says "In some agencies, a relatively small number of high level officials are designated contracting officers solely by virtue of their positions. Contracting officers below the level of a head of a contracting activity shall be selected and appointed under 1.603." I don't think a higher level official has to be a contracting officer in order to be empowered to authorize a contracting officer to make an award despite an unreasonable price. Is the DOD director of pricing a contracting officer?

I'm not going to continue in this topic. Some people demand proof in order to avoid the logic. What would the proof be? There wouldn't be case law. Is the absence of express authorization proof that something cannot be done? There is no proof of anything on either side. The only basis for interpreting FAR 15.405(d) is a combination of logic and common sense. Some of the thinking here is not practical and is very frustrating to read. I'm with Jamal Valentine's instructors, trainers, leaders, contract specialists and contracting officers. Their thinking is consistent with my training and experience.

Seeker said:

Why do you think FAR 15.405(d) tells COs to refer the matter to higher authority? Is it just so higher authority can say, Yes, the price is unreasonable or No, the price is reasonable?

Yes.  Price reasonableness is a subjective determination.  A higher level authority may have greater/different knowledge, perspective, or understanding that allows him or her to determine a price is reasonable in a certain situation.

Seeker said:

Or is it to authorize purchase even though the price is too high.

No.  FAR 15.405 says nothing about authorizing purchases or providing exceptions to other FAR requirements. You can't just read an exception into the FAR because it seems practical to do so.

Seeker said:

Really, what if you just have to have it? What if mission or lives depend upon it and the only source won't reduce its price?

The contracting officer or higher authority should find the price to be reasonable.

Seeker said:

What would you prefer, a lie that a price is fair and reasonable when it's not

Why would it be a lie?  What is a determination of price reasonableness if not a subjective opinion?  There is no mathematical equation that tells you something is reasonable or not.  I'm not saying any price can be justified to be reasonable.  But, as ji20874 explained above, what is unreasonable in one circumstance may be reasonable in another.  And, in an extreme case where lives are on the line and only one product can save those lives, the contracting officer would have a lot of leeway to find an otherwise high price to be reasonable.  I'd like to see the audit report that says x number of lives are only worth x number of dollars and paying more than that represented paying an unreasonable price.

Seeker said:

Is the absence of express authorization proof that something cannot be done?

No, but a federal regulation stating that a contract "shall" be awarded at a fair and reasonable price is an express prohibition against awarding at an unreasonable price.  If you want to argue that there is an exception to that requirement, the burden is on you to identify it.  But, nothing in 15.405(d) suggests that it is providing such an exception.

hmmmm, very interesting

I tend to agree with Seeker's logic.  However, the FAR language is so convoluted that I can't tell what is actually supposed to happen if the KO can't determine that the price is fair and reasonable for award purposes and the higher level agrees that it isn't fair and reasonable.  

It should be evident that, even under competition, if the prices do not appear to be fair and reasonable, the KO can request , if necessary, information other than certified cost or pricing data" in order to evaluate the pricing. 

But it appears that, upon completion of the evaluation, if the prices are determined not to be fair and reasonable, then the standards for the "adequate competition" exception to the requirement to obtain certified cost or pricing are not met.

Seems to then go into a "do loop". Is the next step to obtain a waiver of the requirement before awarding?  Or just bump it up to a high enough level to award regardless?

Lionel Hutz said:

No, but a federal regulation stating that a contract "shall" be awarded at a fair and reasonable price is an express prohibition against awarding at an unreasonable price.  If you want to argue that there is an exception to that requirement, the burden is on you to identify it.  But, nothing in 15.405(d) suggests that it is providing such an exception.

Agree 100%.

joel hoffman said:

I can't tell what is actually supposed to happen if the KO can't determine that the price is fair and reasonable for award purposes and the higher level agrees that it isn't fair and reasonable.

I think the FAR's pricing policy is crystal clear that awards shall be made at fair and reasonable prices...if no one can do that and, therefore, compliance with the FAR is not possible, I'd imagine one would have to pursue a Deviation IAW FAR Subpart 1.4 (emphasis added below).

Quote

“Deviation” means any one or combination of the following:

(a) The issuance or use of a policy, procedure, solicitation provision (see definition in 2.101), contract clause (see definition in 2.101), method, or practice of conducting acquisition actions of any kind at any stage of the acquisition process that is inconsistent with the FAR.

(b) The omission of any solicitation provision or contract clause when its prescription requires its use.

(c) The use of any solicitation provision or contract clause with modified or alternate language that is not authorized by the FAR (see definition of “modification” in 52.101(a) and definition of “alternate” in 2.101(a)).

(d) The use of a solicitation provision or contract clause prescribed by the FAR on a “substantially as follows” or “substantially the same as” basis (see definitions in 2.101 and 52.101(a)), if such use is inconsistent with the intent, principle, or substance of the prescription or related coverage on the subject matter in the FAR.

(e) The authorization of lesser or greater limitations on the use of any solicitation provision, contract clause, policy, or procedure prescribed by the FAR.

(f) The issuance of policies or procedures that govern the contracting process or otherwise control contracting relationships that are not incorporated into agency acquisition regulations in accordance with 1.301(a).

The only question that remains is whether or not such a deviation is precluded by law, executive order, or regulation...

Joel, as you indicated, the FAR does not tell what the higher level official is to do once (s)he receives a referral like this from a contracting officer.  That gives them a lot of wiggle room on what they do.  In my experience, what happens at the higher level is up to the person occupying the higher level position.  In some cases, they will call the CEO or other officer of the company and try to work something out.  Sometimes, they direct the CO to go back to the contractor and state that the higher official agrees that the price is unreasonable and that if the contractor does not lower its price, it will not get the award.  Or as ji has indicated, they may review the record and say the price is reasonable.

Retreadfed:

Retreadfed said:

In my experience, what happens at the higher level is up to the person occupying the higher level position.  In some cases, they will call the CEO or other officer of the company and try to work something out.  Sometimes, they direct the CO to go back to the contractor and state that the higher official agrees that the price is unreasonable and that if the contractor does not lower its price, it will not get the award.

That has been my experience too.

1. I have checked Titles 10 and 41 of the U.S.C. (Annotated) and found no statement to the effect that agencies may award contracts only at "reasonable" or "fair and reasonable" prices.

2. FAR 15.402 states that "contracting officers" shall purchase supplies and services at fair and reasonable prices. It is thus addressed to those who negotiate and award contracts--working level COs. It is clear that COs cannot award contracts at unreasonable prices. However, FAR does not say that agencies or agency heads shall purchase supplies and services only at reasonable or fair and reasonable prices.

3. I searched all of Title 48 of the CFR, Chapter 1, and found no explicit or implied statement to the effect that agencies or agency heads may award contracts only at reasonable or fair and reasonable prices. Nor did I find any prohibition explicit or implied against award of a contract at an unreasonable price in appropriate circumstances.

4. I found the following in FAR 13.106-3(a)(3):

Quote

Occasionally an item can be obtained only from a supplier that quotes a minimum order price or quantity that either unreasonably exceeds stated quantity requirements or results in an unreasonable price for the quantity required. In these instances, the contracting officer should inform the requiring activity of all facts regarding the quotation or offer and ask it to confirm or alter its requirement. The file shall be documented to support the final action taken.

Presumably, that rule means that if the requiring activity confirms its requirement, the contracting officer could issue a purchase order to the supplier despite the unreasonable price for the quantity required. If that's a proper interpretation of the rule, then it puts the lie to any general proposition that agencies cannot award contracts at unreasonable prices.

5. FAR 15.405(d) says:

Quote

If, however, the contractor insists on a price or demands a profit or fee that the contracting officer considers unreasonable, and the contracting officer has taken all authorized actions (including determining the feasibility of developing an alternative source) without success, the contracting officer shall refer the contract action to a level above the contracting officer. Disposition of the action should be documented.

6. FAR states no limitation on the nature of the "disposition."

7. The direction to refer the action to a level above the contracting officer is consistent with my belief that FAR 15.402 is directed at working level contracting officers and not at higher level officials.

8. The rule in FAR 15.405(d) originated with DOD. It was added to the Defense Acquisition Regulation in 1982, 47 FR 9399, March 5, 1982, DAC 76-31, without explanation. The rule appeared in DAR 3-801.1(c) as follows:

Quote

When the contractor insists on a price or demands a profit or fee which the contracting officer considers unreasonable, the contracting officer shall (i) determine the feasibility of developing an alternate source of supply, or (ii) take any other action within his authority. If, after exhausting the above course of action, a satisfactory solution has not been obtained, the contracting officer shall refer the prospective procurement to higher authority. Such referral shall include a complete statement of the attempt made to resolve the matter. With regard to a contractor's refusal to provide cost or pricing data, see 3-807.5.

That rule was included in the original FAR at 15.803(d) in virtually the same language as now appears in FAR 15.405(d)

9. I have searched high and low for any current or historical guidance on the proper implementation of FAR 15.405(d) and the discretion of higher level contracting officials and have found none. I have found nothing in the decisions of the GAO, the boards of contract appeals, the Court of Federal Claims, or the Federal Circuit.

10. In the course of a 45-year career I have been taught and have believed that higher ups could authorize award at an unreasonable price in appropriate circumstances if necessary to get the job done. I have been taught that in official DOD schools. I have read nothing in this thread or elsewhere that persuades me that my career-long belief is not sound.

I conclude that neither statute nor the FAR prescribes any policy or procedure for the proper disposition of situations in which an agency needs something from someone who wants an unreasonable price, has no other source, and has no other option, except that the disposition "should" be documented. Each agency has been left to develop its own policy and procedure.

I further conclude that there is no rule in FAR that precludes award of a contract at an unreasonable price at the direction or with the authorization of an official at least one level above the contracting officer if there is no alternative that will permit mission success.

For what it's worth, I have made inquiries of known and respected persons with many years of experience in acquisition who agree with my conclusion. In fact, when I asked them, they expressed surprise that anyone doubted it.

My policy when interpreting the FAR has long been to seize as much authority as the regulation allows. I have always taken the power I needed to further my agency's mission. When a regulatory passage is ambiguous, as is FAR 15.405(d), I have construed it to give me the authority that I needed.

My policy is consistent with the FAR guiding principles--if a course of action is not forbidden, then it is permissible as long as it makes sense. Others may take a different view and assume that a contracting officer or higher official cannot act without express authority. They have their view; I have mine.

Thanks for reading, and goodbye.

Good discussion!  Let me refine my thoughts...

“Contracting Officer” is defined in the FAR.  It includes anyone “with authority to enter into … contracts and make related determinations and findings.”  See FAR 2.101.  Further, FAR 1.601 states, “Contracts may be entered into and signed on behalf of the Government only by contracting officers. In some agencies, a relatively small number of high level officials are designated contracting officers solely by virtue of their positions.”

It seems pretty clear that when the FAR says “contracting officer” it means anyone with authority to contract on behalf of the government.  Unless defined differently elsewhere, a mandatory FAR requirement directed at “contracting officers” is not limited to working level contracting officers.

FAR 15.402 then states that contracting officers (i.e., anyone with authority to contract) “shall … Purchase Supplies and services from responsible sources at fair and reasonable prices.”  Per FAR 2.101, “Shall means the imperative”; in other words, it is required.  There is no exception in the regulation.  Therefore, contracting officers, including high level agency officials, may not purchase supplies and services at an unreasonable price.  UNLESS, as Matthew points out, a deviation is authorized. 

FAR 1.403 provides that an Agency Head may authorize an individual deviation.  That authority is then delegable pursuant to agency procedures/regulations.  In addition, the FAR requires that the contracting officer “document the justification and agency approval [of the deviation] in the contract file.”  FAR 1.403.  This documentation requirement fits in nicely with FAR 15.405’s requirement that “Disposition of the action should be documented.”

FAR 15.405 does not list every potential “disposition” of a referral because there are a myriad of potential outcomes.  The higher level authority could agree that the price is unreasonable and cancel the procurement; negotiate a lower price that is reasonable; determine the price is, in fact, reasonable; discuss changing the requirements with the requiring activity; refer the matter even higher in order to seek an individual deviation; etc.  The fact that the FAR does not list every possible course of action available does not mean that a course of action otherwise prohibited is now authorized.

Finally, Vern made a great point that this requirement is not found in Title 41 or 10; it is only a regulatory requirement.  As such, it is limited to the scope delineated in the regulation.  In this case, we are discussing a FAR Part 15 requirement that only applies to the award and modification of FAR Part 15 negotiated contracts, as well as “modifications to contracts awarded by sealed bidding.” FAR 15.400.  In other words, it does not apply to the award of FAR Part 14 contracts, the award of contracts under FAR Part 13, or the modification of contracts awarded under FAR Part 13.

Based on all of this, I conclude that contracts can be awarded at an unreasonable price; however, it is not FAR 15.405(d) that provides such authority.  Either, there is no restriction in the first place (e.g., FAR Part 13), or a higher level authority must approve an individual deviation waiving the requirement of FAR 15.402.  There may be others that think a higher level authority can always approve award at unreasonable prices and that a deviation is never needed.  And as a practical matter, a contracting officer probably has little personal or professional exposure if a high level agency official tells him it is okay to award without an official deviation.  But in the end, such a position is not supported by the language of the regulation.

Lionel Hutz said:

It seems pretty clear that when the FAR says “contracting officer” it means anyone with authority to contract on behalf of the government.  Unless defined differently elsewhere, a mandatory FAR requirement directed at “contracting officers” is not limited to working level contracting officers.

I disagree with Lionel's assertion "contracting officer" refers to "anyone" with authority to contract. I also disagree that higher level officials must of necessity obtain a deviation in order to authorize an award at an unreasonable price.

(I'm arguing now on principle. I have no issue with them seeking approval to deviate if they wish to do so.)

1. Lionel's argument rests on a single proposition: that all persons with contracting authority are contracting officers and that FAR 15.402(a) applies to them. I disagree.

FAR 2.101 says, in part:

Quote

“Contracting officer” means a person with the authority to enter into, administer, and/or terminate contracts and make related determinations and findings.

Thus, a contracting officer is a person who has certain authority. It does not logically follow that all persons who have that authority are contracting officers. All professional basketball players are athletes, but not all athletes are professional basketball players.

Consider--we know from FAR 1.601 that all authority to contract vests in the agency head. Thus, agency heads have authority to enter into contracts. Are agency heads contracting officers? Does FAR 15.402(a) apply to them? Does it apply to heads of contracting activities (HCAs) who have contracting authority?

While many of us, myself included, have said that agency heads are contracting officers, that is loose talk. The definition of contracting officer in FAR 2.101, quoted above, is fundamentally the same as the definition of contracting officer in the Contract Disputes Act of 1978, 41 USC 7101:

Quote

(6) Contracting officer.—The term “contracting officer”—

(A) means an individual who, by appointment in accordance with applicable regulations, has the authority to make and administer contracts and to make determinations and findings with respect to contracts; and

(B) includes an authorized representative of the contracting officer, acting within the limits of the representative’s authority.

Yet the Federal Circuit has found that the terms "agency head" and "contracting officer," as used in the Contract Disputes Act, are not equivalent. See Joseph Morton Co., Inc. v. U.S., 757 F. 2d 1273 (1985). In that case the government argued that a restriction in the Contract Disputes Act against agency heads settling claims based on fraud also applied to contracting officers. The Federal Circuit disagreed:

Quote

[T]he Government does not even suggest that the term “contracting officer,” who, under the second sentence of section 605(a) [41 USC § 605, now § 7103], shall decide “[a]ll claims by the government,” and the term “agency head” in the sentence quoted above, are equivalents. Unless this can be shown, the fact that an agency head does not have a particular grant of authority neither adds to nor subtracts from the authority granted a contracting officer. We are persuaded that the use by Congress of two different terms in the same paragraph of the statute manifests an intent that they not be considered equivalents.

Now here is FAR 1.601, General, paragraph (a):

Quote

Unless specifically prohibited by another provision of law, authority and responsibility to contract for authorized supplies and services are vested in the agency head. The agency head may establish contracting activities and delegate broad authority to manage the agency’s contracting functions to heads of such contracting activities. Contracts may be entered into and signed on behalf of the Government only by contracting officers. In some agencies, a relatively small number of high level officials are designated contracting officers solely by virtue of their positions. Contracting officers below the level of a head of a contracting activity shall be selected and appointed under 1.603.

Note that FAR 1.601 does not say that agency heads (or HCAs) are contracting officers. It says that in "some" agencies higher level officials are contracting officers by virtue of their positions, but "some" is not all. The FAR does not identify any such agencies. The DFARS, for instance, does not say that agency heads (Sec of Defense, Sec of Air Force, Sec of Army, Sec of Navy, etc.)  and HCAs are contracting officers. As in the Contract Disputes Act, other statutes and the FAR system regulations routinely distinguish among agency head, head of the contracting activity, and contracting officer. We can assume that they do for a reason. I have found nothing in the FAR system that says or otherwise confirms that all persons with authority to contract are contracting officers. I think Lionel has made a logical error in interpreting the definition of contracting officer in FAR 2.101.

When FAR 15.405(d) directs contracting officers to refer matters of unresolved unreasonable pricing to "a level above the contracting officer," it makes a distinction between the "contracting officer" mentioned in FAR 15.402, who must award at fair and reasonable prices, and the official to whom the matter must be referred, who may dispose of the matter as he or she sees fit.

For more on the confusion about the roles of various acquisition officials, see Cibinic and Nash, "Procurement Officials: You Need A Program To Tell The Players," The Nash & Cibinic Report, May 1987.

Thus, I conclude that "contracting officer," as used in FAR 15.402(a), does not include higher level officials to whom unreasonable prices are to be referred under FAR 15.405(d). It follows that authorization to award at an unreasonable price is not a deviation and that approval to deviate is not necessary.

2. Moreover, just because a person is a head of a contracting activity does not mean that he or she has contracting authority, so by virtue of Lionel's argument such officials would not need a deviation in order to authorize award at an unreasonable price.

Here is the definition of HCA from FAR 2.101:

“Head of the contracting activity” means the official who has overall responsibility for managing the contracting activity.

A manager of contracting officers need not be a contracting officer. My first HCA was a three-star general, Richard C. Henry, the person who appointed me a contracting officer, and he made it clear in no uncertain terms that he was not a contracting officer. My next HCA was a four-star. He did not consider himself a contracting officer, either.

See Reifel et al., "Contracting Officer Authority," 86-4 Briefing Papers 1 (May 1986):

Quote

The fact that an official holds a higher-ranking position than the C.O. should not, however, be interpreted to mean that he automatically acts with authority equivalent to a C.O. and may change the contract. If the superior has not been granted authority to bind the Govt to an agreement, it is irrelevant that he is the “boss,” that his approval is needed for contract budget modifications, or that he is the “contact” person for upcoming contract negotiations.

According to Lionel's argument, an HCA who is, in fact, a contracting officer and has a certificate of appointment, needs a deviation to approve award at an unreasonable price, but an HCA who is not a contracting officer does not. Make sense?

3. It is true that FAR 15.405(d) does not grant authority to authorize award at an unreasonable price.

I know of no statute or regulation that does. But one does not need express authority to do a thing in contracting unless the thing is otherwise prohibited. See FAR 1.102(d) and 1.102-4(e).

Given that FAR 15.402(a) does not apply to higher level officials to whom unreasonable prices have been referred, nothing in statute or FAR prohibits an official at a level above the contracting officer from authorizing award at an unreasonable price in appropriate circumstances. Thus, such authorization would not constitute a deviation. So unless agency policy requires it, approval to deviate is not prerequisite to authorizing an unreasonably priced award. FAR 15.402(a) indicates that contracting officers cannot award at unreasonable prices and that they must refer stalemates at unreasonable prices to higher level authority for disposition. What that disposition might be is a matter of agency policy and managerial discretion.

Bottom line: I won't object if an HCA or chief of a contracting office decides to seek approval to deviate in order to do what he or she is empowered to do without a deviation, but I'll shake my head at the needless paperwork. Otherwise, I'm glad that Lionel and I agree that contracts may be awarded at an unreasonable price in appropriate circumstances, as when there is no alternative but mission disruption or failure. I think that was the real issue.

I should add that this discussion in largely academic. I know that some COs have referred negotiations pursuant to FAR 15.405(d), but I'm pretty certain that it very rarely done.

Lionel Hutz said:

“Contracting Officer” is defined in the FAR.  It includes anyone “with authority to enter into … contracts and make related determinations and findings.”  See FAR 2.101.  Further, FAR 1.601 states, “Contracts may be entered into and signed on behalf of the Government only by contracting officers. In some agencies, a relatively small number of high level officials are designated contracting officers solely by virtue of their positions.”

Lionel,

FAR 2.101(a) states:

Quote

A word or a term, defined in this section, has the same meaning throughout this regulation (48 CFR Chapter 1), unless—

(1) The context in which the word or term is used clearly requires a different meaning

In the context of FAR subpart 15.4, I think a different meaning is required. In addition to the meaning given at FAR 2.101, the "contracting officer" is organizationally beneath others, such as the "head of the contracting activity". For example, FAR 15.403-4(a)(2) states:

Quote

Unless prohibited because an exception at 15.403-1(b) applies, the head of the contracting activity, without power of delegation, may authorize the contracting officer to obtain certified cost or pricing data for pricing actions below the pertinent threshold in paragraph (a)(1) of this subsection, provided the action exceeds the simplified acquisition threshold.

See also FAR 15.403-1 which relieves the contracting officer of the requirement to obtain cost or pricing data if they obtain a waiver from the HCA. 

I think that in the context of FAR subpart 15.4, the contracting officer is clearly an agent of the HCA or other higher-level official. There's more to it than just meeting the criteria in the FAR 2.101 definition. I agree with Vern's interpretation of "contracting officer" to mean "working-level COs" in this context.

Vern Edwards said:

Thus, a contracting officer is a person who has certain authority. It does not logically follow that all persons who have that authority are contracting officers. All professional basketball players are athletes, but not all athletes are professional basketball players.

The FAR says that a person with authority to enter into contract is a contracting officer.  (FAR 2.101)

Your basketball analogy is not accurate because it assumes (correctly) that there are other people that can be athletic but not play basketball. 

But that is not the case with contracting officers.  People other than contracting officers cannot award contracts.  The FAR states that “Contracts may be entered into and signed on behalf of the Government only by contracting officers.”  (FAR 1.601)  The word “only” couldn’t be any clearer.  It does not say “Contracts may be entered into and signed on behalf of the Government only by contracting officers and other people with contracting authority.”

When the boundaries of a group (contracting officer) are defined limited by a single characteristic (authority to contract), then the presence of that single characteristic (authority to contract) means the individual fits in that group.  To paraphrase Vern’s analysis, in the context of the FAR definitions, all Agency Heads are contracting officers, but not all Contracting Officers are Agency Heads. 

Vern Edwards said:

Yet the Federal Circuit has found that the terms "agency head" and "contracting officer," as used in the Contract Disputes Act, are not equivalent.

Whether or not the Federal Circuit distinguishes between the terms “Agency Head” and “Contracting Officer” under the Contract Disputes Act (“CDA”) is a red herring.  I agree that that in the context of the CDA, the term Contracting Officer does not include an Agency Head.  But we are not dealing with the CDA.  The CDA is a different statute with, contrary to your assertion, different definitions.  Let me put the relevant portions one after the other, so the difference is clear. 

First the FAR definition:

Quote

’Contracting officer’ means a person with the authority to enter into, administer, and/or terminate contracts and make related determinations and findings.

The FAR definition of a contracting officer is a person with authority to contract.  It doesn’t matter how they got that authority.  The FAR makes clear that an official can be a contracting officer by virtue of being in a designated position (FAR 1.601(a)), or by being appointed in accordance with Agency regulations (FAR 1.603).

Next the CDA definition:  

Quote

The term “contracting officer”—

(A) means an individual who, by appointment in accordance with applicable regulations, has the authority to make and administer contracts and to make determinations and findings with respect to contracts…

This definition is clearly limited to those who have contracting authority arising out of their “appointment in accordance with applicable regulations.”  It does NOT include those whose contracting authority arise out of the nature of their position, i.e., Agency Head or other high-level designated position.

So, in Morton v. US, when the Federal Circuit held a restriction on an Agency Head does not apply to a contracting officer, it is because the CDA defined those terms to be mutually exclusive.  No so in the FAR where the definition of contracting officer encompasses Agency Heads and other high-level designated officials.

Based on this I conclude the FAR clearly and expresses contemplates that a contracting officer is anyone that has contracting authority and that the FAR 15.402(a) restriction applies to all contracting officers.

Vern Edwards said:

2. Moreover, just because a person is a head of a contracting activity does not mean that he or she has contracting authority, so by virtue of Lionel's argument such officials would not need a deviation in order to authorize award at an unreasonable price.

Vern, I have to be honest, I’m not sure what you are talking about here.

I never mentioned HCA’s in my post.  Unless the HCA has deviation authority, he may not authorize payment of an unreasonable price (under FAR Part 15) regardless of whether he is a contracting officer or not. 

Vern Edwards said:

3. It is true that FAR 15.405(d) does not grant authority to authorize award at an unreasonable price.

I know of no statute or regulation that does.

I’m glad that Vern agrees there is no express statutory or regulatory language that authorizes a contracting officer to pay an unreasonable price contrary to FAR 15.402(a).

Vern Edwards said:

FAR 15.402(a) indicates that contracting officers cannot award at unreasonable prices and that they must refer stalemates at unreasonable prices to higher level authority for disposition. What that disposition might be is a matter of agency policy and managerial discretion.

What if agency regulations are silent on the matter, as many (most?) are.  Under Vern’s scenario, the mere fact that a contracting office has “referred” a stalemate to a higher authority has satisfied the regulatory requirement.  Notice, the regulation does not require that the higher authority “resolve” or “dispose of” anything.  It doesn’t even mandate documentation of the disposition, only that it “should” be documented. 

Does it make sense that a contracting officer, who himself cannot award a contract at an unreasonable price, can authorize another contracting officer under him to award the contract?  “I can’t award the contract at that price.  But, because you are one level below me and you asked me, sure go ahead, no problem.  Just make sure you document it. Or not, if you can’t, no big deal.”

Vern Edwards said:

I should add that this discussion in largely academic.

I agree completely!  But sometimes the academic issues are the most interesting.

Don, I understand and respect both yours and Vern's position.

But, I think it is a stretch to say that the context of FAR 15.402 "clearly requires a different meaning" to the definition of contracting officer. 

In fact the express granting of waiver authority to the HCA in the FAR provisions you cited argues against your interpretation.  Clearly the FAR Council knows how to grant the HCA authority to waive specific FAR requirements.  If the FAR meant for the HCA to be able to waive the requirement of 15.402(a), it would have so stated in language similar to that you identified.

Lionel:

Thanks for responding. I have learned at Wifcon Forum that there comes a time when two people simply cannot (or will not) agree with each other, and that when that happens it's best to stop debating. As far as I know, the only conclusive difference between you and me at this point is that you think an official who wants to authorize award at an unreasonable price must obtain approval to deviate from the FAR pursuant to Subpart 1.4, and I do not. Let's leave it at that.

I'd prefer that we not address each other's arguments any further, because I don't want to debate with you further and don't want to have to come back to this thread to deal with what I consider to be unacceptable assertions or analyses of what I've said. We've both posted at length, I've let you have the final say, and I'd prefer to let readers choose the argument that they prefer without any continuation or supplement by the two of us. I hope you'll agree to that. I ask that you do. Please feel free to argue on with others.

Vern

Lionel,  a fundamental question that should be addressed here is what is the definition of "fair and reasonable price" and what is a "reasonable price"?  Do you have such definitions?

Lionel Hutz said:

If the FAR meant for the HCA to be able to waive the requirement of 15.402(a), it would have so stated in language similar to that you identified.

Lionel,

Your faith in the FAR Council is admirable.

Retreadfed said:

Lionel,  a fundamental question that should be addressed here is what is the definition of "fair and reasonable price" and what is a "reasonable price"?  Do you have such definitions?

This is what I keep returning to. Once a contracting officer elevates an action to a level above,  the higher official may determine a price is reasonable given available data on market conditions (i.e. there is no other palatable choice).

If the offeror will not budge and alternatives do not exist maybe the price is fair and reasonable, today. That is a possibility in free markets.

One more reason relying on previous fair and reasonable price determinations is not a best practice.

Vern,

We can agree to disagree.  No problem.  I enjoyed the discussion, thanks!

My comments that follow are not directed at you or anything you have written.

Cheers!

Don Mansfield said:

Lionel,

Your faith in the FAR Council is admirable.

Don,

Ha ha.  Believe me, I know that consistency is not a strong suit of the FAR Council.  My statement was a reflection of a cannon of statutory and regulatory construction.  See pages 15-16 of this CRS Report for Congress (pdf pages 19-20) (https://fas.org/sgp/crs/misc/97-589.pdf) :

Quote

where Congress includes particular language in one section of a statute but omits it in another ..., it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.

And

Quote

Occasionally the Court draws a contrast between the language at issue and other statutory language that clearly and directly requires the interpretation being pressed by one of the parties. There are some instances—for example, failure to employ terms of art or other language normally used for such purposes—in which this can be a fairly persuasive argument. For example, the Court reasoned that, although “Congress knew how to impose aiding and abetting liability when it chose to do so,” it did not use the words “aid” and “abet” in the statute, and hence did not impose aiding and abetting liability.

I don't know that there is an organization more dysfunctional than Congress, yet that is how Courts and administrative bodies statutes and regulations.  Yes, sometimes cannons of construction are legal fictions.  But if the Courts and GAO use them, they're good enough for me.

Finally, I'll just add one last quote from GAO:

Quote

It is a fundamental requirement that a government agency cannot award a contract at more than a fair and reasonable price, and there is nothing in the TAA or its implementing regulations that indicates that TAA-compliant products can be acquired for an amount greater than a fair and reasonable price.   In this regard, FAR § 15.402(a) states that a contracting officer "must" purchase supplies and services "at a fair and reasonable price."

Granted, that is just one case.  But it is a protest in which GAO examined the language of FAR 15.402(a), noted that it said "contracting officer," and concluded that it is a "fundamental requirement" that applies to "a government agency."

Retreadfed said:

Lionel,  a fundamental question that should be addressed here is what is the definition of "fair and reasonable price" and what is a "reasonable price"?  Do you have such definitions?

There is no hard and fast definition.

U.S. Supreme Court Justice Potter Stewart once famously penned (about defining pornography), "I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it…"

I think the FAR and GAO have taken a similar approach with the definition of a fair and reasonable price. See, for example, Matter of Nutech Laundry & Textiles, Inc., B-291739, February 10, 2003:

Quote

A determination of price reasonableness is a matter of agency discretion, involving the exercise of business judgment, which our Office will not question unless it is shown to be unreasonable.

Here you can see GAO essentially saying, it is up to a contracting officer to determine whether a price is reasonable, unless they think it is unreasonable.  While they may render a decision on a case by case basis, they do not try to establish the outer boundaries of reasonableness.

Even the Director of Defense Pricing, when discussing price reasonableness in the context of a Commercial Item purchase, does not establish a bright line rule.  He writes,

Quote

The standard to be used by Contracting Officers is whether a reasonable businessman or business woman reviewing the data would conclude that it is sufficient to demonstrate that the taxpayers are paying a fair and reasonable price for the item.

http://www.acq.osd.mil/dpap/policy/policyvault/USA007164-14-DPAP.pdf

On the one hand, it would be nice to have more guidance, but on the other, the more you define and establish hard and fast definitions, the more you limit the discretion afforded to a contracting officer.

On 5/18/2017 at 0:16 PM, Retreadfed said:

Lionel,  a fundamental question that should be addressed here is what is the definition of "fair and reasonable price" and what is a "reasonable price"?  Do you have such definitions?

Now, Retread, it has long been understood that "fair and reasonable price" or "reasonable price" is an undefined, subjective standard.

A little history: The earliest reference to "fair and reasonable price" that I could find in the Federal Register was from the Department of the Interior and did not apply to procurement, but to industry group pricing of coal sales to the public. In fact, most early references in the Federal Register concerned agricultural and other commodity pricing. There was no mention with respect to procurement until the beginning of World War II.

Early regulations for military procurement do not say much about pricing and make no mention that I could find of "price analysis," probably because awards were made by formal advertising and went to the low bidder. A 1916 regulation of the Army Quartermaster Corps told quartermaster officer to inform themselves concerning "prevailing prices" before buying on the open market without advertising. 

But the phrase fair and reasonable price was around and used much earlier. The earliest mention that I could find in U.S. federal court decisions was in an 1865 decision of the U.S. Court of Claims, Joseph W. Parish v. U.S., 1 Ct. Cl. 357. The chief quartermaster of St. Louis authorized a man named Parish to buy some horses for use by the cavalry. He bought them for $110 each. Parish's payment vouchers were approved by a commission headed by one Captain Phillip Sheridan. But when Parish sought payment the Army deducted $5 from the unit price. Parish sued for the total of $5,790 that was withheld. The court held for the plaintiff, saying: "There is abundant proof to show that the horses were purchased by Parish in the expectation that he would receive the sum of $110 [per horse] from the government, and that this was a fair and reasonable price." I could find no mention of the phrase in U.S. statutes before that time, so for all I know that court decision was the origin of its use.

"Fair and reasonable price" has always been a phrase used mainly in connection with negotiated procurements, when price was not necessarily determined through competition. Volume I of the Contract Pricing Reference Guides provides an extended dissertation on the concept of "fair and reasonable price" in section I.2.1. But the best one I have read appeared in the 1986 edition of the Armed Services Pricing Manual, on pages 2-6 and 2-7. Here it is:

Quote

Armed Services Pricing Manual (DOD, 1986)

2.3 Fair and Reasonable Price [Chapter 2, Price and Price Analysis, pages 2-6 and 2-7]

You are to procure supplies and services at fair and reasonable prices, but what is fair and reasonable? In Appendix B, a fair and reasonable price is described as one that is fair to both parties, considering the promised quality and timeliness of contract performance. Thus, to be fair to both parties, the price must represent a reasonable compromise between the seller's and the buyer's view of a fair price.

In any given procurement situation, there rarely is a single price that is fair and reasonable from all viewpoints. More likely, there may be a range of prices that are fair under the circumstances, considering the degree of competition and the character of the market in which the item or service, and other, similar ones, are usually bought and sold. "Reasonable," however, is subjective and implies a personal viewpoint: there is a price that is reasonable. As a result, you should consider "fair and reasonable" in three dimensions: fair under current market conditions; reasonable to the seller; and reasonable to the buyer.

Price theory tells us that the kind and degree of competition determine which dimension will be dominant in any given situation. The fair market price is determined by supply and demand if there is perfect or effective competition. Whether that price is also reasonable to either buyer or seller is a material question only if it causes one to enter or leave that particular market.

Under conditions of imperfect competition, the fair market price becomes a progressively less material question as conditions move toward monopoly. The emphasis shifts toward what price is reasonable to the buyer and what price is reasonable to the seller. The buyer's idea of reasonable price is determined by value, utility, and the existence of alternatives. The seller's idea often is based on full costs plus a reasonable return.

While this seems to beg the question, remember that in any given procurement situation no one price is fair and reasonable from all viewpoints. It is more important to understand the economic forces working on the price at which the product will change hands than to arrive at a complete definition of a fair and reasonable price.

Fair and reasonable describes a conclusion that the price is acceptable to both the Government and the seller. in sealed bid procurements, it usually is presumed that the lowest bid price is fair and reasonable. The same presumption usually exists in procurements placed after other competitive procedures, if price competition is effective.

In either case, if price competition is not effective, the lowest offer is not necessarily fair and reasonable. Other factors that must be considered are quality in relation to use, ability to deliver on time, and ultimate cost to the taxpayer. (Ultimate cost may be measured by ease nd cost of maintenance, transportation costs, and service life, including time between overhauls, in addition to the cost of acquisition.) Demonstration that. a given price is fair and reasonable will depend on how the buyer reached the decision to buy at that price, the price comparisons made, the Government engineering estimates used and detailed estimates of the costs to perform, and how the buyer prepared for and conducted negotiations.

Appendix B, the Glossary:

Fair and reasonable price: A price that is fair to both parties, considering the agreed-upon conditions, promised quality, and timeliness of contract performance. Although generally a fair and reasonable price is a function of the law of supply and demand, there are statutory, regulatory, and judgmental limits on the concept.

The glossary entry is described as an explanation, not a definition.

Jamal:

What more guidance do you want?

It has long been understood that "the market" does not necessarily yield what many people would consider fair and reasonable prices. Go to the pharmacy and ask about drug prices. I learned yesterday that a single dose of CroFab rattlesnake antivenom costs $14,000, and if you're bitten you may need more than one dose. The cost of making it is about 0.1 percent of the price. See http://www.smithsonianmag.com/smart-news/why-single-vial-antivenom-can-cost-14000-180956564/. See also http://www.cbsnews.com/news/rattlesnake-selfie-results-in-a-153k-medical-bill/. (Still hate Obamacare?)

Is $14,000 fair and reasonable? Hell no. It's neither fair nor reasonable, but I'll pay it if I'm bitten. What choice do I have? (Although, a friend of my brother got bit near Flagstaff, Arizona, while illegally looking for Indian artifacts. He doesn't have health insurance and he refused to let them treat him with it at the hospital. He went home. His leg turned black up to his crotch and he said it hurt like hell, but he survived without long term ill effect. Of course we told him he was nuts, but there are many nuts out in that desert backcountry and he said he didn't feel alone.)

Some people would say $14,000 is fair and reasonable if you need the stuff in order to survive. If anyone tells you that, make sure you don't vote for them if they run for public office, and don't offer them a drink if they come to your house for any reason other than to split their lottery winnings. Just because you have to have it doesn't make $14,000 per dose fair and reasonable. That's nonsense. Fortunately, I own knee high snake boots and wear them when I'm in rattler country. What if your dog gets bitten? Tip: Don't take stupid or aggressively curious dogs into rattler country. My dog Jonah stays home. He's an idiot and noses or chases anything that moves. As my youngest son would say, if he gets bit, oh well.

This is from Forbes, "Yes, The Market's Unfair," by Paul Maidment, May 8, 2008: "Everything you've heard about the virtues of competition in markets--and about how supply and demand work in concert to set the proper prices for goods, services, and securities, is irrelevant. There are no perfectly functioning markets outside of the imagination of economists."

Some CO's can determine fair and reasonable without any trouble. Others agonize.

But, Retread, you knew that. Jamal, let it go.

Vern, thanks for the history lesson.  I was a history major in college and find the origins of things to be interesting.  As to the reason for my question, in my experience, many COs think that a fair and reasonable price is a price that is developed strictly through cost/price analysis.  I wanted to see where Lionel was on this.

On Friday, May 19, 2017 at 11:47 PM, Vern Edwards said:

What more guidance do you want?

Vern,

I have been intellectually satisfied several posts ago; however, I do value the on-going discussions. That's in regard to unreasonable prices. Maybe it is possible to award at unreasonable prices and maybe FAR 15.404-1(b)(2)(A) supports that. Why else would they caveat comparison with historical prices paid by saying "...if the reasonableness of the prior price is uncertain, then the prior price may not be a valid basis for comparison."? Sounds like some contract prices are assumed to be unreasonable. Also, FAR 13.106-3(A)(2)(ii) states that contracting officers can determine a price fair and reasonable by comparison of the proposed price with prices found reasonable on previous purchases. Is that suggesting that not all purchase prices are found reasonable? 

I still think so-called unreasonable can be called reasonable under the FAR concept of a fair and reasonable price, which has elsewhere been described as the price that a prudent and competent businessperson would be willing to pay for an item or service under market conditions, given available data on the marketplace.

In essence, for me, price reasonableness is largely a judgement call based on market conditions, alternatives for meeting the requirement, price-related factors, non-price evaluation factors that relate to each procurement, and what price can be negotiated with an offeror. Willing to pay is a different standard than happy or wanting to pay. I don't like it, but that's how I see it. I would document the file to explain the situation and move forward.

As always, thank you for the thoughtful and thought-provoking analysis. I'll go watch Disney's Frozen with the kiddos and 'let it go' …

Jamaal Valentine said:

I still think unreasonable can be called reasonable under the FAR concept of a fair and reasonable price, which has elsewhere been described as the price that a prudent and competent businessperson would be willing to pay for an item or service under market conditions, given available data on the marketplace.

In essence, for me, price reasonableness is largely a judgement call based on market conditions, alternatives for meeting the requirement, price-related factors, non-price evaluation factors that relate to each procurement, and what price can be negotiated with an offeror. Willing to pay is a different standard than happy or wanting to pay. I don't like it, but that's how I see it. I would document the file to explain the situation and move forward.

Jamal,

The only thing that bothers me about what you say is that it sounds like there will never be a price that cannot be justified by someone as reasonable. That seems to render the whole concept of fair and reasonable price as phony. So if someone comes along and says, "Hey, you paid too much for that," you can say, "No, it was reasonable to me. It really needed it." Isn't $14,000 reasonable if your life is at stake?

My reaction is that there is nothing reasonable about $14,000 for a single dose of snake antivenom. It may be necessary, because that's the only way to get it, but it's not fair and reasonable unless reasonable is based on degree of need. A sliding scale? The more you need it, the higher the threshold of fairness and reasonableness? Maybe. But then why bother with the concept of price gouging in disasters. Maybe price gouging is even good. Here are some things to read:

https://definitions.uslegal.com/p/price-gouging/

http://www.doj.state.or.us/consumer/Pages/price_gouging.aspx

https://knowledgeproblem.com/2012/11/03/list-of-price-gouging-laws/

http://www.cnbc.com/2017/04/18/airbnb-doubles-down-it-its-efforts-to-fight-hotel-price-gouging.html

http://business.time.com/2012/11/02/post-sandy-price-gouging-economically-sound-ethically-dubious/

https://hbr.org/2013/07/the-problem-with-price-gouging-laws

https://www.nytimes.com/2017/04/20/opinion/how-to-stop-drug-price-gouging.html?_r=0

https://www.technologyreview.com/s/529961/in-praise-of-efficient-price-gouging/

https://www.technologyreview.com/s/529961/in-praise-of-efficient-price-gouging/

https://mises.org/library/price-gouging-saves-lives-hurricane

What's a poor man (or government) to do? FAR 15,405(d)? Why worry?

Thank you, sir.

See "Military healthcare paying more than $400 for a $46 can of baby formula," http://www.wcnc.com/news/health/military-healthcare-paying-more-than-400-for-46-can-of-baby-formula/441585928, dated May 21, 2017.

See also "Is there any reason for the outrageous price of cinnamon sticks? An Investigation," https://theoutline.com/post/930/why-are-cinnamon-sticks-so-expensive

Interesting discussion about pricing on Amazon: "Thread: Why Do Some Sellers Charge Impossibly High Prices?" https://sellercentral.amazon.com/forums/thread.jspa?threadID=185839

There are many stories of outrageous commercial prices, which is something to think about now that the HASC plans to force the government into buying from online commercial sources like OfficeMax,Grainger, and Staples. http://breakingdefense.com/2017/05/thornberry-reform-bill-directs-pentagon-to-just-buy-commercial-products-online/

Cinnamon sticks and vanilla beans. Currently, for fresh produce, I pay four to five times the cost compared to the states.

Not many people signup to bring  a fruit-tray to bbqs or office parties. Growing up in Southern California I was spoiled … here, it's $4 for five small jalapenos, $20 for a watermelon, don't even think about mangoes, strawberries, or blueberries.

On 5/20/2017 at 0:06 AM, Jamaal Valentine said:

I still think unreasonable can be called reasonable under the FAR concept of a fair and reasonable price, which has elsewhere been described as the price that a prudent and competent businessperson would be willing to pay for an item or service under market conditions, given available data on the marketplace.

In essence, for me, price reasonableness is largely a judgement call based on market conditions, alternatives for meeting the requirement, price-related factors, non-price evaluation factors that relate to each procurement, and what price can be negotiated with an offeror. Willing to pay is a different standard than happy or wanting to pay. I don't like it, but that's how I see it. I would document the file to explain the situation and move forward.

Jamal, I agree.

When examining issues of “reasonableness” the law uses what is known as the “Reasonable Person” standard.  It is most often associated with the law of Torts, but is equally applicable to contract law, when it is sometimes called the “reasonably prudent business person” standard. 

Quote

Such a “person” is really an ideal, focusing on how a typical person, with ordinary prudence, would act in certain circumstances. The test as to whether a person has acted as a reasonable person is an objective one, and so it does not take into account the specific abilities of a defendant. Thus, even a person who has low intelligence or is chronically careless is held to the same standard as a more careful person or a person of higher intelligence.

http://injury.findlaw.com/accident-injury-law/standards-of-care-and-the-reasonable-person.html

When we talk about whether a price is reasonable, we are asking whether a reasonably prudent business person in a given situation would pay the price in question.  This standard is reflected in the advice of the Director of Defense Pricing (quoted in my post above) when he states that the determination should be made from the point of view of “a reasonable businessman or business woman reviewing the data.” 

Under this standard, it is not be enough for the contracting officer merely to say, “The price is reasonable to me.”  Nor is it required that the specific price be reasonable in all situations.  Rather, the contracting officer must be able to say, “A typical business person, with ordinary prudence, in the same circumstances I am in, would be willing to pay this price.”  When you see examples of unreasonable pricing, it is because it does not meet that criteria.  Either, there are other equivalent options at better prices, or the government’s need is not great enough to pay the requested price and it is more prudent to simply go without.

For example, under normal circumstances, a contracting officer is not going to be able to determine $10,000 to be a reasonable price for a coffee pot.  It does not matter how much he or she subjectively loves coffee.  Nor is it enough that an extravagant millionaire might purchase a $10,000 coffee pot as a luxury.  There are many options when it comes to purchasing coffee pots, and a typical business person, with ordinary prudence under normal circumstances is not going to pay that price for a coffee pot.

A good example in private industry is a television commercial.  Without context, $4M for a 30 second commercial sounds unreasonable.  And, if a local cable company demands $4M from Pepsi for a 30 second ad during a rerun of McHale’s Navy, it would be unreasonable.  The need for any one ad is not that great, and there are other less expensive, equally effective opportunities to air commercials.  A reasonably prudent business person would not pay that price.

But if FOX demands $4M from Pepsi for a 30 second ad during the Super Bowl, it may be determined to be a reasonable price.  The number of viewers plus the potential for ads to go viral and generate “buzz” make the return on that $4M purchase a much better deal.  Considering prices at this year’s Super Bowl approached $5M, one might even think Pepsi was getting a good deal at only $4M. The product and price haven't changed, but the circumstances have.

Tweak the scenario just a bit more and the price can become unreasonable again.  Imagine a company that does not sell products to the general public and is operating at maximum capacity such that a Super Bowl commercial is not going to help generate sufficient revenue to justify the purchase.  In that case, even the “bargain” rate of $4M is not a price that a typical business person with ordinary prudence would pay in those circumstances.

Keep changing the circumstances, i.e., the data, and you can find multiple scenarios in which the same price for the same item is either reasonable or unreasonable from the point of view of an typical business person with ordinary prudence.  If reasonableness of price did not depend on the specific facts of a procurement, then the Government could come out with a universal price list that capped the prices across all government contracts.  The FAR recognizes the variable nature of the price reasonableness determination and puts that responsibility on the individual with the most knowledge of the circumstances of the procurement.

Two things I would like to make clear to readers:

1. Price reasonableness (contracting officer) is separate from requirements definition (client, program manager, etc.). I have witnessed contracting officers overstepping their roles because of price related concerns.

2. Price reasonableness always considers the non-cost/price factors of the source selection. (e.g. the evaluation factors and significant subfactors that establish the requirements of acceptability including past performance)

On 5/19/2017 at 3:06 PM, Jamaal Valentine said:

I still think unreasonable can be called reasonable under the FAR concept of a fair and reasonable price, which has elsewhere been described as the price that a prudent and competent businessperson would be willing to pay for an item or service under market conditions, given available data on the marketplace.

Emphasis added.

The highlighted statement, taken literally, is absurd. A proposed or quoted price is reasonable or it is not.

The DOD memo cited and linked by Lionel Hutz is entitled, "Commercial Items and the Determination of Reasonableness of Price for Commercial Items" and is dated Feb. 4, 2015. It does not address determinations of price reasonableness in noncommercial acquisitions. Moreover, it does not explain the precise nature of Lionel's "reasonably prudent business person" standard. Read what the memo says carefully:

Quote

The standard to be used by contracting officers is whether a reasonable businessman or businesswoman reviewing the data would conclude that it is sufficient to demonstrate that the taxpayers are paying a fair and reasonable price for the item.

Think about that. Think carefully. Do you agree?

Lionel Hutz said:

When examining issues of “reasonableness” the law uses what is known as the “Reasonable Person” standard.  It is most often associated with the law of Torts, but is equally applicable to contract law, when it is sometimes called the “reasonably prudent business person” standard.

Lionel cited a Findlaw entry, "Standards of Care and the 'Reasonable Person'," but the entry does not support his assertion that the "reasonably prudent business person" standard used in tort and criminal law is "equally applicable" to contract law. It makes no mention of contract law. If you're going to say things like that you should cite an apt reference. See, instead, Dimatteo, "The Counterpoise of Contracts: The Reasonable Person Standard and the Subjectivity of Judgment," South Carolina Law Review (Winter 1997). https://www.cisg.law.pace.edu/cisg/biblio/dimatteo5.html 

The reasonable person standard applied in contract law is not identical with the reasonable person standards applied in tort and criminal law. From the Dimatteo article:

Quote

Professor Prosser notes that the reasonable person of tort is a hypothetical personification of the "community ideal of reasonable behavior." Although stemming from the same family tree, the reasonable person of contract differs in make-up and disposition. In tort the reasonable person is a more universalized personage, reflective of the general duties of care owed to fellow human beings. The reasonable person of contract is a more specialized creature, possessing all of the idiosyncratic features of the contracting parties viewed within the context of their interaction.

Footnote omitted.

In any case, pre-award determinations of price reasonableness are not matters of contract law, and FAR Part 15 makes no mention of any "reasonable person" or "reasonably prudent business person" standard for pre-award determinations of price reasonableness.

The standard for post-award contractual determinations of cost reasonableness is stated in FAR 31.201-3 and is a matter of contract law and regulation. You can see FAR 31.201-3 applied in Kellogg Brown & Root Services, Inc. v. U.S., 742 F. 3d 967 (Fed. Cir. 2014). See also Kellogg Brown & Root Services, Inc. v. U.S., 107 Fed.Cl. 16 (2012). 

The interesting questions to be answered for the purposes of this thread are:

1. What is to be the standard of price reasonableness in any given case?
2. Is the standard of price reasonableness for the item constant or does it change with circumstances, including circumstances of need? (Is price reasonableness ever a function of the degree of need? If a given price is unreasonable in routine acquisitions, can it be reasonable in emergencies? If so, what of the concept of price gouging in cases of disasters?)
3. Is the application of the standard of price reasonableness entirely subjective, or is there a threshold at which a price is reasonable or unreasonable to all?
4. In cases in which cost analysis must be done, does price reasonableness necessarily turn on the relationship between estimated cost and proposed price?

FAR does not answer those questions. The closest FAR Part 15 comes to providing guidance about a standard for price reasonableness is probably the following, from FAR 15.405(b):

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A fair and reasonable price does not require that agreement be reached on every element of cost, nor is it mandatory that the agreed price be within the contracting officer’s initial negotiation position.The contracting officer’s objective is to negotiate a contract of a type and with a price providing the contractor the greatest incentive for efficient and economical performance.

That does not strike me as especially helpful, and it does not seem applicable to the acquisition of commercial items.

According to Lionel:

Lionel Hutz said:

When we talk about whether a price is reasonable, we are asking whether a reasonably prudent business person in a given situation would pay the price in question.  This standard is reflected in the advice of the Director of Defense Pricing (quoted in my post above) when he states that the determination should be made from the point of view of “a reasonable businessman or business woman reviewing the data.” 

Under this standard, it is not be enough for the contracting officer merely to say, “The price is reasonable to me.”  Nor is it required that the specific price be reasonable in all situations.  Rather, the contracting officer must be able to say, “A typical business person, with ordinary prudence, in the same circumstances I am in, would be willing to pay this price.”  When you see examples of unreasonable pricing, it is because it does not meet that criteria.  Either, there are other equivalent options at better prices, or the government’s need is not great enough to pay the requested price and it is more prudent to simply go without.

Emphasis added.

I emphatically disagree with both DOD's memo and the statement I highlighted from Lionel, because contracting officers are not "typical business persons." They are supposedly specially-trained agents of a particular kind of government, and our government's standards of prudence are not always the same as private sector standards. The government has responsibilities that "typical business persons" do not have (disaster relief) and buys many things that typical business persons do not buy (one year of test support services at Yuma Proving Ground; $400,000 flight helmets for F-35 pilots).

The difference between contracting officers and typical business persons is shown in the following from the Contract Pricing Reference Guides, Vol. 1, I.2.1:

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As a buyer, you should consider a price that is TOO HIGH to be unfair. What happens if you agree to a price that is too high?

• You will have failed to fulfill your most basic responsibility as a Government contracting officer or contract specialist. 
• You will waste scarce Government funds. 
• Since you are publicly accountable as a Federal employee for your decisions, you may have to answer to management, the Inspector General, the General Accounting Office, a Congressional committee, or the public at large.

Also, keep this in mind, from FAR 15.405(a):

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Taking into consideration the advisory recommendations, reports of contributing specialists, and the current status of the contractor’s purchasing system, the contracting officer is responsible for exercising the requisite judgment needed to reach a negotiated settlement with the offeror and is solely responsible for the final price agreement.

Bottom line: I think that a CO determination of fairness and reasonableness is subjective within what I'll call "publicly acceptable" boundaries. Despite the "solely responsible" phrase in FAR 15.405(a), a CO's determination cannot be entirely subjective, because it may be judged by critical persons with a special point of view, and a CO must think about what such persons' standards might be before biting the bullet. He or she must be prepared to respond to their objections with a coherent and reasonable explanation. As I mentioned in an earlier post, some government buyer thought that $400 was a reasonable amount to pay for baby formula. Now that the determination has come to light, a U.S. senator has some questions.

Having said all that, it appears to me that most COs make determinations of price reasonableness without much difficulty or risk. But who knows what they'd say if asked to explain their determinations.

Vern, some old mossbacks like me remember the Renegotiation Board.  Would you be in favor of reviving it or something like it?

Vern Edwards said:

In any case, pre-award determinations of price reasonableness are not matters of contract law, and FAR Part 15 makes no mention of any "reasonable person" or "reasonably prudent business person" standard for pre-award determinations of price reasonableness.

See FAR 15.404-1(a)(7), which refers you to the informational Contract Pricing Reference Guides (CPRG) for instruction and professional guidance. Here is what Volume 1, Chapter 0 states:

What Is Reasonable? A reasonable price is a price that a prudent and competent buyer would be willing to pay, given available data on:

Market conditions, your alternatives for meeting the requirement, price-related factors, noncompetitive acquisitions, non-price evaluation factors, and applying judgment to the determination.

CPRG further provides that "…a price that is reasonable today may not be reasonable tomorrow."

*****it is noted that the CPRGs are not directive in nature

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15.405(d): "If, however, the contractor insists on a price or demands a profit or fee that the contracting officer considers unreasonable.."

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con·sid·er

kənˈsidər/

verb

1. believe; think.

   • "at first women were considered to be at low risk from HIV"

   • take (something) into account when making an assessment or judgment.

     "one service area is not enough when you consider the number of cars using this highway"

     synonyms:

     take into consideration, take account of, make allowances for, bear in mind, be mindful of, remember, mind, mark, respect, heed, note, make provision for

     "the inquiry will consider those issues"

     antonyms:

     ignore

Note the actual words used : "consider" is primarily subjective, in that it refers to the weighing of information the CO considers relevant in order to reach a supportable conclusion.  A lack of information, or information in the wrong format,  can also lead a CO to "consider" a price or fee unreasonable within the bounds of the FAR.

The CO's job is not to make organizational-wide decisions; those calls are left to the politicals and their senior leadership. So of course if the CO can't make a determination in accordance with the FAR, higher-level concurrence is required to make an award.  That's just normal oversight.

Here's a perfect example: back in the day, I was negotiating a deal for a piece of gear for  a Navy fighter jet. The contractor's yield rates on the main component were so abysmal that I couldn't abide allowing 100% of the scrap rate.   Years later I found out that the reason for the low yields was the fact that the government data package we provided was "incomplete", i.e., the US acquired it using sources and methods of which I was unaware at the time....so not so 'unreasonable' after all, as it turned out.

Retread:

No to renegotiation. It was never that good an idea, it was hard, and you could never get it through Congress these days.

Jamal:

The CPRG says "prudent and competent buyer," not "reasonably prudent business person." I think of a government buyer as what I described above: "specially-trained agents of a particular kind of government." Government contracting personnel are not "typical" businesspersons. Commonplace "reasonable" and "prudent" person standards do not take the government buyer's unique role and public interest concerns into account. What a business person selling something thinks would be fair to the taxpayer is not necessarily what a contracting officer would think is fair to the taxpayer.

Retreadfed said:

Vern, some old mossbacks like me remember the Renegotiation Board.

Mulligans only belong in a game of golf.  Especially mine.

I followed FAR 1.108(a) convention and used the following common dictionary meaning of buyer:

1. A person who makes a purchase.

1.1 A person employed to select and purchase stock or materials for a large retail or manufacturing business.

https://en.oxforddictionaries.com/definition/buyer

FAR uses the term buyer at least thirteen times - all seemingly consistent with one or more of the definitions above. In my judgement, FAR's use of the term buyer includes the general public, private sector, and government buyers. (Unless a specific use requires a different interpretation)

I know it's commonly accepted that price reasonableness is only concerned with prices that are too high, but is that all a prudent and competent buyer would be concerned with?

CPRG alludes to price reasonableness being concerned with prices being fair to the seller (not too low).

Awarding at prices that are unfairly low may have an undesired impact on the market and the buyer's own interest. For example, Canada took advantage of an expired trade deal in 2015 and sold lumber at unfairly low prices here in the U.S, and that [resulted in less competition as smaller mills could not compete]. At that point, the remaining sellers had more control over prices.

https://www.google.co.jp/amp/s/www.marketplace.org/amp/2017/05/22/economy/timber-tariff-cuts-different-ways-in-canada-us

For those seeking an advanced degree in the history of government contract pricing, a few titles from my library (prompted by Retreaded's mention of renegotiation):

• Brande, Stuart D., Warhogs: A History of War Profits in America (The University Press of Kentucky, 1997)
• Braucher, Robert, The Renegotiation Act of 1951, 66 Harvard Law Review 270 (December 1952)
• Crowell, J. Franklin, Government War Contracts (Oxford University Press, 1920)
• Miller, John Perry, Pricing of Military Procurements (Yale University Press, 1949)
• Nash, Ralph C., Pricing Policies in Government Contracts, 29 Law and Contemporary Problems 361 (1964)
• Seidman, J.S., Seidman's Legislative History of Excess Profits Tax Laws 1946 - 1917 (William S. Hein & Co., Inc., 1998)
• Weston, J. Fred, ed., Procurement and Profit Renegotiation (Wadsworth Publishing Co., Inc., 1960)
• Wilson, Mark P., "Taking A Nickel Out Of The Cash Register": Statutory Renegotiation of Military Contracts And The Politics Of Profit Control In The United States During World War II, 28 Law and History Review 343 (May 2010)
• University of Michigan, Official Publication, Vol. 45, No. 127, April 8, 1944, Renegotiation and Termination of War Contracts 1942 -1944

There is an amazing amount of historical stuff out there bearing on how we got to where we are today. I'll post more titles as I unpack boxes.

More history of pricing:

• Preston, L.E., Contract Negotiations and Results in Aircraft Procurement: Case Studies of the B-52 and B-58 (Rand, 1962).
• Fascinating.Pricing for Profit (Harvard Business Review Reprints 1970 -74). Dated, but interesting.
• Joint Economic Committee of Congress, Report of the Subcommittee on Economy in Government: The Economics of Military Procurement (1969)
• Pownall, G., An Empirical Analysis of the Regulation of the Defense Contracting Industry: The Cost Accounting Standards Board (2 Journal of Accounting Research 291 (Autumn 1986)
• House Committee on Banking and Currency, Hearings,To Renew the Defense Production Act of 1950, as amended (1968). These hearings were the origins of the Cost Accounting Standards. It is "The Admiral Hyman Rickover Show," and provides extended views on some aspects of contract pricing

I’d like to correct something I wrote earlier. 

I previously stated that “Price reasonableness is a subjective determination.”  When I stated that, I meant that a determination of price reasonableness would vary depending on the facts and conditions of the acquisition.

I still believe that; however, that is not the proper use of the term “subjective.” 

The reasonable person standard is an objective, not subjective standard.  In an objective standard, the personal beliefs of the party are irrelevant.  What matters is what a typical person exercising ordinary prudence would find reasonable.  On the other hand, a subjective standard considers the actual beliefs of the party when deciding whether he or she acted reasonably.  See the following article for a discussion of The Objective Theory of Contracts. (http://scholarship.law.tamu.edu/cgi/viewcontent.cgi?article=1301&context=facscholar) which states:

Quote

The objective theory of contracts provides that mutual assent to a contract is determined by reference to external acts and manifestations, not by evidence of subjective, internal intention. Stated more simply, contract formation depends on what is communicated, not on what is merely thought. Thus, modem objective theory provides that "objective manifestations of intent of [a] party should generally be viewed from the vantage point of a reasonable person in the position of the other party.”

The Dimatteo article cited by Vern also makes this same point when it states:

Quote

A reasonable person must therefore be constructed on a case by case basis. This substituted contracting party possesses the intellect, sophistication, and good faith demeanor of the average reasonable person. The issue in dispute is then resolved by the application of this reasonable party. The subjective intent of the parties is replaced by the intent of this reasonable person applied ex ante.

Further, I agree that when dealing with professionals, the reasonable person standard is elevated to that of a reasonable professional in that field.  A professional has skills and abilities superior to the average person and is expected to utilize those skills/abilities when appropriate.  So, for example, a doctor that treats a person with a broken leg will be held to the standard of a typical doctor exercising ordinary prudence, not just a typical person.

So, to summarize up to this point: There is not a limit on what can be considered a reasonable price in all acquisitions; it will vary depending on the circumstances.  In addition, the whims and subjective beliefs of a contracting officer are NOT considered in determining whether a price is reasonable.  Rather, the decision must be viewed from the objective standpoint of a reasonable person.  And finally, because we are dealing with professionals exercising skill in their chosen profession, the reasonable person standard is elevated to the standard of a reasonable professional.

It seems, the disagreement lies in whether the hypothetical “reasonable professional“ should be the more specific “typical contracting officer,” or the more general “typical business person.”

First, with regard to determining price reasonableness, contracting officers are not generally accepted as having skills and abilities superior to business people in private industry, such that they should be considered separate or held to a higher standard. There are highly skilled, intelligent and educated people in both the public and private sector.  It may appear that the two groups are at odds in determining price reasonableness if you compare the price at which a typical business person would like to SELL to that which a typical contracting officer would like to PAY.  But that is the wrong comparison because the circumstances are not the same (sell vs pay). Rather, the question to be asked is, whether under the same circumstances, a typical business person would PAY the price being evaluated for the needed goods or services.  In other words, is the Government getting a worse deal than the private sector would get in the same situation?  I see no reason to believe contracting officers, as a class, have superior abilities and make better price reasonableness determinations such that they should be held to a higher standard.

Next, the rights and duties of a contracting officer are not inherently greater than that of a private business person. The US Supreme Court stated, “When the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals.” Winstar v. United States, 518 U.S. 839, 895 (1996) (quoting Lunch v. United States, 292 U.S. 571 (1934)).  When the Government wants to impose rules, obligations or standards on a contracting officer that are in addition to, or more strict than, the private sector (for example, restrictions on accepting gifts) it does so through specific statutes, regulations, and policy.  Absent such a specific requirement, the actions of the Government and its contracting officers are governed by the law applicable to the private sector.

Finally, the FAR already allows a contracting officer to rely on what a typical business person considers reasonable in the form of published market prices.  See FAR 15.404-1(b)(2) (“The Government may use various price analysis techniques and procedures to ensure a fair and reasonable price.  Examples of such techniques include… (iv) Comparison with competitive published price lists, published market prices of commodities, similar indexes…”)  There is no caveat that private industry market prices support a determination of price reasonableness only if they also pass another more stringent level of scrutiny.

Based on this, I believe that a contracting officer can conclude that a price is fair and reasonable if he or she determines that typical business person, with ordinary prudence, in the same circumstances, would pay the price.

Lionel:

What constitutes a "fair and reasonable price" is a matter of regulatory interpretation, not contract interpretation, and not negligence. Does your reasonable person standard apply to regulatory interpretation? Please cite references.

I should add that you do not seem to understand that there is more than one reasonable person standard. The standard for torts is not the same as the standard for crimes or for contracts. Also, you are asserting many things for which you provide no support, such as:

Quote

First, with regard to determining price reasonableness, contracting officers are not generally accepted as having skills and abilities superior to business people in private industry, such that they should be considered separate or held to a higher standard.

and

Quote

Next, the rights and duties of a contracting officer are not inherently greater than that of a private business person.

I don't think Winstar has ever been interpreted to support the assertion that you are making. Are you going to give us anything other than your own unsupported opinion?

Finally:

Quote

There is not a limit on what can be considered a reasonable price in all acquisitions; it will vary depending on the circumstances.

No one has suggested that there is a universal standard applicable to all circumstances. Are you saying that in any particular set of circumstances there is no limit on what can be considered a reasonable price?

...An example or two of competitive published price lists for commercial items?  Thanks.

I don't see any benefit in asserting that a price reasonableness decision must be objective.  As I see it, a price reasonableness decision includes both factual observations (objective?) and value judgments (subjective?).  Some price reasonableness decisions will have more of an objective flavor; some will have more of a subjective flavor.

In torts, they say an action based on a reasonable person standard is objective and an action based on a person's feelings is subjective.  But surely the method of divining or discerning a reasonable person standard (what a reasonable person would do) is very much subjective.  So in a tort case, the lawyers argue and the judge uses a subjective method to come up with a reasonable person standard, and then retroactively imposes that standard on the defendant in the case.  Objective?  Really?

I am fine with price reasonableness determinations that are influenced by a contracting officer's value judgments; providing, the contracting officer is faithfully doing his or her job.

The problem with Lionel's analysis is that he is trying (needlessly, in my opinion) to apply a judicial standard to a situation to which it does not apply. Pre-award determinations of price reasonableness do not involve litigation. There is no basis (or reason) for applying a judicial standard to the determination. If there were a judicial issue of regulatory interpretation, then the question might be asked if there is a reasonable person standard in matters of regulatory interpretation. If there were any such standard, then we'd have to determine what that interpretation might be.

The determination of price reasonableness is one of professional practice, and if there is any standard for making it, it is a professional standard of judgment, not a judicial one.

In short, Lionel has given us no reason to assent to his rather broad assertion that:

Quote

The decision [about price reasonableness] must be viewed from the objective standpoint of a reasonable person.

I see nothing in FAR or in any other guidance indicating that the determination of price reasonableness is to be based on an "objective standpoint." On the other hand, the decision is not entirely subjective. The regulations provide extensive guidance about what COs should consider when determining price reasonableness. That guidance establishes broad boundaries of reasonableness--broad, but boundaries nontheless. See FAR 15.404-1, which says, in part:

Quote

(b) Price analysis for commercial and non-commercial items.

(1) Price analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit. Unless an exception from the requirement to obtain certified cost or pricing data applies under 15.403-1(b)(1) or (b)(2), at a minimum, the contracting officer shall obtain appropriate data, without certification, on the prices at which the same or similar items have previously been sold and determine if the data is adequate for evaluating the reasonableness of the price. Price analysis may include evaluating data other than certified cost or pricing data obtained from the offeror or contractor when there is no other means for determining a fair and reasonable price. Contracting officers shall obtain data other than certified cost or pricing data from the offeror or contractor for all acquisitions (including commercial item acquisitions), if that is the contracting officer’s only means to determine the price to be fair and reasonable.

(2) The Government may use various price analysis techniques and procedures to ensure a fair and reasonable price. Examples of such techniques include, but are not limited to, the following:

(i) Comparison of proposed prices received in response to the solicitation. Normally, adequate price competition establishes a fair and reasonable price (see 15.403-1(c)(1)(i)).

(ii) Comparison of the proposed prices to historical prices paid, whether by the Government or other than the Government, for the same or similar items. This method may be used for commercial items including those “of a type” or requiring minor modifications.

(A) The prior price must be a valid basis for comparison. If there has been a significant time lapse between the last acquisition and the present one, if the terms and conditions of the acquisition are significantly different, or if the reasonableness of the prior price is uncertain, then the prior price may not be a valid basis for comparison.

(B) The prior price must be adjusted to account for materially differing terms and conditions, quantities and market and economic factors. For similar items, the contracting officer must also adjust the prior price to account for material differences between the similar item and the item being procured.

(C) Expert technical advice should be obtained when analyzing similar items, or commercial items that are “of a type” or requiring minor modifications, to ascertain the magnitude of changes required and to assist in pricing the required changes

(iii) Use of parametric estimating methods/application of rough yardsticks (such as dollars per pound or per horsepower, or other units) to highlight significant inconsistencies that warrant additional pricing inquiry.

(iv) Comparison with competitive published price lists, published market prices of commodities, similar indexes, and discount or rebate arrangements.

(v) Comparison of proposed prices with independent Government cost estimates.

(vi) Comparison of proposed prices with prices obtained through market research for the same or similar items.

(vii) Analysis of data other than certified cost or pricing data (as defined at 2.101) provided by the offeror.

See also:

Quote

(c) Cost analysis.

(1) Cost analysis is the review and evaluation of any separate cost elements and profit or fee in an offeror’s or contractor’s proposal, as needed to determine a fair and reasonable price or to determine cost realism, and the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency.

(2) The Government may use various cost analysis techniques and procedures to ensure a fair and reasonable price, given the circumstances of the acquisition. Such techniques and procedures include the following:

(i) Verification of cost data or pricing data and evaluation of cost elements, including—

(A) The necessity for, and reasonableness of, proposed costs, including allowances for contingencies;

(B) Projection of the offeror’s cost trends, on the basis of current and historical cost or pricing data;

(C) Reasonableness of estimates generated by appropriately calibrated and validated parametric models or cost-estimating relationships; and

(D) The application of audited or negotiated indirect cost rates, labor rates, and cost of money or other factors.

(ii) Evaluating the effect of the offeror’s current practices on future costs. In conducting this evaluation, the contracting officer shall ensure that the effects of inefficient or uneconomical past practices are not projected into the future. In pricing production of recently developed complex equipment, the contracting officer should perform a trend analysis of basic labor and materials, even in periods of relative price stability.

(iii) Comparison of costs proposed by the offeror for individual cost elements with—

(A) Actual costs previously incurred by the same offeror;

(B) Previous cost estimates from the offeror or from other offerors for the same or similar items;

(C) Other cost estimates received in response to the Government’s request;

(D) Independent Government cost estimates by technical personnel; and

(E) Forecasts of planned expenditures.

(iv) Verification that the offeror’s cost submissions are in accordance with the contract cost principles and procedures in part 31 and, when applicable, the requirements and procedures in 48 CFR Chapter 99 (Appendix to the FAR looseleaf edition), Cost Accounting Standards.

(v) Review to determine whether any cost data or pricing data, necessary to make the offeror’s proposal suitable for negotiation, have not been either submitted or identified in writing by the offeror. If there are such data, the contracting officer shall attempt to obtain and use them in the negotiations or make satisfactory allowance for the incomplete data.

(vi) Analysis of the results of any make-or-buy program reviews, in evaluating subcontract costs (see 15.407-2).

None of that suggests that a determination of price reasonableness depends on what Lionel called "whims and subjective beliefs." On the other hand, none of it suggests that the determination must be that which would be made by some hypothetical "typical businessperson."

Lionel appears to contradict himself when he says, on the one hand:

Quote

Because we are dealing with professionals exercising skill in their chosen profession, the reasonable person standard is elevated to the standard of a reasonable professional.

Followed by:

Quote

With regard to determining price reasonableness, contracting officers are not generally accepted as having skills and abilities superior to business people in private industry, such that they should be considered separate or held to a higher standard.

Quote

I see no reason to believe contracting officers, as a class, have superior abilities and make better price reasonableness determinations such that they should be held to a higher standard.

Really?! The assertion that COs should not be held to a higher standard than a typical business person, is frankly ridiculous. A businessperson is free to do with his or her money what no contracting officer is free to do with the public's. A contracting officer is charged with a very high standard of responsibility:

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1.602-1(b) No contract shall be entered into unless the contracting officer ensures that all requirements of law, executive orders, regulations, and all other applicable procedures, including clearances and approvals, have been met.

1.602-2 Contracting officers are responsible for ensuring performance of all necessary actions for effective contracting, ensuring compliance with the terms of the contract, and safeguarding the interests of the United States in its contractual relationships. In order to perform these responsibilities, contracting officers should be allowed wide latitude to exercise business judgment. Contracting officers shall—

(a) Ensure that the requirements of 1.602-1(b) have been met, and that sufficient funds are available for obligation;

(b) Ensure that contractors receive impartial, fair, and equitable treatment; 

(c) Request and consider the advice of specialists in audit, law, engineering, information security, transportation, and other fields, as appropriate

See also FAR 1.108, FAR Conventions:

Quote

(f) Imperative sentences. When an imperative sentence directs action, the contracting officer is responsible for the action, unless another party is expressly cited.

Those obligations condition every determination of price reasonableness. They are burdens that the typical business person does not bear when dealing with the government. The typical business person is free to take risks and employ tactics that contracting officers are not free to take or employ.

COs are not business persons at all, much less typical ones. They are government officials. There is a world of difference between a contracting officer and a typical business person. Is a typical business person qualified to be a contracting officer? See FAR 1.603-2 and DFARS 201.603-2. See GSAM 501.603-2. I don't think so.

The special expertise of the CO is especially apparent when he or she must make decisions. See Nash, "Contracting Officer Decisions: How Much Independence", The Nash & Cibinic Report (January w013):

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Most importantly, a decision must represent the contracting officer's independent judgment. See Pac. Architects & Eng'rs Inc. v. United States, 491 F.2d 734, 744, 203 Ct. Cl. 499 (Ct. Cl. 1974) (quoting N.Y. Shipbldg. Corp. [v. U.S.], 385 F.2d [427] at 435 [(Ct. Cl. 1967)] (holding that a contracting officer must “put his own mind to the problems and render his own decisions”)); N. Star Alaska Hous. Corp. v. United States, 76 Fed. Cl. 158, 209 (2007) (“[A] contracting officer may not forsake his duties, but rather must ensure that his decisions are the product of his personal and independent judgment.”); CEMS, Inc. v. United States, 65 Fed. Cl. 473, 479 (2005) (noting that the contracting officer “failed to take ownership of all determinations included in the final contracting officer's opinion”); see also Air-O-Plastik Corp., GSBCA 4802 et al., 81-2 BCA ¶ 15,338 (“Usually a holding that a given decision does not represent the independent judgment of the contracting officer is reached only when the purported decision is imposed by higher authority or when the contracting officer completely abandons his decisional responsibility to another.”). To inform that judgment, contracting officers are entitled to obtain technical and legal advice. See Pac. Architects & Eng'rs Inc., 491 F.2d at 744 (noting that when a contracting officer is preparing a decision, there is “no implied prohibition against his first obtaining or even agreeing with the views of others”); Barringer & Botke, IBCA 428-3-64, 65-1 BCA ¶ 4,797 (“[A] contracting officer may, for the purpose of forming his independent judgment, obtain information and advice from his staff offices and advisors, particularly in the areas of law, accounting and engineering, in which fields he may have little or no expertise.”). However, contracting officers may not substitute the judgment of others for their own independent judgment. See N.Y. Shipbldg. Corp., 385 F.2d at 435 (holding that it is improper for a contracting officer to “merely rubber-stamp[ ] a subordinate's or superior's findings”); CEMS, Inc., 65 Fed. Cl. at 480 (“Although a contracting officer may review claims using in-house assistance, he must still understand and be persuaded by the determination made in his contracting officer's final decision.”); Jamco Constructors, Inc., VABCA 3271, 94-1 BCA ¶ 26,405 (“[A] contracting officer may not abdicate his responsibility by accepting any opinion offered without subjecting it to some analysis--particularly where he is, or should be, aware of information which calls that opinion into question.”).

To what typical business person do the courts apply such standards?

In Penner Installation Corp. v. U.S., 116 Ct.Cl. 550 (1950), the U.S. Court of Claims provided described the special standing of contracting officers in a comment about the CO's role in deciding disputes:

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They are the Government's representatives, charged with the duty of seeing that the Government gets what it bargained for. Many contractors, on the other hand, bent upon making as much money as they can out of the contract, are constantly seeking ways out of doing this and doing that. Frequently, it is a constant battle--the contracting officer as the Government's representative, on the one hand, and the contractor on the other. To ask the contracting officer to act impartially when he must decide a dispute between the contractor and his employer is, indeed, putting upon him a burden difficult to bear.

That is not the role of the typical business person. Finally, from FAR 15.405(a):

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Taking into consideration the advisory recommendations, reports of contributing specialists, and the current status of the contractor’s purchasing system, the contracting officer is responsible for exercising the requisite judgment needed to reach a negotiated settlement with the offeror and is solely responsible for the final price agreement. However, when significant audit or other specialist recommendations are not adopted, the contracting officer should provide rationale that supports the negotiation result in the price negotiation documentation.

The determination of price reasonableness is subjective within the broad limits delineated by FAR, within the boundaries of of professional responsibility, and within the boundaries of professional pride. It is a matter of special public trust. The standard is not that of the typical business person. The law does not require the typical business person to worry about whether a price is fair to the other party. Thus, $600 for an EpiPen 2Pak and $406 for $46 worth of baby formula.

Ah well, unfortunately, I do not have time for a proper response as an extra-long weekend is calling my name, and there is work yet to be done.  I'll just say I disagree and return the courtesy of leaving you the last word.  As always, thanks for the discussion!

Have fun and be safe over the holiday weekend.

Vern

Just so everyone will understand what Lionel and I have been arguing about:

If I understand him correctly, Lionel asserts that when determining fairness and reasonableness of a proposed price a CO must apply an objective test--that of what a "reasonable person" or "reasonably prudent business person," or "typical business person" would consider fair and reasonable. Alternatively, he says that the CO must apply an objective "reasonable professional" test.

I assert that there is no objective test and that the determination of reasonableness is subjective within rational boundaries delineated by the general guidance in FAR 15.404. Moreover, I assert that the determination is subjective from the point of view of a government official, not a business person.

For clarification, I understand the term "objective" to mean that reasonableness is inherent in the price proposed, and not in the mind of the person making the determination. However, I think that Lionel understands "objective" to mean that reasonableness lies in the hypothetical mind of his "typical business person." I accept his understanding as part of his argument.

I understand the term "subjective" to mean that reasonableness is a matter of a CO's personal opinion. I think Lionel understands it the same way.

Thus, based on a subjective approach, two COs looking at the same price under the same circumstances might arrive at different and equally valid conclusions about its reasonableness. One might think the price is "just right," while the other might think it's "too much." On the other hand, based on Lionel's objective approach, two COs looking at the same price under the same circumstances from the point of view of a "typical business person" should arrive at the same conclusion about its reasonableness.

I find this issue to be very interesting, and hope that Lionel comes back to it after the holidays. I hope that others will chime in, as well.

Everyone should keep in mind that the determination of price reasonableness must be made in acquisitions as diverse as those for commercial items and those for specialized military or specially designed scientific equipment, such as the helmets worn by pilots flying the F-35 and special sensors to be carried by spacecraft. Reasonableness in some acquisitions is a matter of simple market analysis, but in others, for which there is no market, such as for weapon systems and specially designed scientific equipment, it must be the product of in-depth cost analysis. Could it be that different approaches would apply to different acquisitions--Lionel's objective approach in one and my subjective-within-boundaries approach in another?

Vern Edwards said:

Could it be that different approaches would apply to different acquisitions--Lionel's objective approach in one and my subjective-within boundaries approach in another?

I would agree.  My view may be too narrow whereby I have not dedicated a lot of time to thinking about the matter.

But my conclusion is based on this.

Consider an award of of a simplified acquisition based solely on price, or a sealed bid.

A sealed bid could be for a complex multimillion construction project. A simplified acquisition could be for a $13 million project to defend against a possible biological attack.

Vern Edwards said:

A sealed bid could be for a complex multimillion construction project. A simplified acquisition could be for a $13 million project to defend against a possible biological attack.

Vern - I agree yet I am trying to understand the comment?   Are you saying that "complex"ity of the work determines whether the supply, service, or construction project's price is fair and reasonable?  I am probably not getting it but I thought the discussion of this thread was what approach to looking at an offer - objective and subjective - might apply with regard to determining fair and reasonable price?

Carl:

I am suggesting that the method of contracting--simplified acquisition, sealed bidding, or negotiation--should not determine whether an objective or subjective approach is appropriate. That the issue turns on other considerations.

Perhaps Lionel's objective, "typical business person" approach to determining price reasonableness is appropriate when:

• acquisitions are for commercial commodities or commodified services,
• prices are set by head-to-head competition or in a well-defined market, and
• simple price analysis is enough.

In such cases two equally competent COs making the same buy under the same circumstances should agree on the fairness and reasonableness of the proposed price. The objective, "typical business person" approach makes sense.

On the other hand, my "subjective within boundaries" approach is appropriate when:

• an acquisition is for complex, custom, or customized supplies and services (e.g., F-35 helmets, spacecraft, software development, logistics support services, and ship repair),
• the acquisition is sole source or for goods or services for which there are no market prices, and
• some cost analysis is necessary, even with competition.

In such cases two equally competent COs making the same buy under the same circumstances might reasonably disagree on the fairness and reasonableness of the proposed price.