5.5 Pre-Negotiation Objectives & Competitive Negotiations (FAR 15.406)

5.5 Pre-Negotiation Objectives & Competitive Negotiations (FAR 15.406)

Negotiation is a process of bargained exchange between the Government and an offeror designed to reach mutual agreement on contract price, terms, and conditions. Under FAR 15.406-1, Contracting Officers (COs) must establish written pre-negotiation objectives prior to conducting negotiations on any contract or modification requiring cost or price analysis.

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Pre-Negotiation Objectives & The PNOM (FAR 15.406-1)

Pre-negotiation objectives establish the Government's official target position, acceptable range, and negotiation boundaries. They ensure that government negotiators enter discussions with a clear strategy supported by price or cost analysis.

The Pre-Negotiation Objectives Memorandum (PNOM)

The CO documents pre-negotiation objectives in a formal Pre-Negotiation Objectives Memorandum (PNOM). The PNOM must detail:

• Technical & Price Assessment: Analysis of proposed direct labor, materials, subcontracts, and indirect rate pools.
• Pricing Position: Government target price, minimum acceptable position, and ceiling price.
• Profit / Fee Objective: Calculation of fair profit using structured profit methodologies.
• Advisory Audit Input: Summary of recommendations provided by DCAA auditors, ACOs, or technical specialists, noting any points of agreement or disagreement.

[Proposal Analysis] ➔ [DCAA / ACO Input] ➔ [Draft PNOM Target & Minimum] ➔ [CO Approval] ➔ [Enter Negotiations]

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Structured Profit Analysis & The Weighted Guidelines Method (FAR 15.404-4)

FAR 15.404-4 mandates that Contracting Officers use a structured approach for determining profit or fee objectives on negotiated contracts where cost analysis is performed.

Statutory Fee Limitations (10 U.S.C. 3861 & 41 U.S.C. 3905)

Federal law imposes strict statutory caps on fee percentages based on contract type (calculated as a percentage of estimated cost, excluding fee):

• Experimental, Developmental, or Research Contracts: Fee cannot exceed 15% of estimated cost.
• Architect-Engineer (A-E) Services: Total fee for A-E services for production of designs, plans, and drawings cannot exceed 6% of estimated construction cost.
• All Other Cost-Plus-Fixed-Fee Contracts: Fee cannot exceed 10% of estimated cost.

The Weighted Guidelines Method

Agencies (such as DoD under DFARS 215.404-71) use the Weighted Guidelines Method to establish profit objectives based on four core evaluation factors:

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Executing Competitive Negotiations & Bargained Exchanges

When conducting negotiations, the Contracting Officer leads the acquisition team to achieve contract terms that represent best value to the Government.

Bargaining Techniques & Best Practices

• Objective Bargaining: Focusing on cost line items supported by empirical audit data or market indices.
• Trade-Offs: Exchanging concessions on performance schedules or testing protocols for price reductions.
• Avoiding Unfair Tactics: Government negotiators must maintain professional standards, avoiding arbitrary price cut demands unsupported by cost/price analysis.

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The Price Negotiation Memorandum (PNM) (FAR 15.406-3)

Upon completion of negotiations, the Contracting Officer must document the results in a written Price Negotiation Memorandum (PNM). The PNM is the single most critical legal document in the pricing file, recording the basis for finding the negotiated price fair and reasonable.

Mandatory Elements of the PNM (FAR 15.406-3(a))

1. Purpose of Negotiation: Summary of acquisition type, solicitation number, and contract action.
2. Principal Participants: Names, titles, and organizations of all government and contractor negotiators.
3. Current Cost or Pricing Data Certificate: Reference to the signed TINA Certificate of Current Cost or Pricing Data (if applicable).
4. Summary of Proposed, Pre-Negotiation, and Final Prices: Comprehensive line-item comparison table showing proposed, PNOM target, and final agreed price.
5. Cost Element Discrepancies: Detailed explanation of principal differences between proposed costs, government objective, and final negotiated settlement.
6. Impact of Advisory Audits: Summary of DCAA/ACO audit findings and explanation of how audit recommendations were resolved.
7. Fair and Reasonable Determination: Explicit legal statement detailing why the final negotiated price is fair and reasonable.

DCAA Advisory Audit Coordination & Resolution Protocols

Prior to finalizing the Pre-Negotiation Objectives Memorandum (PNOM), the Contracting Officer must coordinate with the Defense Contract Audit Agency (DCAA) or civilian contract audit office whenever cost analysis is required. The DCAA audit report provides advisory recommendations regarding questioned direct labor costs, unallowable overhead expenses (under FAR Subpart 31.2), and proposed subcontract pricing. If the CO chooses to depart from DCAA audit recommendations—such as accepting a contractor proposed overhead rate that DCAA questioned—the CO must explicitly document the legal and technical justification for the disposition in both the PNOM and the final Price Negotiation Memorandum (PNM) pursuant to FAR 15.406-3(a)(8).

Step-by-Step Weighted Guidelines Profit Evaluation

When applying the Weighted Guidelines Method (FAR 15.404-4 and DFARS 215.404-71), the CO assigns numerical weights to specific cost risk factors. For example, direct labor effort receives a higher profit weight (e.g., 9% to 12%) than routine material pass-through costs (e.g., 1% to 4%), encouraging contractors to perform high-value technical labor in-house. Contract performance risk assigns a 0% to 1% profit weight for cost-plus-fixed-fee contracts, but increases to 4% to 6% for firm-fixed-price contracts, rewarding contractors for assuming full financial cost risk.