Ch 2 - Maximize Price Competition

• 2.0 - Chapter Introduction
• 2.1 - Improving the Schedule
  • 2.1.1 - Consolidate the Requirements
  • 2.1.2 - Describe Government Needs to Promote Competition
  • 2.1.3 - Consider Acquiring Other Than New Material
  • 2.1.4 - Consider Delivery Or Performance Schedules
  • 2.1.5 - Consider Liquidated Damages
• 2.2 - Improving Business Terms and Conditions
  • 2.2.1 - Base The Contract Type On Risk Analysis
  • 2.2.2 - Review Applicability Of Socioeconomic Requirements
  • 2.2.3 - Match Payment And Finance Terms to Market Conditions
  • 2.2.4 - Furnish Government Property
  • 2.2.5 - Optimize Price/Technical Trade-Offs
• 2.3 - Publicizing The Acquisition

2.0 - Chapter Introduction

Acquisition strategy. In this chapter, we will examine the effect of numerous acquisition decisions on competition and contract pricing. The sections of this chapter, provide answers to the following three questions:

• How can solicitation Schedules (e.g., Part I of the Unified Contract Format or UCF) be improved to yield more effective price competition?
• How can business terms and conditions (e.g., Parts II - IV of the UCF) be improved to yield more effective price competition?
• How can the methods of publicizing the buy be tailored to yield more effective price competition?

Why promote competition? The Government policy regarding competition is stated in FAR 6.101(b):

Contracting officers shall provide for full and open competition through the use of competitive procedure(s) . . . that are best suited to the circumstances of the contract action and consistent with the need to fulfill the Government's requirements efficiently.

Competition is important to contract pricing in three ways:

• Competition is widely acknowledged as the best way to encourage firms to offer a quality product at a reasonable price.
• Competitive prices are one of the best bases to use in evaluating the reasonableness of an offered price.
• Adequate price competition is the most common basis for excepting offerors from the Truth in Negotiations (TINA) requirement to submit cost or pricing data.

What does "Maximizing Price Competition" mean? To maximize price competition, you must:

• Attract competitive offers from the best vendors (in terms of their track records for pricing, quality, timeliness, and integrity), and
• Obtain reasonably-priced offers, in part because the solicitation:
  • Reflects the Government's actual minimum need and
  • Prospective contract provisions balance the cost risk associated with satisfying that need.

Key acquisition team members. Efforts to maximize competition require a detailed analysis of Government requirements. To be effective this analysis must involve affected members of the Acquisition Team. Member participation will vary from acquisition to acquisition, but most often contracting personnel and one or more of the following team members will be involved:

• Users-key source of information on the real needs of the Government;
• Requirement Managers-key decision makers;
• Suppliers-information source in market research and analysis; and
• Contracting Personnel-responsible for the effectiveness of the acquisition decision.

Potential impediments to competition. In various acquisition situations, you may use many different formats to organize a solicitation or contract. Regardless of the format, there are potential impediments to competition.

2.1 - Improving The Schedule

Section Introduction. Solicitations and contracts must include the product or service requirements that the contractor is expected to meet. These requirements should be specified in a manner designed to promote full and open competition and should only include restrictive provisions or conditions that are necessary to satisfy the minimum needs of the Government (see FAR 11.002(a)(1)).

This section covers the following strategies for improving purchase descriptions and related terms (i.e., Part I of the UCF-Schedule) to obtain more effective price competition:

• 2.1.1 - Consolidate Requirements
• 2.1.2 - Describe Government Needs To Promote Competition
• 2.1.3 - Review Requirements Documents
• 2.1.4 - Use And Maintain Requirements Documents
• 2.1.5 - Acquire Other Than New Material
• 2.1.6 - Consider Delivery Or Performance Schedules
• 2.1.7 - Use Liquidated Damages
• 2.1.8 - Use Variation In Quantity
• 2.1.9 - Pursue Restrictive Requirement Relief

2.1.1 - Consolidate Requirements

Introduction. Federal agencies are required to procure supplies in quantities that will:

• Result in the total cost and unit cost most advantageous to the Government, where practicable (FAR 7.202).
  • Total cost is the sum of allowable direct and indirect costs allocable to the contract, incurred or to be incurred, less any allocable credits, plus any allocable facilities capital cost of money (FAR 31.201-1).
  • Unit cost is the cost to complete any unit identified in the contract.
• Not exceed the reasonable quantity expected to be required by the agency.

In contracting, the general assumption is that larger quantities will attract greater competition and result in lower prices due to manufacturing economies of scale and specialization. However, most inventory management systemsdo not consider the effect of larger quantities on price. Price is considered to be fixed regardless of the quantity purchased. Because inventory management systems typically do not consider the benefits of requirement consolidation, contracting personnel must often take primary responsibility for coordinating consolidation efforts.

Consolidation decision. As you review the Government requirements and prepare the schedules of supplies or services, consider the following:

Consolidate purchase requests. If you expect to receive purchase requests from a number of different activities for the same end item, encourage those activities to submit their purchase requests at roughly the same time. Then award a single contract for the aggregate quantity in the purchase requests.

Consider polling the requiring activities by phone if you suspect that a number of requiring activities will need the same end item. You might also consider "riding" the contract of another agency that needs the same end items (see FAR 17.502).

Place economic order quantities. The major drawback to consolidating requirements is that you may acquire a warehouse full of supplies that are not immediately needed. The Government incurs a daily cost for storing unused supplies-a cost that may over time outweigh any price breaks from having purchased in bulk. Therefore, when deciding the quantity to acquire at any one time, you should minimize the total cost of both:

• Buying the supplies; and
• Storing the supplies.

This means balancing per unit prices against per unit storage costs, taking into account how many units are likely to be drawn from inventory each month. The "Economic Order Quantity" is the quantity that represents the best balance of acquisition and storage costs-this is the quantity that ideally you should award at any one time.

If inventory managers are available, work with them to determine the economic order quantity. You can also solicit information from offerors relevant to determining the economic order quantity.

Use indefinite delivery contracts. Indefinite-deliverycontracts give the Government greater flexibility and buying power by combining requirements over an extended period of time with limited obligation regarding the exact time of delivery. They establish limits on the Government's obligation under the contract and provide flexibility in scheduling deliveries to minimize the costs to the Government for holding and managing inventory. See FAR 16.5 for specific details about the various types of indefinite-delivery contracts available.

Comparison of contract types. The following table compares the Government pricing leverage for the three indefinite-delivery contract types and a definite-quantity definite-delivery contract:

2.1.2 Describe Government Needs To Promote Competition

Need description objectives. FAR 11.002(a) requires that agencies describe Government needs in a manner designed to:

• Promote full and open competition, with due regard to the nature of the supplies or services to be acquired; and
• Only include restrictive provisions or conditions to the extent necessary to satisfy the minimum needs of the agency or as authorized by law.

Contracting officer responsibility. Normally, you will not be ultimately responsible for describing Government needs. That will normally be the responsibility of technical experts and the requiring activity. However, as a member of the Acquisition Team, you are responsible for sharing your acquisition knowledge in an attempt to meet the needs of the Government. See FAR 11 for additional information on describing Agency needs/requirements.

2.1.3 Consider Acquiring Other Than New Material

Introduction. Your market research may identify situations were it would be advantageous to the Government to acquire items that are not new (e.g., rebuilt items), former Government surplus property, or residual inventory. Such items may be available at a fraction of the price of new material. You must consider the best interests of the Government in deciding whether to solicit offers based on providing such items.

Contracting Officer Authorization. Do not permit a contractor to provide other than new material, former Government surplus property, or residual inventory unless the contractor has obtained the appropriate contracting officer authorizations required by FAR 52.211-5, Material Requirements clause.

2.1.4 Consider Delivery Or Performance Schedules

The time of delivery or performance is an essential contract element and must be clearly stated in solicitations and contracts. See FAR 11.4 for additional considerations related to delivery or performance schedules. Assure that delivery or performance schedules are realistic and meet the requirements of the acquisition. Remember that unreasonably tight or difficult to attain schedules:

• Tend to restrict competition;
• Are inconsistent with small business policies; and
• May result in higher prices.

2.1.5 Consider Liquidated Damages

In Government contracting, a liquidated damages clause is a stipulation by the Government and contractor to a sum of money to be recovered by the Government in the event the contractor fails to meet a specified contract delivery or performance requirement. Liquidated damages are normally assessed at a daily rate for each day of delay in meeting the delivery or performance requirement. A liquidated damages clause may be used in any type of contract, but such clauses are most commonly used in construction contracts. See FAR 11.5 for additional information on Liquidated Damages.

As you decide whether to include a liquidated damages clause in the contract, consider the probable effect on contract pricing, competition, and contract administration:

• Concern among prospective offerors about the cost risk associated with liquidated damages may increase contract prices and decrease competition. A tight delivery schedule will increase offeror concern. If the risk of timely performance is substantial, consider using positive performance incentives rather than liquidated damages.
• The cost/difficulty of contract administration will likely increase if the contractor perceives that timely performance is unlikely or impossible. Numerous claims may result as the contractor attempts to use Government action or inaction to justify its failure to meet the contract schedule.

Estimating a Reasonable Rate (FAR 11.502(b), FAR 11.503(b), and FAR11.503(c)). Whenever you use liquidated damages, you must calculate the rate on a case-by-case basis, based on an estimate of actual damage to the Government if the contractor does not perform on time. Assure that the rate is reasonable because a rate fixed without any reference to probable actual damages may be held to be a penalty, and therefore unenforceable.

If a liquidated damages clause is used in a construction contract, the contract should identify a daily rate for the assessment of liquidated damages. As a minimum, the rate should cover the estimated cost of inspection and superintendence for each day of delay in contract completion. Whenever the Government will suffer other specific losses due to the failure of the contractor to complete the work on time, the rate should also include an amount to cover those losses. Examples of specific losses include the:

• Cost of substitute facilities;
• Rental of buildings and/or equipment; or
• Continued payment of quarters allowances.

Usually, a single liquidated damages rate (e.g., $500 per day) is used from the date of contractually required delivery/performance until the contractor actually delivers or the contract is terminated. However, the probable damage to the Government may not follow a linear pattern.

• If appropriate to reflect probable damages to the Government, you may develop two or more incremental rates which provide for a declining rate assessment as the delinquency continues.
• You may also include an overall maximum dollar amount or period of time, or both, during which liquidated damages may be assessed, to ensure that the result is not an unreasonable assessment of liquidated damages.

2.2 - Improving Business Terms And Conditions

Section Introduction. This section covers the following strategies for selecting clauses and provisions for the solicitation to maximize price competition:

• 2.2.1 - Base The Contract Type On Risk Analysis
• 2.2.2 - Review Applicability Of Socioeconomic Requirements
• 2.2.3 - Match Payment And Finance Terms To Market Conditions
• 2.2.4 - Furnish Government Property
• 2.2.5 - Consider Warranty Requirements
• 2.2.6 - Optimize Price/Technical Tradeoffs

2.2.1 - Base The Contract Type On Risk Analysis

Introduction. The selection of contract type can have a significant effect on both competition and contract price. See FAR 16.1 for additional information on selecting contract types.

Two Contract Categories. Most contract types fit into one of two categories:

• Fixed-Price; or
• Cost-Reimbursement.

The biggest difference between the two is the assignment of risk.

In fixed-price contracts, the contractor is required to deliver the product specified and there is a maximum limit on the amount of money the Government must pay.

In cost-reimbursement contracts, the contract is required to deliver a "best effort" to provide the specified product. All allowable costs must be reimbursed, regardless of delivery, up to the level specified in the contract.

Risk, Contract Type, and Price. Analysis of the risk inherent in the contracting situation is the key element in the selection of an appropriate contract type. The relationship between risk, contract type, and price can be demonstrated by the following examples.

Examples:

• Selection of a fixed-price contract when the risks are beyond the contractor's control, as in many development contracts, will increase price and reduce competition.
• Selection of a cost-reimbursement contract when the risks are well within the contractor's control, as in most production contracts, will reduce the contractor's motivation to control costs.

Commercial Items. When acquiring commercial items, agencies shall use firm-fixed-price contracts or fixed-price contracts with economic price adjustment for the acquisition of commercial items, except, a time-and-materials contract or labor-hour contract (see Subpart 16.6) may be used for the acquisition of commercial services when specified conditions are met. See FAR 12.207(b).

Major Types of Contracts. The table below presents a comparison of the major contract types.

Notes to tables:

Note 1 - Goodwill being the value of the name, reputation, location and other intangible assets of a firm.

Note 2 - Performance is evaluated by an Award Fee Panel with fee determined by a Fee Determining Official. Fee determinations are not subject to contract disputes provisions.

Note 3 - The CPFF contract is commonly used in situations where the Government is more interested in technical excellence than cost control. However, you must be aware that higher cost does not necessarily equal technical excellence. Contractors may attempt to shift unnecessary resources to CPFF contracts to control costs on other contracts.

2.2.2 - Review Applicability Of Socioeconomic Requirements

Introduction. The Government has established socioeconomic programs to achieve national social and economic goals, but these programs can also limit potential sources. As you implement these programs, always consider the probable effect on competition and contract pricing. See FAR 8 for information on required sources of supply and FAR 19 for information on Small Business Programs.

2.2.3 - Match Payment And Finance Terms To Market Conditions

Introduction. See FAR 32 for policies and procedures for contract financing and other payment matters. Under cost-reimbursement contracts, contractors are typically reimbursed for costs incurred on a monthly basis. Under fixed-price contracts, payment is made in a lump sum at contract completion unless other financing terms are provided for in the contract. Sometimes, you can attract a greater level of competition and lower-priced offers by providing financing. However the costs of extending such financing must be considered.

Contractor Financing. Requiring contractors to fund the entire contract may severely limit competition, particularly with large contracts and long performance periods. Any firm that does submit an offer will probably offer a higher price to cover the cost of working capital. Recognizing the potential effects of required contractor funding on competition and pricing, you may want to consider other financial terms.

However, there are negative aspects to Government funding. Government funds are not free. The Government must also pay interest on borrowed capital. In addition, when the Government provides working capital support, the contractor has both the funds and the product. In the event of contractor default or bankruptcy, the Government may lose both the product and the funds.

Circumstances for Financing Commercial Items. In some markets, commercial buyers commonly provide contract financing. You may include appropriate financing terms in contracts for commercial purchases when doing so will be in the best interest of the Government (see FAR 32.202-1).

Do not automatically include financing in commercial item contracts. Consider customary commercial financing arrangements as part of your market research. In particular, consider:

• The extent to which other buyers provide contract financing for purchases in that market;
• The overall level of financing normally provided;
• The amount or percentages of any payments equivalent to advance payments;
• The basis for any payments equivalent to commercial interim payments as well as the frequency, and amounts of percentages; and
• Methods of liquidation of contract financing payments and any special or unusual payment terms applicable to delivery payments.

2.2.4 - Furnish Government Property

Introduction. Government-furnished property can be used in several ways to encourage competition and assure overall price reasonableness. See FAR 45 for information related to Government Property.

Description. The term propertyincludes facilities, material, special tooling, special test equipment, and agency peculiar property. Different types of property can be used to affect competition and pricing.

Overview of Government Property. The table below provides an overview of the various types of Government property and how each type can be used to affect competition and pricing.

2.2.5 - Optimize Price/Technical Trade-Offs

Technical Factors that Can Reduce Competition. The factors already considered in this chapter have the greatest effect on competition and contract price. There are, however, many other technical and business factors that can reduce competition and increase prices. These include:

• Security requirements;
• Payment provisions that increase contractor investment;
• Packaging requirements that require survival under extreme conditions;
• Unclear instructions, certifications, and notices to bidders/offerors;
• Unclear source selection criteria; and
• Conflicting and restrictive general contract clauses.

Technical Factors and Price. Technical factors could invite offerors to submit higher prices as the tradeoff for a technically superior offer. Key questions to ask regarding proposed technical evaluation factors:

• Will the technical evaluation factor unnecessarily force the acquisition into a higher-priced market segment?
• Will the technical factor constructively amend the specifications to require more than the Government's actual minimum needs?
• Given the likely effect on contract price, is the factor truly necessary to minimize the technical or business risks inherent in the contract requirements?
• Will use of the technical factor likely result in a "greater value" for the taxpayer?
• Are technical factors clear such that offerors understand the Government's priorities and how offerors will be evaluated in accordance with these priorities?