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Chapter 9 - Determining Fair and Reasonable Pricing

9.2 Price or cost analysis requirement

9.2.2 Methods of price analysis

The most common methods or criteria used to determine whether a price is fair and reasonable are:

  • Price competition. When two or more acceptable offers are received and the lowest price is selected, the price of the lowest offeror can be assumed to be fair and reasonable. It is noted that generally where the difference in prices between the two offers ranges up to 15%, price competition is said to exist. A price which is very low must be checked to assure that the supplier understands what he is selling and has made no errors.
  • Catalog or established price list. Where only one offer is received and the supplier has a published or established price list or catalog which sets forth the price of an IT good that is offered generally, this fact can be used to find the price fair and reasonable. The catalog should be current (within one year, usually). It is a good idea to obtain a name of another recent purchaser and confirm that this was the price paid. Often, discounts off of the price list are offered. If this is the case, it should be included in the written price analysis. The IT good to be purchased should generally be a commercially produced one sold to the general public in substantial quantities.
  • GSA contracts or pricing agreements. The federal government often enters into contracts with various companies as to the prices of items which will be sold to the government. Typically these are the highest prices that a supplier can sell a single unit to a federal government agency, and they often include fees and rebates back to the federal General Services Administration (GSA). A fair and reasonable price is typically lower than GSA prices.
  • Price based on prior competition. If only one supplier bids and the price of the item is relatively the same as the price of the item when it was purchased using an earlier competition, this may be acceptable. In such cases, the buyer must cite the price of the prior purchase and note if it was competitive or based on catalog price or other means. An increase in price, with no current catalog or competition, should be near the current rate of inflation.
  • Comparison to substantially similar item(s). Often an item is very similar to a commercial one but has added features, which are required. If the supplier can validate the price of the base item, by a catalog, and then state the cost of the additional features, the buyer can determine the price is reasonable based on these two factors. The reasonableness of the extra cost can be checked from other purchases that had similar extras or be based on an evaluation of the extra cost by technical subject matter experts.
  • Sales of the same item to other purchasers. If the supplier has no catalog but has sold the same item to others recently, the price can be determined to be fair and reasonable by verifying with those other purchasers what price they paid.
  • Market prices: Where an item has an established market price, verification of an equal or lower price also establishes the price to be fair and reasonable.
  • Historical prices. If the buyer has a history of the purchase of the item over several years, use of this information, taking into account inflation factors, can be used to determine a price fair and reasonable. Refer to Appendix A for more details on historical prices.
  • Independent estimate. If an independent 3rd party estimate of the item has been prepared and other methods or information is available, a price can be compared to the estimate. If it compares favorably this can be the basis to find a price fair and reasonable.