Chapter 9 - Determining Fair and Reasonable Pricing

9.1.1 Fair pricing

Buyers and suppliers may have different perceptions on what price is fair. To be fair to the buyer, a price must be in line with the fair market value of the contract deliverable. To be fair to the supplier a price must be realistic in terms of the supplier's ability to satisfy the terms and conditions of the contract. In agreeing to a price that is too low a supplier may:

• cut corners on product quality
• deliver late
• default, forcing a time-consuming re-procurement
• refuse to deal with the Commonwealth in the future
• be forced out of business entirely

Below-cost prices are not necessarily unfair to the supplier. A supplier, in its business judgment may decide to submit a below-cost bid. Such a bid is not invalid. Whether the supplier can then perform the contract at the low price offered is a matter of responsibility which may pose a risk to the buyer. Be aware of suppliers who submit offers below anticipated costs and may expect to either increase the contract amount after award through change orders or to receive follow-on contracts at higher prices to recover losses incurred on the buy-in contract. In addition, the offered price may be unexpectedly low because the supplier has made gross mistakes in determining price.