22.2 Price Documentation and a Worked Cost Negotiation

Establishing and Documenting Fair and Reasonable Pricing

A price-reasonableness memorandum records the evidence for a significant purchase. Use the level of documentation required by the governing rules; an identical standalone memorandum is not a condition of every public contract's legal existence. In the event of a public records request, administrative bid protest, or state legislative audit, this memorandum serves as the legal defense of the expenditure.

Mandatory Application Scenarios

A documented reasonableness assessment is especially important in these conditions:

1. Sole-Source Procurements: Where an agency contracts with an exclusive supplier, the complete absence of market competition requires comprehensive cost or price analysis to justify the commitment of public funds.
2. Single Bid Received: When an agency issues a competitive Invitation for Bids (IFB) or Request for Proposals (RFP) but receives only one bid, competition did not materialize. The buyer cannot assume the single bid is reasonable; the buyer must independently prove reasonableness using historical prices, an IGCE, or cost breakdowns.
3. Emergency Procurements: When life, health, safety, or property preservation requires immediate contract award without formal competitive advertising, the buyer must still document that the emergency prices are fair under disaster market conditions.
4. Contract Modifications & Change Orders: Unilateral or bilateral amendments that alter project scope or add new work must be accompanied by cost/price analysis for the added work before the change order is executed.

Key Components of a Reasonableness Memorandum

A legally robust Determination of Fair and Reasonable Price memorandum must include:

• Identification of the procurement method, solicitation number, and vendor;
• Detailed description of the goods, services, or construction being procured;
• Identification of the specific price or cost analysis techniques utilized;
• Explicit mathematical calculations, including inflation adjustments, volume discounts, or cost element adjustments;
• Factual justification demonstrating why the selected pricing baseline is comparable;
• A clear, unambiguous conclusion stating that the final negotiated price is fair and reasonable to the public entity; and
• Signature and date by a procurement official holding an active, delegated contracting warrant.

Concrete Procurement Scenario: The Proprietary SCADA Upgrade

To observe these principles in practical application, consider the following public procurement case study:

Scenario: A municipal water utility operates a proprietary Supervisory Control and Data Acquisition (SCADA) system controlling clean water pumping stations across the city. The central server hardware and proprietary software require a major operational upgrade. The system architecture is fully patented and proprietary to CyberFlow Technologies; third-party software engineers cannot modify the source code without violating copyright law. The public buyer lawfully approves a sole-source justification under local procurement ordinance.

In this hypothetical example with no materials or other direct costs, CyberFlow Technologies submits a sole-source proposal for $419,584 to deliver software modifications, field instrumentation updates, and engineering services. The firm refuses to offer a standard commercial catalog price, noting that municipal water systems have unique telemetry configurations.

Procurement Action & Cost Analysis:

1. Rejection of Price Analysis as Insufficient: Because the system is proprietary and no competitive market exists, price analysis alone cannot establish reasonableness. The buyer requires CyberFlow to submit an itemized cost breakdown.
2. Review of Direct Labor: CyberFlow proposes 1,200 hours of Lead Software Engineering at $175 per hour ($210,000) and 800 hours of Field Integration Technicians at $110 per hour ($88,000). The buyer compares the $175 rate against regional BLS wage data and recent county information technology contracts, using a hypothetical supported comparable unburdened rate of $135 per hour. BLS employee wages must not be compared directly with fully burdened contractor billing rates. The buyer challenges the proposed wage rate.
3. Audit of Indirect Rates: CyberFlow applies an indirect G&A rate of 28% across all labor and materials. The buyer requests CyberFlow's audited indirect rate schedule. The audit reveals that CyberFlow included costs disallowed under this contract's stated cost principles within their G&A cost pool. Removing the unallowable expenses reduces the verifiable G&A rate to 21%.
4. Cost Realism & Scope Adjustment: The utility's engineering staff reviews the proposed 800 technician field hours and determines that because the city's internal technicians will handle the physical wiring terminations, only 500 contractor field hours are required.
5. Negotiation and Fair & Reasonable Award: Through structured cost negotiations, the buyer adjusts the engineering rate to $145/hour, reduces field hours to 500, applies the corrected 21% G&A rate, and agrees to a 10% profit markup on cost. The revised direct labor is 1,200 × $145 + 500 × $110 = $229,000; adding 21% G&A gives $277,090, and adding the 10% markup gives $304,799, a reduction of $114,785 from $419,584 while ensuring the vendor receives a fair profit. The buyer drafts a detailed cost analysis memorandum establishing that $304,799 is fair and reasonable, executing the contract under their delegated warrant.