Fair and Reasonable Contract Price
Issued September 7, 2016
This Advisory instructs State agencies on how to ensure that a procurement contract price is fair and reasonable. This guidance must be incorporated into Action Agenda Items recommending award of contracts based on a single bid or a single offer received or based on a sole source determination.
BACKGROUND: The phrase fair and reasonable, though used in State Procurement Regulations, is not defined.* Procurement agencies often use the phrase fair and reasonable to describe contract prices on Agenda Items recommending awards. However, these Items typically do not explain what underpins the agency’s conclusion. The Board of Public Works intends for State agencies to have a uniform approach to analyzing and recommending fair and reasonable contract prices.
WHAT IS FAIR AND REASONABLE?
A proposed price is fair and reasonable if a prudent buyer would be willing to pay a prudent seller that price based on the current market.**
WHAT TO INCLUDE IN THE ACTION AGENDA ITEM:
A procurement agency recommending contract award based on the sole source method or on a single response to a competitive procurement must first determine if the proposed price is fair and reasonable using either a price analysis or a cost analysis.
PRICE ANALYSIS: The Price Analysis method looks at the whole price; it does not examine the individual cost and profit components. Here are some Price Analysis methods that may be used to evaluate whether a proposed price is fair and reasonable:
- Price competition. Two or more acceptable bids are received.
- GSA Schedule. Proposed price is comparable to price on federal General Services Administration contracts.
- Current catalog or established price list. Proposed price is comparable to established price list (for example, a catalog) that bidder published within one year of proposed price.
- Market price. Proposed price is comparable to verifiable market price.
- Historical price. Proposed price is comparable to price agency has paid over multiple years, taking into account the applicable Consumer Price Index (CPI) and additional agency requirements (for example, new insurance requirements).
- Price based on prior competition. Proposed price is comparable to price that resulted from a prior competitive procurement that received more than one bid, taking into account the applicable CPI and additional agency requirements (for example, new insurance requirements).
- Pre-bid estimate. Proposed price is comparable to estimate prepared for agency before bids submitted.
- Comparable item. Proposed price is comparable to another commercial item but has added features as long as the vendor validates the cost of the added features.
- Sale of same item to other purchasers. Proposed price is comparable to the price at which the vendor has sold the same item/service to another purchaser, when the other purchaser’s price is verified.
- Other reasonable basis. Proposed price may be determined fair and reasonable when a State agency articulates a rationale appropriate to the circumstances.
COST ANALYSIS: The Cost Analysis method examines individual cost elements that compose the total proposed price. Individual cost elements include labor rates, material costs, overhead, indirect rates, general and administrative expenses, and profits or fees. A Cost Analysis is typically done only when a Price Analysis is not practicable. The Cost Analysis may then be compared with pricing data obtained from other reliable sources.
* For example: COMAR 21.05.03.05B [State’s policy is to procure from responsible sources at “fair and reasonable prices calculated to result in the lowest ultimate overall cost to the State.”]; COMAR 21.05.07.06A(3) [In small procurements in which a single bid is received, award may be made if price is “fair and reasonable.”]; COMAR 21.05.03.02A(4)(c) [discussions not necessary if initial offer is “fair and reasonable price.”]
** “A price is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of a competitive business.” 48 CFR 31.201-3 [Federal Acquisition Regulations].