Pricing and Cost Accounting: A Handbook for Government Contractors

By Darrell J. Oyer CPA

The essential reference to help federal contractors negotiate and maintain profitable contracts—Now in its third edition!

This is the essential reference to help federal contractors negotiate and maintain profitable contracts—and remain in compliance throughout the life of the contract.
Government contracting rules and regulations have changed significantly over the past six years. This new third edition addresses these changes and more:
New thresholds for certification of cost and pricing data
Revisions in cost accounting standards
Implementation of commercial time-and-material and labor-hour contracts
New, stringent ethics requirements
Impact of stimulus funding
Revised cost principles, including excessive pass-through costs, post-retirement benefits, and travel costs
Redirected audit initiatives based on the GAO review of DCAA
Plus…changed requirements for bidding…pricing…cost accounting…subcontracting…contract modification…all the information you need to be in compliance with the new rules.
No other single book provides as much up-to-date federal procurement cost and pricing information in such a concise - yet comprehensive - format.

• Language: English
• Publisher: Berrett-Koehler Publishers, Inc.
• Release date: Apr 1, 2011
• ISBN: 9781567263541

Darrell J. Oyer CPA

Darrell J. Oyer, CPA, is president of Darrell J. Oyer Co., a consulting firm that provides services and training to government contractors and federal government employees. His wealth of experience includes developing and reviewing contractor estimating systems, cost accounting structures, and cost control systems to ensure compliance with federal procurement requirements. Previously he was a partner in the Deloitte & Touche government contracts advisory practice and worked for the Defense Contract Audit Agency and the U.S. Air Force Auditor General’s office. He is also the author of Pricing and Cost Accounting: A Handbook for Government Contractors, Third Edition, from Management Concepts Press.

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Index

Preface

Government contracting is unique. Its intricacies often cannot be understood using common sense and experience in the commercial marketplace. The terminology alone is confusing to the uninitiated. However, the rules are not mysterious—they simply need to be understood. The purpose of this book is to help demystify the process of winning and carrying out a government contract.

Obtaining government business is often very different from obtaining commercial business, largely because extensive rules are in place to ensure fairness in the award of contracts that use public funds. Contractual arrangements with the government feature documents that contain numerous contract clauses, all of which need to be read and understood—even in the haste of preparing a contract bid. The nature of determining contract price is often significantly different because of the various alternatives to the firm-fixed-price arrangement most common in the commercial marketplace.

Not only is the government your customer, but it also acts as your overseer in some contract situations. Accordingly, both estimating and accounting systems may have to be audited before you can successfully obtain and conclude a government contract. A key issue is that not all costs can be included in your price to the government. Detailed rules on reimbursement are designed to prevent the taxpayer from paying for costs that are against public policy.

Current and potential contractors must be aware of and understand the rules. Most contractors are at least familiar with the Federal Acquisition Regulation (FAR); importantly, however, rules and regulations related to the cost accounting standards (CAS) may also be applicable to a contract.

Government contracting rules and regulations are constantly changing. Contractors need to be current on the often-changing requirements.

Since 1999 the thresholds for certification of cost and pricing data have changed twice, the threshold for CAS coverage has been substantially revised, new issues have arisen in commercial item contracting, profit guidelines have been revised by several major agencies, cost principles have been revised, and audit initiatives have been redirected. This third edition incorporates these changes and many others.

Without current information you could be attempting to comply with rules and regulations that are no longer current. Or, you could be in noncompliance with unknown new rules. The former is costly and the latter can be fatal to a business entity.

This book is intended to serve as a practical guide for contracting with the federal government. To help guide current and potential contractors in dealing with the myriad issues that can arise from contract bid through contract closeout, the book follows the life cycle of a government contract.

Chapter 1 describes the methods that the government uses to award contracts. The focus of the remainder of the book is on those situations where government involvement in contractor operations is most significant. Chapter 2 describes the various types of government contracts, generally falling under the categories of fixed-price and cost-reimbursement. The pricing and administration of the various contract types are often closely related to their unique features.

Chapter 3 addresses what a contractor must include in an accounting system that will be considered adequate for government contracting. Key requirements are written policies and procedures, labor recording practices, designation of direct vs. indirect costs, establishment of indirect cost pools, establishment of cost controls, and consistency in application. Contractors should establish an accounting system before pricing or bidding on a contract.

Not all business costs are allowable in pricing and billing costs under many government contracts. A cost must generally be reasonable in nature and amount, allocable to the contract, in accord with generally accepted accounting principles and practices, and in compliance with the contract terms. Chapter 4 addresses these aspects of pricing and billing. In addition, Chapter 5 addresses individual cost allowability rules contained in the FAR.

Some contracts and subcontracts are subject to the CAS. Chapter 6 addresses which contracts are covered by the CAS, who must submit a CAS disclosure statement, the difference between full and modified coverage, the ramifications of the CAS contract clause, the dreaded cost impact statement, and the key aspects of the 19 standards.

With an understanding of the contract types and the cost rules described in the preceding chapters, a contractor can turn to estimating costs or developing prices as described in Chapter 7. Generally, a contractor should have established estimating policies and procedures, and provide for estimating techniques by cost element. Chapter 8 contains advice on the second element of a price: markup on cost or estimated cost. The FAR and individual agencies have their own rules on how markup is to be evaluated; these guidelines are described.

Chapter 9 addresses a unique aspect of government contracts when prices are negotiated based on cost and pricing data: the Truth in Negotiations Act. The basics provisions of this act—specifically, defective pricing and postaward reviews—are described in detail. The chapter addresses penalties, reasons for the law, basic requirements, covered pricing actions, government proofs of defective pricing, and contract price adjustments.

Chapter 10 covers matters related to contract administration. These include contract modifications, subcontracting responsibilities, cost monitoring and reporting, and contract closeout. In addition, the government may terminate a contract for convenience. Cost-reimbursement rules for these terminations are described.

The final chapter, Chapter 11, addresses the various audits that may be performed during contract performance. These audits include price proposals, incurred costs, contract modification pricing, postaward reviews, termination settlements, interim payment requests, the CAS, accounting systems, estimating systems, operations audits, financial jeopardy audits, and contract closeouts.

Contracting with the federal government can be a worthwhile, profitable undertaking. The key is to understand the applicable rules and regulations—and to be prepared to carry them out in a way that enables the contracting relationship to be mutually beneficial for both the contractor and the federal government. It can be done!

Darrell J. Oyer, CPA

February 2011

Instructor materials available. Please contact [e-mail].

CHAPTER 1

Federal Government Procurement Methods

The federal government uses three primary methods for soliciting and awarding contracts: commercial items, sealed bids, and negotiations. Commercial items are addressed in Part 12 of the Federal Acquisition Regulation (FAR), with special coverage of Federal Supply Service (FSS) contracts in Part 38. Sealed bids are covered by FAR Part 14, Sealed Bidding. Negotiations, which usually involve some interface between the government and the contractor, are classified as either competitive or sole source and are subject to FAR Part 15, Contracting by Negotiation. The difference between FAR Parts 12 and 15 is often not fully understood. Part 12 pertains to commercial purchases by the government and Part 15 pertains to commercial purchases as exemptions from submission of cost or pricing data.

Effective April 1, 1985, the Competition in Contracting Act (CICA) of 1984 made sweeping changes to the government’s competitive procedures. Overall, the aim of CICA was to promote full and open competition in the acquisition process. More specifically, Congress intended to put competitive proposals on the same level with sealed bids, and to significantly limit the use of other than competitive, or sole source proposals. The Federal Acquisition Streamlining Act of 1994 set forth the government’s preference for the acquisition of commerical items by establishing acquisition policies more closely resembling those of the commercial marketplace and encouraging the acquisition of commercial items and components. Since these reforms in the mid-1990s, government procurement officials have gradually reverted to pre-1990s practices.

COMMERCIAL ITEMS

The federal government’s policy is to first conduct market research to determine whether commercial items or nondevelopmental items are available that could meet the agency’s requirements. Agencies are to acquire commercial items or nondevelopmental items when they are available to meet agency needs and are to require prime contractors and subcontractors at all tiers to incorporate, to the maximum extent practicable, commercial items or nondevelopmental items as components of items supplied to the agency.

A commercial item is defined in FAR Part 2.101 as:

(1) Any item, other than real property, that is of a type customarily used by the general public or by nongovernmental entities for purposes other than governmental purposes, and—

(1) Has been sold, leased, or licensed to the general public; or

(ii) Has been offered for sale, lease, or license to the general public;

(2) Any item that evolved from an item described in paragraph (1) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation;

(3) Any item that would satisfy a criterion expressed in paragraphs (1) or (2) of this definition, but for—

(i) Modifications of a type customarily available in the commercial marketplace; or

(ii) Minor modifications of a type not customarily available in the commercial marketplace made to meet Federal Government requirements. Minor modifications means modifications that do not significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process. Factors to be considered in determining whether a modification is minor include the value and size of the modification and the comparative value and size of the final product. Dollar values and percentages may be used as guideposts, but are not conclusive evidence that a modification is minor;

(4) Any combination of items meeting the requirements of paragraphs (1), (2), (3), or (5) of this definition that are of a type customarily combined and sold in combination to the general public;

(5) Installation services, maintenance services, repair services, training services, and other services if—

(i) Such services are procured for support of an item referred to in paragraph (1), (2), (3), or (4) of this definition, regardless of whether such services are provided by the same source or at the same time as the item; and (ii) The source of such services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government;

(6) Services of a type offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard commercial terms and conditions. This does not include services that are sold based on hourly rates without an established catalog or market price for a specific service performed or a specific outcome to be achieved. For purposes of these services—

(i) Catalog price means a price included in a catalog, price list, schedule, or other form that is regularly maintained by the manufacturer or vendor, is either published or otherwise available for inspection by customers, and states prices at which sales are currently, or were last, made to a significant number of buyers constituting the general public; and

(ii) Market prices means current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated through competition or from sources independent of the offerors.

(7) Any item, combination of items, or service referred to in paragraphs (1) through (6) of this definition, notwithstanding the fact that the item, combination of items, or service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor; or

(8) A nondevelopmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments.

Agencies must use firm-fixed-price contracts, fixed-price contracts with economic price adjustment, or time-and-material/labor-hour contracts for the acquisition of commercial items. Use of any other contract type to acquire commercial items is prohibited. These contract types may be used in conjunction with an award fee and performance or delivery incentives when the award fee or incentive is based solely on factors other than cost.

Although the contracting officer must establish price reasonableness, customary commercial terms and conditions should be used when pricing commercial items. Commercial item prices are affected by factors that include speed of delivery, length and extent of warranty, limitations of seller’s liability, quantities ordered, length of the performance period, and specific performance requirements. The contracting officer must ensure that contract terms, conditions, and prices are commensurate with the government’s need. Government agency guidance often limits the use of the commercial item classification.

The Federal Supply Schedule program is directed and managed by the General Services Administration (GSA). GSA may delegate certain responsibilities to other agencies. The FSS program provides federal agencies with a simplified process for acquiring commercial supplies and services in varying quantities while obtaining volume discounts. Indefinite-delivery contracts are awarded using competitive procedures to firms. The firms provide supplies and services at stated prices for given periods of time, for delivery within a stated geographic area such as the 48 contiguous states, the District of Columbia, Alaska, Hawaii, and overseas. The schedule contracting office issues publications that contain a general overview of the FSS program and address pertinent topics. Always remember that if an item is on a Federal Supply Schedule, it is conclusively a commercial item.

SEALED BIDS

The sealed bid method of contracting is used to select contractors solely on the basis of the lowest price, when certain FAR conditions permit. The sealed bid method can be used if: (1) time permits; (2) award is based on price (i.e., not cost) and price-related factors; (3) discussions with the bidders are unnecessary; and (4) more than one sealed bid is expected. The sealed bid method of contracting operates most effectively when two conditions exist:

The government is able to describe its needs in sufficient detail to permit bids to be prepared and evaluated on a common basis.

The number of competitors and the quantity being purchased are sufficient to ensure real competition.

The government’s requirements and the terms and conditions of the proposed contract are announced publicly and circulated widely to potential bidders by way of an Invitation for Bids (IFB). Formal advertising eliminates the need for the government to negotiate with competitors about their bids and provides an objective means for distinguishing among capable competitors. Essentially, the government feels confident that the established market price has been subject to arm’s-length transaction. Furthermore, the government is focusing on price and not on contractor cost and profit.

A sealed bid effectively serves as a contract offer. It may be withdrawn or modified before opening, but once opened, a bid generally cannot be revoked or modified. In developing a bid price under a sealed bid solicitation, the contractor is responsible for estimating cost and profit in any manner deemed appropriate to best accomplish its objectives. Contractors submit price information only; they do not have to disclose cost data and profit rates to the government.

The contractor’s bid need not be based on cost. Instead, it may be based primarily on the contractor’s assessment of its risk and its competitive position. For example, if the contractor has a unique item that no one else can sell, its price—and therefore its profit—might be higher. If the contractor is trying to break into a market, its price might be lower to meet or beat the competition. Similarly, a contractor operating at full capacity may decide to increase its estimated labor costs because overtime will be required to accomplish the work. In this case, the contractor may feel comfortable increasing its profit rate as well. Conversely, a contractor operating at less than full capacity, or one relatively new to the industry, may determine that a more aggressive price and lower profit are required to win the contract. Of course, the contractor must balance its form of pricing against the risk as well as its ability to absorb any potential loss.

When preparing a response to a sealed bid solicitation, a contractor must be sensitive to 41 U.S.C. 253(B)(e) and 10 U.S. C. 2305(b) (5). The objective of these laws is to ferret out antitrust violations—practices by contractors designed to eliminate competition or restrain trade. This order requires government agencies to report to the attorney general each sealed bid procurement over $10,000 that involves identical bids. Identical bids are defined as two or more bids that are identical in terms of unit price or total amount after giving effect to discounts and all other relevant factors. Contracts resulting from sealed bidding are to be firm-fixed-price contracts or fixed-price contracts with economic price adjustment.

CONTRACTING BY NEGOTIATION

Negotiation means contracting through the use of competitive or other-than-competitive (i.e., sole source) proposals. Simply put, a negotiated contract is any contract awarded without using sealed bidding. The single element that most distinguishes contracting by negotiation from contracting by sealed bid is the subjective judgment required in a negotiation to weigh quality and other factors against price. Overall, negotiation permits the government greater latitude in selecting contractors (see Figure 1).

The basic elements in a sealed bid procurement—the existence of an established price and a functioning marketplace—are not as well defined in negotiation. The procedures used in negotiating a contract vary depending on the competitive environment; specifically, multiple bidders vs. sole source awards. The government’s focus shifts from price analysis to a combination of price and cost analysis. And the contracts are subject to various complicated federal regulations that mandate how costs should be determined, accumulated, and allocated.

For each government acquisition, the relative importance of cost or price will likely vary. In acquisitions where the requirement is clearly definable and the risk of unsuccessful contract performance is minimal, cost or price may be dominant in source selection. The less definitive the requirement, the more development work required, or the greater the contract performance risk, the more dominant technical or past performance considerations will likely be.

If the acquisition selection is to consider award to other than the lowest priced offeror or other than the highest technically rated offeror, the solicitation will state the relative importance of all evaluation factors and whether all evaluation factors other than cost or price are together significantly more important than, approximately equal to, or significantly less important than cost or price. This permits tradeoffs among cost or price and non-cost factors, and allows the government to accept other than the lowest priced proposal. Any perceived benefits of a higher priced proposal must merit the additional cost.

Figure 1

Contracting by Sealed Bid vs. Negotiation

The lowest priced, technically acceptable source selection basis is appropriate when best value is expected to result from the process. Under this process, the evaluation factors and significant subfactors that establish the requirements of acceptability will be presented in the solicitation. Solicitations must specify that award will be made on the basis of the lowest evaluated price of proposals meeting or exceeding the acceptability standards for non-cost factors. Past performance need not be an evaluation factor in lowest price, technically acceptable source selections. If the government determines that a small business concern’s past performance is not acceptable, the matter is referred to the Small Business Administration for a Certificate of Competency determination. Proposals are evaluated for acceptability but not ranked using the non-cost/price factors.

Oral presentations by offerors as requested by the government may substitute for, or augment, written information at any time in the acquisition process, and are subject to the same restrictions as written information regarding timing and content. Prerecorded videotaped presentations are generally not considered oral presentations, although they may be included in offeror submissions. The solicitation may require each offeror to submit part of its proposal through oral presentations. However, certifications, representations, and a signed offer sheet (including any exceptions to the government’s terms and conditions) must be submitted in writing. Information pertaining to areas such as an offeror’s capability, past performance, work plans or approaches, staffing resources, transition plans, or sample tasks (or other types of tests) may be suitable for oral presentations. When oral presentations are required, the solicitation must provide offerors with sufficient information to prepare for those presentations.

The government must maintain a record of oral presentations. A copy of the record placed in the file may be provided to the offeror. When an oral presentation includes information that the parties intend to include in the contract as material terms or conditions, the information must be put in writing. Incorporation by reference of oral statements is not permitted.

Exchanges of information among all-interested parties, from the earliest identification of a requirement through receipt of proposals, must be consistent with procurement integrity requirements. The purpose of exchanging information is to improve the understanding of government requirements and industry capabilities. This allows potential offerors to judge whether or how they can satisfy the government’s requirements, enhances the government’s ability to obtain quality supplies and services at reasonable prices, and increases efficiency in proposal preparation, proposal evaluation, negotiation, and contract award.

An early exchange of information among participants in the acquisition process can identify and resolve concerns regarding the acquisition strategy. This includes proposed contract type, terms and conditions, and acquisition planning schedules; the feasibility of the requirement, including performance requirements, statements of work, and data requirements; the suitability of the proposal instructions and evaluation criteria, including the approach for assessing past performance information; the availability of reference documents; and any other industry concerns or questions. Early exchanges of information can be accomplished through industry or small business conferences, public hearings, market research, one-on-one meetings with potential offerors, presolicitation notices, draft Requests For Proposals (RFPs), Requests For Information (RFIs), presolicitation or preproposal conferences, and site visits.

Special notices of procurement matters or electronic notices may be used to publicize the government’s requirement or to solicit information from industry. RFIs may be used when the government does not presently intend to award a contract, but wants to obtain price, delivery, other market information, or capabilities for planning purposes. Responses to these notices are not offers and cannot be accepted by the government to form a binding contract. There is no required format for RFIs.

After release of a solicitation, the contracting officer is the focal point for any exchange with potential offerors. When specific information about a proposed ac-quisition that would be necessary for the preparation of proposals is disclosed to one or more potential offerors, that information is to be made available to the public as soon as practicable, but no later than the next general release of information, in order to avoid creating an unfair competitive advantage. Information provided to a particular offeror in response to that offeror’s request must not be disclosed if doing so would reveal the potential offeror’s confidential business strategy. When a presolicitation or preproposal conference is conducted, materials distributed at the conference are made available to all potential offerors upon request.

This process invites potential offerors to submit information that allows the government to advise the offerors about their potential to be viable competitors. A pre-soli-ci-tation notice identifies the information that must be submitted and the criteria that will be used in making the initial evaluation. Information sought may be limited to a statement of qualifications and other appropriate information (e.g., proposed technical concept, past performance, limited pricing information). At a minimum, the notice contains sufficient information to permit a potential offeror to make an informed decision about whether to participate in the acquisition. This process should not be used for multistep acquisitions where it would result in offerors being required to submit identical information in response to the notice and in response to the initial step of the acquisition.

The government evaluates responses and advises each respondent in writing either that it will be invited to participate in the resultant acquisition or, based on the information submitted, that it is unlikely to be a viable competitor. The agency advises respondents considered not to be viable competitors of the general basis for that opinion. The agency informs all respondents that, notwithstanding the advice provided by the government in response to their submissions, they may participate in the resultant acquisition.

RFPs are used in negotiated acquisitions to communicate government requirements to prospective contractors and to solicit proposals. RFPs for competitive acquisitions describe the government’s requirement, the anticipated terms and conditions that will apply to the contract, information required to be in the offeror’s proposal, and factors and significant subfactors that will be used to evaluate the proposal and their relative importance. The solicitation may authorize offerors to propose alternative terms and conditions, including the contract line item number (CLIN) structure. When alternative CLIN structures are permitted, the evaluation considers the potential impact on other terms and conditions or the contract requirement.

An RFP may be issued for Office of Management and Budget (OMB) Circular A-76 studies, which involve cost comparisons between government and contractor performance. Electronic commerce may be used to issue RFPs and to receive proposals, modifications, and revisions. If facsimile proposals are authorized, contracting officers may request offeror(s) to provide the complete, original signed proposal at a later date. Oral RFPs generally are authorized when processing a written solicitation would delay the acquisition of supplies or services to the detriment of the government. Use of an oral RFP does not relieve the government from complying with other FAR requirements.

TIMELINESS—SEALED BID AND COMPETITIVE PROPOSALS

Offerors are responsible for submitting offers, and any revisions and modifications to them, so that they reach the government office designated in the solicitation on time.

If an emergency or unanticipated event interrupts normal government processes so that proposals cannot be received at the office designated for receipt of proposals by the exact time specified in the solicitation, and urgent government requirements preclude amendment of the solicitation closing date, the time specified for receipt of proposals will be deemed to be extended to the same time of day specified in the solicitation on the first work day on which normal government processes resume. If no time is specified in the solicitation, the time for receipt is 4:30 p.m., local time, for the designated government office on the date that proposals are due.

Proposals, and modifications to them, that are received in the designated government office after the exact time specified are late and will be considered only if they are received before award is made and one of the following conditions is met:

The proposal was sent by registered or certified mail not later than the fifth calendar day before the date specified for receipt of offers.

The proposal was sent by mail (or telegram or facsimile, if authorized) or hand-carried (including delivery by a commercial carrier) if it is determined by the government that the late receipt was due primarily to government mishandling after receipt at the government installation.

The proposal was sent by U.S. Postal Service Express Mail Next Day Service-Post Office to Addressee, not later than 5:00 p.m. at the place of mailing two working days prior to the date specified for receipt of proposals. (The term working days excludes weekends and U.S. federal holidays.)

The proposal was transmitted through an electronic commerce method authorized by the solicitation and was received at the initial point of entry to the government infrastructure not later than 5:00 p.m. one working day prior to the date specified for receipt of proposals.

There is acceptable evidence to establish that the proposal was received at the activity designated for receipt of offers and was under the government’s control prior to the time set for receipt of offers, and the contracting officer determines that accepting the late offer would not unduly delay the procurement.

The proposal was the only one received.

The government will promptly notify any offeror if its proposal, modification, or revision was received late, and inform the offeror whether or not it will be considered, unless contract award is imminent.

When a late proposal or modification is transmitted within the United States or Canada by registered or certified mail or by U.S. Postal Service Express Mail Next Day Service-Post Office to Addressee and is received before award, the offeror will be promptly notified that the offeror must establish that the proposal was sent by either: (1) registered or certified mail showing a date of mailing not later than the fifth calendar day before the date specified for opening; or (2) U.S. Postal Service Express Mail Next Day Service-Post Office to Addressee showing a date of mailing not later than 5:00 p.m. two federal working days prior to the date specified. Late proposals and modifications that are not considered will be held unopened, unless opened for identification, until after award and then retained with other unsuccessful proposals.

Proposals may be withdrawn at any time before award. Written proposals are withdrawn upon receipt by the government of a written notice of withdrawal. Oral proposals in response to oral solicitations may be withdrawn orally. Upon withdrawal of an electronically transmitted proposal, the data received will not be viewed and will be purged from primary and backup data storage systems.

EVALUATION PROCESS—COMPETITIVE PROPOSALS

An award decision is based on evaluation factors and significant subfactors that are tailored to the acquisition. Evaluation factors and significant subfactors must represent the key areas of importance and emphasis to be considered in the source selection decision and support meaningful comparison and discrimination between and among competing proposals. The evaluation factors and significant subfactors that apply to an acquisition and their relative importance are subject to the following requirements:

Price or cost to the government will be evaluated in every source selection.

The quality of the product or service will be addressed in every source selection through consideration of one or more non-cost evaluation factors such as past performance, compliance with solicitation requirements, technical excellence, management capability, personnel qualifications, and prior experience.

Generally, past performance will be evaluated in all source selections for negotiated competitive acquisitions expected to exceed $1,000,000.

Generally, the extent of participation of small disadvantaged business concerns in performance of the contract will be evaluated in unrestricted acquisitions expected to exceed $500,000 ($1,000,000 for construction). All factors and significant subfactors that will affect contract award and their relative importance must be stated clearly in the solicitation. Although the rating method need not be disclosed in the solicitation, the general approach for evaluating past performance information must be described. The solicitation must state whether all evaluation factors other than cost or price, when combined, are significantly more important than cost or price, approximately equal to cost or price, or significantly less important than cost or price.

Proposal evaluation is an assessment of the proposal and the offeror’s ability to perform the prospective contract successfully. The government evaluates competitive proposals and then assesses their relative qualities based solely on the factors and subfactors specified in the solicitation. Evaluations may be conducted using any rating method or combination of methods, including color or adjectival ratings, numerical weights, and ordinal rankings. The relative strengths, deficiencies, significant weaknesses, and risks supporting proposal evaluation must be documented.

Normally, competition establishes price reasonableness. When contracting on a firm-fixed-price or fixed-price with economic price adjustment basis, comparison of the proposed prices will usually satisfy the requirement to perform a price analysis. In very limited situations, a cost analysis may be appropriate to establish the reasonableness of the successful offeror’s price. When contracting on a cost-reimbursement basis, evaluations include a cost realism analysis to determine what the government should realistically expect to pay for the proposed effort, the offeror’s understanding of the work, and the offeror’s ability to perform the contract. Cost realism analyses may also be used on fixed-price incentive contracts or, in very exceptional cases, on other competitive fixed-price-type contracts.

The currency and relevance of past performance information, the source of the information, the context of the data, and general trends in the contractor’s performance are considered. A solicitation describes the approach for evaluating past performance, including evaluating offerors with no relevant performance history, and provides offerors an opportunity to identify past or current contracts (including federal, state, and local government and private) for efforts similar to the government requirement. A solicitation authorizes offerors to provide information on problems encountered on the identified contracts and the offeror’s corrective actions. The government considers this information, as well as information obtained from any other sources, when evaluating the offeror’s past performance.

The evaluation should take into account past performance information regarding predecessor companies, key personnel who have relevant experience, or subcontractors that will perform major or critical aspects of the requirement when such information is relevant to the acquisition. In the case of an offeror without a record of relevant past performance or for whom information on past performance is not available, the offeror may not be evaluated favorably or unfavorably on past performance. The evaluation includes the past performance of offerors in complying with subcontracting plan goals for small disadvantaged business (SDB) concerns and monetary targets for SDB participation.

Cost information may be provided to members of the technical evaluation team in accordance with agency procedures. The government may reject all proposals received in response to a solicitation, if doing so is in the best interest of the government.

COMMUNICATIONS—COMPETITIVE PROPOSALS

If contract award will be made without discussions, offerors may be given the opportunity to clarify certain aspects of proposals or to resolve minor or clerical errors. An example of the former is the relevance of an offeror’s past performance information and adverse past performance information to which the offeror has not previously had an opportunity to respond.

Award may be made without discussions if the solicitation states that the government intends to evaluate proposals and make award without discussions. If the solicitation contains such a notice, the government may later determine that it is necessary to conduct discussions. Communications are exchanges between the government and offerors after receipt of proposals, leading to establishment of the competitive range.

If a competitive range is to be established, these communications:

Are limited to the offerors whose past performance information is the determining factor preventing them from being placed within the competitive range and those offerors whose exclusion from, or inclusion in, the competitive range is uncertain.

May be conducted to enhance government understanding of a proposal, allow reasonable interpretation of the proposal, or facilitate the government’s evaluation process. (Such communications are not to be used to cure proposal deficiencies or material omissions, materially alter the technical or cost elements of the proposal, and/or otherwise revise the proposal. Such communications may be considered in rating proposals for the purpose of establishing the competitive range.)

Are for the purpose of addressing issues that must be explored to determine whether a proposal should be placed in the competitive range. (Such communications are not to provide an opportunity for the offeror to revise its proposal, but may address ambiguities in the proposal or other concerns, e.g., perceived deficiencies, weaknesses, errors, omissions, or mistakes and information relating to relevant past performance.)

Will address adverse past performance information on which the offeror has not previously had an opportunity to comment.

If discussions are to be conducted, the government must establish a competitive range based on the ratings of each proposal against all evaluation criteria. The government must establish a competitive range comprising all the most highly rated proposals, unless the range is further reduced for purposes of efficiency. The government may determine that the number of most highly rated proposals that might otherwise be included in the competitive range exceeds the number at which an efficient competition can be conducted. If the solicitation notifies offerors that the competitive range can be limited for purposes of efficiency, the government may limit the number of proposals in the competitive range. Offerors excluded or otherwise eliminated from the competitive range may request a debriefing.

After establishment of the competitive range, the government and offerors begin negotiations with the intent of allowing the offerors to revise their proposals. These negotiations may include persuasion, alteration of assumptions and positions, and give-and-take, and may apply to price, schedule, technical requirements, type of contract, or other terms of a proposed contract.

When negotiations are conducted in a competitive acquisition, they take place after establishment of the competitive range and are called discussions. Discussions are tailored to each offeror’s proposal, and are conducted by the contracting officer with each offeror within the competitive range. The primary objective of discussions is to maximize the government’s ability to obtain best value, based on the requirement and the evaluation.

The government must indicate to, or discuss with, each offeror still being considered for award, significant weaknesses, deficiencies, and other aspects of its proposal (such as cost, price, technical approach, past performance, and terms and conditions) that could be altered or explained to enhance materially the proposal’s potential for award. The scope and extent of discussions are a matter of contracting officer judgment. In discussing other aspects of the proposal, the government may, in situations where the solicitation stated that evaluation credit