Negotiating a Fair and Reasonable Price for Your Government Contract Modification
Know the Difference Between “Cost” and “Price” Analysis when Negotiating Change Orders for Federal Government Contracts
As federal government contractors know, changes to the work are expected and negotiating a fair value for those changes can be difficult. The contracting officer may be pushing to perform a “cost” analysis to price your federal contract modification. A “cost” analysis approach may not be your only option.
The Federal Acquisition Regulations (FAR) define “cost” analysis as “the review and evaluation of any separate cost elements and profit or fee in an offeror’s or contractor’s proposal.” 48 C.F.R. § 15.404-1(c)(1). Deconstructing your change order proposal into each separate cost element, including dissecting your profit and contingency, can be daunting and contrary to your standard estimating procedure. Meanwhile, following this “cost” analysis approach can be detrimental to your bottom line if the contracting officer is applying it to achieve government savings by whittling away any mark-up you figured as compensation for the risk of taking on the additional work.
As an alternative approach, consider investigating the “price” analysis method for negotiating proposals for government contract modifications. The FAR defines the “price” analysis method as “the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit.” 48 C.F.R. § 15.404-1(b)(1).
The “price” analysis method is used when certified cost or pricing data are not required. The FAR establishes the circumstances under which certified cost data will be required. One exemption to the certified cost data requirement includes a situation where you have established adequate price competition for your proposal. This can be established by showing pricing data for similar work you performed in the past. See 48 C.F.R. § 15.403-1(c)(1)(iii).
Convincing the contracting officer to use the “price” analysis may be a significant hurdle, but it is one you can overcome with careful consideration of the FAR provisions and appropriate documentation of your pricing data for similar work you performed in the past. Engaging counsel and an outside consultant that specializes in pricing government work should be among your considerations early in the proposal negotiation process.
Misenko Construction Law can assist with handling government contract modifications and prosecuting claims for additional payment against the U.S. Government in matters before the United States Civilian Board of Contract Appeals.
If you have questions about negotiating government contract change orders for your project, please do not hesitate to contact us.