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Ch 2 - Maximize Price Competition

2.0 - Chapter Introduction2.1 - Improving the Schedule

o 2.1.1 - Consolidate the Requirementso

2.1.2 - Describe Government Needs to PromoteCompetitiono 2.1.3 - Review Requirements Documentso 2.1.4 - Use and Maintain Requirements Documentso 2.1.5 - Acquire Other Than New Materialo 2.1.6 - Consider Delivery or Performance

Scheduleso 2.1.7 - Use Liquidated Damageso 2.1.8 - Consider Variation in Quantityo 2.1.9 - Pursue Restrictive Requirement Relief

2.2 - Improving Business Terms and Conditionso 2.2.1 - Base The Contract Type On Risk Analysiso 2.2.2 - Review Applicability Of Socioeconomic

Requirementso 2.2.3 - Match Payment And Finance Terms to Market

Conditionso 2.2.4 - Furnish Government Propertyo 2.2.5 - Consider Warranty Requirementso 2.2.6 - Optimize Price/Technical Tradeoffs

2.3 - Publicizing The Acquisition

2.0 - Chapter Introduction

Acquisition strategy. In this chapter, we will examine theeffect of numerous acquisition decisions on competition andcontract pricing. The sections of this chapter, provideanswers to the following three questions:

How can solicitation Schedules (e.g., Part I of theUCF) be improved to yield more effective pricecompetition?How can business terms and conditions (e.g., Parts II

- IV of the UCF) be improved to yield more effectiveprice competition?How can the methods of publicizing the buy be tailoredto yield more effective price competition?

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

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Contracting officers shall provide for full and opencompetition 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 theGovernment's needs efficiently.

Competition is important to contract pricing in threeways:

Competition is widely acknowledged as the best way toencourage firms to offer a quality product at areasonable price.Competitive prices are one of the best bases to use inevaluating the reasonableness of an offered price.

Adequate price competition is the most common basisfor excepting offerors from the requirement to submitcost or pricing data.

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

Attract competitive offers from the best vendors (interms of their track records for pricing, quality,timeliness, and integrity), andObtain reasonably-priced offers, in part because the

solicitation:o Reflects the Government's actual minimum need ando Prospective contract provisions balance the cost

risk associated with satisfying that need.

Key acquisition team members. Efforts to maximizecompetition require a detailed analysis of Governmentrequirements. To be effective this analysis must involveaffected members of the Acquisition Team. Memberparticipation will vary from acquisition to acquisition,but most often contracting personnel and one or more of thefollowing team members will be involved:

Users-key source of information on the real needs ofthe Government;Requirement Managers-key decision makers;Suppliers-information source in market research andanalysis; and

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Contracting Personnel-responsible for theeffectiveness of the acquisition decision.

Potential impediments to competition. In variousacquisition situations, you may use many different formats

to organize a solicitation or contract. Regardless of theformat, there are potential impediments to competition.

Potential Impediments to Price CompetitionSolicitation

Element Potential Impediments

Supplies orServices andPrices

Failure to consolidate requirements

RequirementsDocuments

Use of vague or ambiguous termsExcessive (i.e., gold plated) or

impractical requirementsUse of design specifications whenperformance specifications are feasibleBrand-name specificationsBrand-name-or-equal specifications thatadmit few, if any, equalsUse of Government-unique specificationsfor commercial or commercial-typedeliverablesBiased specifications (i.e.,specifications geared to the unique

features of a single product or ofpremium priced products)

Packaging andMarking

Noncommercial requirementsExcessive requirementsBiased requirements

Inspection andAcceptance

Noncommercial requirementsExcessive requirementsBiased requirements

Deliveries orPerformance Noncommercial termsDelivery requirements not in tune withmarket cycles (e.g., requirements for"out-of-season" deliveries.)Excessively tight deadlines

ContractAdministration

Noncommercial requirements

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Data Excessive requirements

SpecialContractRequirements

Noncommercial requirementsExcessive requirements

ContractClauses

Noncommercial terms and conditionsExcessive requirements (e.g., anexcessively long warranty period,relative to commercial warranties)Use of the wrong type of contract,given risks inherent in the workFailure to use terms and conditionsthat could encourage competition

Instructions,Conditions,

and Notices toOfferors

Noncommercial requirementsExcessive requirements

Evaluation forAward

Price given too little weight relativeto technical factorsBiased evaluation factors (e.g., gearedto unique features of a single productor of premium priced products)

2.1 - Improving The Schedule

Section Introduction. Solicitations and contracts mustinclude the product or service requirements that thecontractor is expected to meet. These requirements shouldbe specified in a manner designed to promote full and opencompetition and should only include restrictive provisionsor conditions that are necessary to satisfy the minimumneeds of the Government (see FAR 11.002(a)(1) ).

This section covers the following strategies forimproving purchase descriptions and related terms (i.e.,

Part I of the UCF-Schedule) to obtain more effective pricecompetition:

2.1.1 - Consolidate Requirements2.1.2 - Describe Government Needs To PromoteCompetition2.1.3 - Review Requirements Documents2.1.4 - Use And Maintain Requirements Documents

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2.1.5 - Acquire Other Than New Material2.1.6 - Consider Delivery Or Performance Schedules2.1.7 - Use Liquidated Damages2.1.8 - Use Variation In Quantity2.1.9 - Pursue Restrictive Requirement Relief

2.1.1 - Consolidate Requirements

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

Result in the total cost and unit cost mostadvantageous to the Government, where practicable ( FAR7.202 ).

o Total cost is the sum of allowable direct andindirect costs allocable to the contract,incurred or to be incurred, less any allocablecredits, plus any allocable facilities capitalcost of money ( FAR 31.201-1 ).

o Unit cost is the cost to complete any unitidentified in the contract.

Not exceed the reasonable quantity expected to berequired by the agency.

In contracting, the general assumption is that largerquantities will attract greater competition and result inlower prices. However, most inventory management systems donot consider the effect of larger quantities on price.Price is considered to be fixed regardless of the quantitypurchased. Because inventory management systems typicallydo not consider the benefits of requirement consolidation,contracting personnel must often take primaryresponsibility for coordinating consolidation efforts.

Consolidation decision. As you review the Governmentrequirements and prepare the schedules of supplies orservices, consider the following:

Consolidation DecisionIf you can answer "YES" tothe following questions... AND... Then...

Is the contracting officelikely to receive morepurchase requests for thisitem or service during the

Quantity anddeliveryrequirements arefirm and full

Consolidatepurchaserequests into asingle definite

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funding iscurrently

vailable.aCan we reasonably estimatetotal organizationrequirements for the

coming year?

deliverycontract.

coming year?

Can this requirement becombined with other knownrequirements to reduce thetotal cost to theGovernment?

Quantity ortiming of

requirements isnot firm or fullfunding is notcurrentlyavailable.

Consolidatepurchase

requests into asingleindefinitedeliverycontract.

Consolidate purchase requests. If you expect to receivepurchase requests from a number of different activities forthe same end item, encourage those activities to submittheir purchase requests at roughly the same time. Thenaward a single contract for the aggregate quantity in thepurchase requests.

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

Place economic order quantities. The major drawback toconsolidating requirements is that you may acquire awarehouse full of supplies that are not immediately needed.The Government incurs a daily cost for storing unusedsupplies-a cost that may over time outweigh any pricebreaks from having purchased in bulk. Therefore, whendeciding the quantity to acquire at any one time, youshould minimize the total cost of both:

Buying the supplies; and Storing the supplies.

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

If inventory managers are available, work with them todetermine the economic order quantity. You can also solicit

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information from offerors relevant to determining theeconomic order quantity.

Use indefinite delivery contracts. Indefinite-deliverycontracts give the Government greater flexibility and

buying power by combining requirements over an extendedperiod of time with limited obligation regarding the exacttime of delivery. They establish limits on the Government'sobligation under the contract and provide flexibility inscheduling deliveries to minimize the costs to theGovernment for holding and managing inventory.

Types of indefinite-delivery contracts ( FAR 16.501 ).Thereare three principal types of indefinite-delivery contracts:

Definite QuantityIndefinite QuantityRequirements

Indefinite quantity and requirements contracts are furtherdivided into delivery order and task order contracts.

A delivery order contract is an indefinite quantity orrequirements contract for supplies.A task order contract is an indefinite quantity orrequirements contract for services.

Indefinite-quantity contract (See FAR 16.504 ). Anindefinite-quantity contract (either delivery order or taskorder) provides for an indefinite quantity of purchaseswithin limits established in the contract. At the time thatthe contract is awarded, the Government is only obligatedto acquire a stated minimum quantity (or dollar value)during the term of the contract. Delivery orders or taskorders may be placed as needed until the maximum quantity(or dollar value) stated in the contract is reached.

If the indefinite quantity contract is not for advisoryand assistance services, give the maximum practicable

preference to making multiple awards under a singlesolicitation. For advisory and assistance contracts thatwill not exceed three years and $10,000,000 (including alloptions) you may (but you are not required to) givepreference to making multiple awards. If the indefinite-quantity contract for advisory and assistance servicesexceeds three years and $10,000,000 (including alloptions), you must make multiple awards unless only one

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offer is received or a written determination to make asingle award is made in accordance with FAR 16.504(c).

Example of situation for use: Suppose an organizationneeds specialized engineering support. The exact amount of

support is not known at the beginning of the year, but therequiring activity can estimate minimum and maximumrequirement limits. Here, an indefinite-quantity contractprovides a useful contracting and pricing tool.

Requirements contract (See FAR 16.503 ). A requirementscontract (either delivery order or task order) requires thecontractor to fill all actual purchase needs for specificrequirements at an agreed-to price. The contract mustinclude a realistic estimate of the Government'srequirements during the contract period. However, theGovernment is obligated to order only its actualrequirements.

Example of situation for use: Suppose the organizationrequires a standard commercial item. The exact quantity isnot known at the beginning of the year and it is notpossible to clearly estimate a minimum and a maximumquantity for the year. However, it is possible to developan estimate of quantity needs. A requirements contract willpermit the organization to contract for needs that maydevelop based on the estimated quantity.

Comparison of contract types. The following tablecompares the Government pricing leverage for the threeindefinite-delivery contract types and a definite-quantitydefinite-delivery contract:

Contract Type and Pricing Leverage

Contract Type Pricing LeverageRankingDefinite-Quantity-Definite-Delivery

First, if the entirequantity is known andcontracted for at onetime.

Last, if individualsmall orders arerequired.

Definite-Quantity-Indefinite-Delivery

Second

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Indefinite-Quantity-Indefinite-Delivery orRequirements

Third

2.1.2 Describe Government Needs To Promote Competition

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

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

Contracting officer responsibility. Normally, you willnot be ultimately responsible for describing Governmentneeds. That will normally be the responsibility oftechnical experts and the requiring activity. However, as amember of the Acquisition Team, you are responsible forsharing your acquisition knowledge in an attempt to meetthe needs of the Government.

Points to consider in describing requirements (See FAR11.002(a)(2) ). To promote full and open competition tothe maximum extent possible, the Acquisition Team must:

State supply or service requirements in terms of:o Functions to be performed;o Performance required; oro Essential physical characteristics;

Define requirements in terms that enable and encourageofferors to supply commercial items, or modifiedcommercial items, or, to the extent that commercialitems suitable to meet the agency's needs are notavailable, nondevelopmental items;Provide offerors of commercial items andnondevelopmental items an opportunity to compete inany acquisition to fill such requirements;Require prime contractors and subcontractors at alltiers to incorporate commercial items ornondevelopmental items as components of items suppliedto the agency; andModify requirements in appropriate cases to ensurethat the requirements can be met by commercial items

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or, to the extent that commercial items suitable tomeet the agency's needs are not available,nondevelopmental items.

Comparing functional, performance, and design

requirements. As indicated above, there are three basicways to define a requirement: function, performance, anddesign requirements. A specific Government need could bedescribed using just one of the three ways, but most needsare described using some combination of the three. Still, aparticular requirement is normally classified as the typeof requirement it most resembles, even though it alsocontains the elements of other types of requirements.

Comparing Requirements

RequirementType

States

requirement interms of... Considerations for use...

Functional Functions to beperformed.For example, acontainer forserving water toindividuals.

When needs are complex andinnovation is desirable,they permit the greatestcompetition.HOWEVER, requirements thatpermit a wide variety ofapproaches can alsoincrease the difficulty ofdetermining pricereasonableness, becausecompetitive prices may nolonger be useful bases forprice analysis (e.g., a10-ounce pewter cup vs. a4-ounce paper cup).

Performance Performancerequired.For example, aservingcontainercapable ofholding eightounces of waterfor a period oftwo hours.

May make it possible foryou to obtain competitionand innovation onspecialized requirements.HOWEVER, as withfunctional requirements,performance requirementsthat permit a wide varietyof approaches can alsolimit the usefulness ofcompetitive prices as abase for price analysis(e.g., an 8-ounce pewter

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cup vs. an 8-ounce papercup).

Design Essentialphysical

characteristics.For example, a303 stainlesscup, withspecifieddiameter andheight.

Requirements consistentwith the designs and

production methods commonin the appropriateindustry can be effectivein obtaining pricecompetition and uniformproducts.Unique or out of daterequirements can restrictcompetition and increaseprices.Competitive pricestypically provide a goodbase for price analysis.HOWEVER, if the designrequirement is unique orout of date, all theprices offered may beunreasonable.

2.1.3 Review Requirements Documents

General Order of Precedence. The Acquisition Team mayselect from existing requirements documents, modify orcombine existing requirements documents, or create newrequirements documents to meet agency needs, as long as theTeam's selection is consistent with the following order ofprecedence (see FAR 11.101(a) ):

Documents mandated for use by law.Performance-oriented documents.Detailed design-oriented documents.Standards, specifications and related publicationsissued by the Government outside the Defense orFederal series for the non-repetitive acquisition ofitems.

Environmentally Preferable Material. The AcquisitionTeam should prepare product descriptions to make maximumpractical use of recovered material and other materialsthat are environmentally preferable (see FAR 11.101(b) ).

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Recovered materials ( FAR 23.402 ) are waste materials andby-products which have been recovered or diverted fromsolid waste including post-consumer material. However,recovered materials do not include those materials and by-products generated from, and commonly reused within, anoriginal manufacturing process. The EnvironmentalProtection Agency has developed a list of designated itemsthat are or can be made with recovered materials in 40 CFRChapter 1, Subchapter I . For example, paper and paperproducts have been designated as items that can be producedwith recovered materials.

An environmentally preferable ( FAR 23.703 ) material is anitem that has a lesser negative effect on human health orthe environment when compared with competing products thatserve the same purpose. This comparison should be madeusing principles recommended in guidance issued by the EPAand may consider raw materials acquisition, production,manufacturing, packaging, distribution, reuse, operation,maintenance, or disposal of the product.

Standardization Programs. The Acquisition Team mustselect existing requirements documents or develop newrequirements documents that meet the needs of the agency inaccordance with applicable standardization programs (seeFAR 11.102 .

Product Market Acceptance ( FAR11.103 ). There may besituations where the agency needs to assure that existingcommercial or nondevelopmental products will meet the needsof the Government. For example, the agency may require anitem that has a demonstrated reliability, performance, orproduct support record in a specified environment. In suchsituations, the agency head may require offerors todemonstrate that the items offered:

Either:o Have achieved commercial market acceptance; OR o Have been satisfactorily supplied to an agency

under current or recent contracts for the same orsimilar requirements; AND

Otherwise meet the item description, specifications,or other criteria prescribed in the public notice andsolicitation.

If the agency head determines that offerors mustdemonstrate market acceptance, develop solicitation

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criteria that the Acquisition Team can use to evaluateproduct market acceptance. Ensure that the criteria:

Reflect the minimum need of the Government;Relate to an item's performance and intended use, not

an offeror's capability;Are supported by market research;Include consideration of items supplied satisfactorilyunder recent or current Government contracts, for thesame or similar items; andConsider the entire relevant commercial market,including small business concerns.

Do not make market acceptance the sole criterion thatyou use to determine whether an item meets Governmentrequirements. You should also conduct related marketresearch to evaluate the item's acceptability. Whenever youhave questions concerning an item's acceptability, youshould involve other appropriate members of the AcquisitionTeam in the evaluation process.

Whenever you use commercial market acceptance as anevaluation criterion, document your rationale in thecontract file. In your documentation, describe thecircumstances that justify the use of commercial marketacceptance criteria, and support the specific criteriabeing used.

Items Peculiar to One Manufacturer ( FAR 6.302-1(c) and11.104 ). An acquisition that uses a brand-namedescription or other purchase description to specify aparticular brand-name product, or feature of a product,peculiar to one manufacturer does not provide for full andopen competition regardless of the number sourcessolicited. For that reason, you must not use suchdescriptions unless:

The particular brand-name, product, or feature isessential to the Government's requirements, and market

research indicates other companies' similar products,or products lacking the particular feature, do notmeet, or cannot be modified to meet, the agency'sminimum needs; andThe authority to contract without providing for fulland open competition is supported by thejustifications and approvals required under FAR 6.302-1 .

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Content of Brand-Name-Or-Equal Purchase Descriptions. FAR11.104(b) requires that each brand-name-or-equal purchasedescription include, in addition to the brand name, ageneral description of those salient physical, functional,or performance characteristics of the brand name item thatan "equal" item must meet to be acceptable for award.

Example of Problems That Can Develop: In 1991, the GeneralAccounting Office (GAO) reported (GAO/NSIAD 91-53) thatsolicitations giving only part numbers as item descriptionsmay be unnecessarily restricting competition. Allsolicitations questioned by the report required offerors tosubmit technical data, on both the brand-name itemidentified in the solicitation and any alternative productoffered, so that the Government could determine whether theoffered item met Government needs. However, thesolicitations usually did not identify descriptiveinformation available in the buying center on the itemsbeing solicited.

Several prospective sources indicated that they couldnot identify the items required, because only part numberswere provided. Providing even incomplete data toprospective offerors should be beneficial to the Governmentby helping to increase competition.

2.1.4 - Use And Maintain Requirements Documents

Identifying Applicable Specifications and Related Documents( FAR 11.201 ). Any requirements documents used in asolicitation or contract must be clearly identified toavoid any confusion about the Government's requirements.

Identify Federal or Military specifications. If youcite requirements documents listed in the GeneralServices Administration (GSA) Index of FederalSpecifications, Standards and Commercial Item

Descriptions , the DoD Index of Specifications andStandards (DoDISS) , or other agency index, identifyeach document's approval date and the dates of anyapplicable amendments and revisions. Do not usegeneral identification references, such as "the issuein effect on the date of the solicitation." Do notfurnish the cited requirements documents with thesolicitation, except when:

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Assure that interested parties know where to obtainnongovernment standards adopted by theGovernment. nbsp; Interested parties may generally

obtain them from the GSA Specification Section or theDoD Standardization Documents Desk those nongovernment(voluntary) standards adopted for use by Federal orDefense activities. Standards not available from thesesources may be obtained from Government libraries,activities subscribing to document handling servicesor the organization responsible for the preparation,publication or maintenance of the standard.

Identifying the Need for Changes ( FAR11.203 ). Standardization documents are maintained toassure that requirements for items used across theGovernment are uniform. However, products available in thecommercial market and the needs of the Government changeover time.

As part of your market research, communicate withcustomers to determine how well the requirements documentreflects the customer's needs. If the customer indicatesthat the requirements do not meet customer needs, obtainsuggestions for corrective action.

Whenever practicable, you may provide affected industryan opportunity to comment on the requirements documents. Ifindustry sources recommend changes, obtain comments fromthe appropriate members of the Acquisition Team beforetaking any action to modify requirements documents.

Modifying Standardization Documents ( FAR11.202 ). Whenever you determine that Governmentstandardization documents should be changed:

Submit any recommended changes for standardizationdocuments listed in the GSA Index of Federal

Specifications, Standards and Commercial ItemDescriptions, to the General Services Administration,Federal Supply Service, Office of Acquisition,Washington, DC 20406.Submit any recommendations for changes tostandardization documents listed in the DoDISS to thecognizant preparing activity.

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When you cite an existing standardization document butmodify it to meet agency needs, follow the guidanceprovided in the appropriate standardization reference.

2.1.5 - Consider Acquiring Other Than New Material

Introduction. Your market research may identifysituations were it would be advantageous to the Governmentto 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 ofnew material. You must consider the best interests of theGovernment in deciding whether to solicit offers based onproviding such items.

Contracting Officer Authorization. Do not permit acontractor to provide other than new material, formerGovernment surplus property, or residual inventory unlessthe contractor has obtained the appropriate contractingofficer authorizations required by FAR 52.211-5 , MaterialRequirements clause.

Considering Authorization Requests. Allow offers of otherthan new material, former Government surplus property, orresidual inventory unless you determine that such materialsare unacceptable. As you make your determination, considerthe following:

Requirements of law or regulation;Safety of persons or property; andContract performance requirements.

When you are acquiring commercial items, you shouldconsider the customary practice in the industry for theitem being acquired. For example, in many industries it iscommon practice to use rebuilt parts because of the savingsover the purchase of new parts. In other industries, safety

and performance considerations make the use of newcomponents essential.

2.1.6 - Consider Delivery Or Performance Schedules

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Introduction. The time of delivery or performance is anessential contract element and must be clearly stated insolicitations and contracts. Assure that delivery orperformance schedules ( FAR 11.401(a) ) are realistic andmeet the requirements of the acquisition. Remember thatunreasonably tight or difficult to attain schedules:

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

Consider Market Norms. In 1990, GAO examined inventoryand contracting practices at two Government buying centers(GAO/NSIAD 90-124). GAO found that, in most cases, buyersmade no effort to match delivery schedules to market norms.Instead, buyers awarded contracts based on quotes todeliver on the date specified by the organizations'automated inventory system. Since little was known aboutmarket delivery norms, there was no reason to question thespecified delivery schedule. Buyers assumed that supplierswould deliver according to the contract schedule.

The data collected by GAO do not support thatassumption. GAO examiners reviewed 109 purchases of 57supply items. They found that:

1 purchase (0.9%) was delivered exactly on time58 purchases (53.2%) were delivered an average of 51days late50 purchases (45.9%) were delivered an average of 61days early

At these buying centers, failure to consider marketnorms may have had a substantial impact on competition,prices, and other acquisition costs.

Many prospective competitors who recognized that therequired delivery schedule did not provide sufficienttime for production and delivery, may have been

unreasonably excluded from the competition.Some firms may have had an unfair competitiveadvantage because they knew that the Government wouldaccept less-than-agreed-to delivery.The Government likely paid unnecessarily high pricesbecause of the limited competition and unenforceddelivery schedules.

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Items delivered late may have caused inventoryshortages or other operational delays.Items delivered early may have increased Governmentinventory holding costs.

Supply/Service Schedule Factors to Consider ( FAR11.402(a) ) Consider the following factors whenestablishing delivery schedules for supplies or services:

Urgency of need;Industry practices;Market conditions;Transportation time;Production time;Capabilities of small business concerns;Administrative lead time for obtaining and evaluatingoffers -- contractor delivery should not be curtailedbecause of Government delays in contract award;Time required for contractors to comply with anyconditions precedent to contract performance; andTime required for the Government to perform itscontract obligations -- such as delivering Government-Furnished Property.

Construction Schedule Factors to Consider ( FAR11.402(b) ) In developing a schedule for constructionprojects, you must consider such factors as:

Nature and complexity of the project;Construction seasons involved;Required completion date;Availability of materials and equipment;Capacity of contractors to perform;Use of multiple completion dates (e.g., a separatecompletion date for separable items of work).

Selecting Appropriate Method of Expressing Schedule ( FAR11.403(a) ) Consider different ways of expressing deliveryor performance schedules and select the one that seems most

appropriate for your acquisition situation. Common methodsof expressing contract delivery or performance requirementsinclude specific:

Calendar dates ;Time periods from a contract date (e.g., from the dateof contract award, from date of acceptance by the

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Government, or from the effective date of thecontract);Time periods from the date of receipt of contractnotice by the contractor (e.g., notice of award ornotice of acceptance by the Government);Time period for delivery after receipt by thecontractor of each individual order under the contract(e.g., orders under indefinite delivery contracts andGSA schedules).

2.1.7 - Consider Liquidated Damages

Introduction. In Government contracting, a liquidateddamages clause is a stipulation by the Government andcontractor to a sum of money to be recovered by theGovernment in the event the contractor fails to meet aspecified contract delivery or performance requirement.Liquidated damages are normally assessed at a daily ratefor each day of delay in meeting the delivery orperformance requirement. A liquidated damages clause may beused in any type of contract, but such clauses are mostcommonly used in construction contracts.

Deciding Whether to Use Liquidated Damages ( FAR 11.502 andDFARS 211.504 ). In some agencies, use of a liquidateddamages clause may be mandatory in certain contractingsituations, For example, the Department of Defense requiresthe use of liquidated damages in all construction contractsover $500,000.

If the use of a liquidated damages clause is notspecifically required by your agency, you should only useliquidated damages when you can answer "YES" to both of thefollowing questions:

Will the Government reasonably expect to suffer damageif the delivery or performance is delinquent?

Would the extent or amount of such damage be difficultor impossible to ascertain?

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

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Concern among prospective offerors about the cost riskassociated with liquidated damages may increasecontract prices and decrease competition. A tightdelivery schedule will increase offeror concern. Ifthe risk of timely performance is substantial,consider using positive performance incentives ratherthan liquidated damages.The cost/difficulty of contract administration willlikely increase if the contractor perceives thattimely performance is unlikely or impossible. Numerousclaims may result as the contractor attempts to useGovernment action or inaction to justify its failureto meet the contract schedule.

Estimating a Reasonable Rate ( FAR 11.502(b) , 11.503(b) , and11.503(c) ). Whenever you use liquidated damages, you mustcalculate the rate on a case-by-case basis, based on anestimate of actual damage to the Government if thecontractor does not perform on time. Assure that the rateis reasonable because a rate fixed without any reference toprobable actual damages may be held to be a penalty, andtherefore unenforceable.

If a liquidated damages clause is used in a constructioncontract, the contract should identify a daily rate for theassessment of liquidated damages. As a minimum, the rateshould cover the estimated cost of inspection andsuperintendence for each day of delay in contractcompletion. Whenever the Government will suffer otherspecific losses due to the failure of the contractor tocomplete the work on time, the rate should also include anamount to cover those losses. Examples of specific lossesinclude the:

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

Usually, a single liquidated damages rate (e.g., $500

per day) is used from the date of contractually requireddelivery/performance until the contractor actually deliversor the contract is terminated. However, the probable damageto the Government may not follow a linear pattern.

If appropriate to reflect probable damages to theGovernment, you may develop two or more incremental

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rates which provide for a declining rate assessment asthe delinquency continues.You may also include an overall maximum dollar amountor period of time, or both, during which liquidateddamages may be assessed, to ensure that the result isnot an unreasonable assessment of liquidated damages.

2.1.8 - Consider Variation In Quantity

Introduction ( FAR 11.701(a) ). As part of your marketresearch, you should evaluate the market use of variationin quantity clauses for the item(s) you are acquiring. Inparticular, you should consider possible variations inquantity for fixed-price supply contracts, servicecontracts that involve the furnishing of supplies, andunit-priced construction contracts.

Reasonable Variation for Supplies ( FAR 11.701(a) and (b)and 52.211-16 ). When you are preparing a solicitation fora fixed-price supply contract or service contract thatinvolves the furnishing of supplies, you can insert the FARVariation in Quantity clause to provide for accepting aquantity that is greater than the quantity called for inthe contract, a quantity that is less than the quantitycalled for in the contract, or both, as long as thevariation is caused by conditions of loading, shipping,packing, or by allowances in manufacturing processes.

In the solicitation, you must describe the acceptableplus or minus variation as a percentage of a specificquantity of items.

Base the percentage(s) that you assign on your marketresearch of the items and industry involved.

o Tailor the plus and minus variation percentagesto the item and industry involved -- do not use astandard or usual variation that you apply in all

circumstances.o Neither variation percentage should be larger

than necessary to afford a contractor reasonableprotection.

o Neither the plus or minus variation percentageshall exceed 10 percent.

o Either variation percentage could be as small azero.

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o If you allow both a plus and a minus variation,the plus percentage and the minus percentages canbe different (e.g., plus 10 percent and minus 5percent).

Carefully determine which quantity or quantities willbe subject to the variation. Possibilities include:

o The total contract quantity,o A particular item (e.g., Item 1 only),o Each quantity specified in the delivery schedule,o Total item quantities for each destination, oro Total quantity of each item without regard to

destination.

Delivery of Excess Supplies ( FAR 11.701(c) and 52.211-17 ). You are preparing a solicitation for a fixed-pricesupply contract and you are concerned that the contractormay deliver more than the quantity specified in thecontract (including any allowable variation in quantity)?You know that delivery of even a small quantity of excessitems will result in unnecessary administrative cost to theGovernment, because Government personnel will have todetermine and manage the disposition of the excesssupplies. What action can you take to protect theGovernment?

You can insert the FAR Delivery of Excess Quantitiesclause, into the solicitation/contract. That clauseprovides that:

Excess quantities of items totaling up to $250 invalue may be retained by the Government withoutcompensating the contractor.Excess quantities of items totaling $250 in value may,at the Government's option, be either returned at thecontractor's expense or retained and paid for at thecontract unit price.

Reasonable Variation for Construction ( FAR 11.702 and52.211-18 ). When you are preparing a solicitation for a

fixed-price construction contact that will authorize avariation in the estimated quantity of unit-priced items(e.g., feet of road paving), you must insert the FARVariation in Estimated Quantity clause. Under this clause:

When the actual quantity of a unit-priced item variesmore than 15 percent above or below the estimatedquantity, either the contracting officer or the

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contractor can demand an equitable adjustment in thecontract price. The equitable adjustment must be basedupon any increase or decrease in costs due solely tovariation above 115 percent or below 85 percent of theestimated quantity.If a quantity variation causes an increase in the timenecessary for contract completion, the contractor mayrequest an extension of time.

2.1.9 - Pursue Restrictive Requirement Relief

Introduction. Improving Government requirements documentsto increase competition requires responsible and effectivemanagement at all levels. The effort is not limited tocontracting and requirements management activities, butmust extend to all members of the Acquisition Team.

Analysis. Typically, you must work closely with otherAcquisition Team members to analyze the:

User's real needsCurrent product requirementsProducts available in the commercial marketReal restrictions that prevent the use of commercialproducts

Improving Communications. Effective communications areessential. Acquisition Team members must communicateeffectively with each other as well as with top managementin the department or agency.

The objectives and benefits of pursuing restrictiverequirement relief must be communicated to everyoneinvolved.

Any effort to eliminate restrictive requirements musthave top management support. Top management can communicate

its support by establishing an effective monitoring system-using the inspectors general, internal audit, or othergroups. Monitors should periodically evaluate whethermanagers at all levels are taking an active and positiveapproach to eliminating restrictive requirements,increasing competition, and increasing the use ofcommercial and nondevelopmental items.

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Effective Communication System. The table below providesan overview of the communication process necessary toeliminate restrictive requirements, and the key AcquisitionTeam members involved.

Effective CommunicationPersonnel Communicating With... Communicating About...

Users RequirementsManagersContractingPersonnel

Adequacy of currentspecifications incommunicating theuser's minimum needs.Current productcapabilities.Current productfailures and

deficiencies.Suggestions forimprovement andcorrective action.

RequirementsManagers

UsersContractingPersonnel

Satisfaction of userneeds with currentproducts.Satisfaction of userneeds by lessexpensive commercial

products.Tailoring ofmandatoryrequirementsdocuments to assureidentification of theminimum Governmentneeds.Justification forother than commercialitems or services.

Suppliers UsersRequirementsManagers

The industry:o Business

practices insales anddistribution.

o Productioncapacity.

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o Packaging andpreservationpractices.

Commercial productsavailable to satisfy

user needs.Commercial productquality practices.Commercial productsupport.

ContractingPersonnel

UsersRequirementsManagersSuppliers

Restrictiverequirements.Provision ofcommercial marketinformation to users

and requirementsmanagers.Analysis ofcompetitiveconditions in themarket.CommunicatingGovernmentrequirements tosuppliers in a waythat maximizescompetition.

Catalyst for Action.

Situation 1: Two potential suppliers assure you that theircommercial products will "do the job just as well as theproduct specified by Federal Specifications, and save theGovernment at least 15 percent." The user and the

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requirements manager say that "the commercial products maywork" but they are "not sure of the possible long-termeffects on safety." They feel that, "we should stick withthe product we know."

Situation 2: You have a brand-name request for copy paper.Technical personnel certify that only the brand-name canmeet Government needs. Suppliers of other copy papersindicate that their brands are "as good as the requestedpaper in all important respects and will save theGovernment at least 25 percent." Users and the requirementsmanager still maintain that "the brand-name paper is theonly brand that does not jam under prevalent high-humidityconditions."

What should the contracting officer do?

In both the situations above, technical personnel haveevaluated the commercial products and have rejected them,and it appears that the contracting officer's job is done.However, FAR 11.002(a)(1)(ii) requires that you:

Only include restrictive provisions or conditions to theextent necessary to satisfy the minimum needs of the agencyor as authorized by law.

In both situations, it appears that some suppliers arebeing unreasonably excluded from the competition. TheGovernment may be paying for more than it needs at pricesmuch higher than necessary. In addition, the rejectedpotential suppliers may protest exclusion from any futurecontract actions.

As a contracting officer, you should continue to askquestions to make sure that you get the correct answerabout the true agency requirements. There are no "dumbquestions" in contracting, except those that are neverasked!

Action Support. To whom should the contracting officerraise questions?

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Ideally, you should work with concerned members of theAcquisition Team to raise questions about unnecessarilyrestrictive requirements to higher authority within theagency. In the case of a Government specification item, youshould raise the question to the authority responsible forthe specification. If other members of the Acquisition Teamrefuse to question requirements that appear to beunnecessarily restrictive, you, as the contracting officer,should raise questions to higher technical authoritythrough contracting channels.

Whether you act alone or with the Team to questionrequirements, the ultimate answer might be to accept or toreject the proposed alternatives. Regardless of the answer,you have fulfilled the responsibility of pursuing allactions necessary to ensure effective contracting. You havealso formed the basis for a broad Government position onthe answer. If potential suppliers do protest, no one willwonder why you did not ask the question earlier.

2.2 - Improving Business Terms And Conditions

Section Introduction. This section covers the followingstrategies for selecting clauses and provisions for thesolicitation to maximize price competition:

2.2.1 - Base The Contract Type On Risk Analysis2.2.2 - Review Applicability Of SocioeconomicRequirements2.2.3 - Match Payment And Finance Terms To MarketConditions2.2.4 - Furnish Government Property2.2.5 - Consider Warranty Requirements2.2.6 - Optimize Price/Technical Tradeoffs

2.2.1 - Base The Contract Type On Risk Analysis

Introduction. The selection of contract type can have asignificant effect on both competition and contract price.

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

Fixed-Price; orCost-Reimbursement.

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The biggest difference between the two is theassignment of risk.

In fixed-price contracts , the contractor is required todeliver the product specified and there is a maximum limit

on the amount of money the Government must pay.

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

Risk, Contract Type, and Price. Analysis of the riskinherent in the contracting situation is the key element inthe selection of an appropriate contract type. Therelationship between risk, contract type, and price can bedemonstrated by the following examples.

Examples:

Selection of a fixed-price contract when the risks arebeyond the contractor's control, as in manydevelopment contracts, will increase price and reducecompetition.Selection of a cost-reimbursement contract when therisks are well within the contractor's control, as inmost production contracts, will reduce thecontractor's motivation to control costs.

Commercial Items ( FAR 16.201 ). When acquiring commercialitems, you are limited to using either a firm fixed-price(FFP) or fixed-price with economic price adjustment(FPEPA).

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

Comparison of Major Types of Contracts

Firm Fixed-Price (FFP) Indefinite Delivery(ID)Fixed-Price Economic

Price Adjustment(FPEPA)

PrincipalRisk to BeMitigated

Costs of performancecan be estimated with ahigh degree ofconfidence. Thus, thecontractor assumes therisk.

At time of award,delivery requirementsare not certain.

Market prices forrequired labor and/ormaterials are likely tobe highly unstable overthe life of contract.

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In FARParts 16 ,32 , 35 , and52

of effort contract maybe used for R&D ifagreement can bereached on effortrequired at a price $100,000.

complies with FAR Part16.Multiple awardspreferred for mostindefinite quantitycontract items.Single award requiredfor requirementscontract items.

Variants Firm Fixed-Price Levelof Effort

Definite quantity,indefinite quantityrequirements.

Comparison of Major Types of Contracts

Fixed-Price Award Fee(FPAF)

Fixed-PriceProspective

Redetermination (FPPR)

Fixed-PriceIncentive (FPI)

PrincipalRisk to BeMitigated

Acceptancecriteria areinherentlyjudgmental,with acorrespondingrisk that theend user willnot be fullysatisfied.

Costs ofperformance canbe estimated withconfidence onlyfor the firstyear ofperformance.

Labor ormaterialrequirementsfor work aremoderatelyuncertain.Hence, theGovernmentassumes part ofthe risk.

Use When Judgmental

standards canbe fairlyapplied. 2 Thepotential feeis large enoughto both:

Provide ameaningfulincentive.

Justify theadministrative burdensof an FPAF.

The Government

needs a firmcommitment fromthe contractor todeliver thesupplies orservices duringsubsequent years.The dollars atrisk outweigh theadministrativeburdens of anFPRP.

Ceiling price

can beestablishedthat covers themost probablerisks inherentin the natureof the work.

The proposedprofit sharingformula wouldmotivate thecontractor tocontrol costsand meet otherobjectives.

Elements A firmfixed-price

Fixed pricefor the first

Ceiling price

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Fee pool

Standardsforevaluating

performance.

Criteria fordetermininga "fee"based onperformanceagainst thestandards. 2

period.

Proposedsubsequentperiods (at

least 12months apart).

Timetable forpricing thenextperiod(s).

Target cost

Target profit

Delivery,

quality,and/or otherperformancetargets(optional)

Ratio foradjustingprofit basedon actualcosts and/orperformance.

ContractorIs ObligedTo

Perform at thetime, place,and the pricefixed in thecontract.

Provideacceptabledeliverables atthe time andplace specifiedin the contractat the priceestablished foreach period.

Provide anacceptabledeliverable atthe time andplace specifiedin thecontract, at orbelow theceiling price.

ContractorIncentive(Other ThanMaximizing Goodwill) 1

Generallyrealizes anadditionaldollar ofprofit forevery dollarthat costs arereduced; earnsan additionalfee forsatisfying theperformancestandards.

For the period ofperformance,realizes anadditional dollarof profit forevery dollar thatcosts arereduced.

Realizes ahigher profitby completingthe work belowthe ceilingprice and/or bymeetingobjectiveperformancetargets.

PrincipalLimitationsIn FARParts 16 ,32 , 35 , and52

Must benegotiated.

Must benegotiated.Contractor musthave an adequateaccounting systemthat supports thepricing periods.Prompt

Must bejustified. Mustbe negotiated.Contractor musthave anadequateaccountingsystem. Targets

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redeterminations.must besupported bythe cost data.

Variants RetroactiveRedetermination.

Firm orSuccessive

Targets.

Comparison of Major Types of ContractsCost-Plus-Fixed-

Fee(CPFF)

Cost-Plus-Incentive-Fee

(CPIF)

Cost-Plus-Award-Fee(CPAF)

PrincipalRisk toBeMitigated

Labor hours, labor mix, and/or material requirements (amongother things) necessary to perform are highly uncertain andspeculative. Hence, the Government assumes the risksinherent in the contract, benefiting if the actual cost islower than the expected cost; losing if the work cannot becompleted within the expected cost of performance. Some costtype contracts include procedures for raising or lowering

the fee as an incentive for the contractor to perform atlower cost and/or attain performance goals.

Use When Formulas relatingfee to performance(e.g. to actualcosts) would beunworkable or ofmarginal utility.

Objectiverelationship can beestablished betweenthe fee and suchperformance measuresas actual costs,delivery dates,performancebenchmarks, and thelike.

Objective incentivetargets are notfeasible forcritical aspects ofperformance.Judgmental standardscan be fairlyapplied. 2 Potentialfee would provide ameaningfulincentive.

Elements Estimated cost

A fixed fee

Target cost

Performance targets(optional)

Minimum, maximum,and target fee

Ratio for adjustingfee based on actualcosts and/orperformance

Estimated cost

Standards forevaluatingperformance

Base and maximumfees

Procedures foradjusting "fee"based on performanceagainst the

standards 2ContractorIsObliged To

Make a good faith effort to meet the Government's needswithin the estimated cost in the Schedule.

ContractorIncentive(Other ThanMaximizing Goodwill) 1

Realizes a higherrate of return(i.e., fee dividedby total cost) astotal cost

Realizes a higherfee by completingthe work at a lowercost and/or bymeeting other

Realizes a higherfee by meetingjudgmentalperformancestandards.

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decreases. 3 objectiveperformance targets.

A TypicalApplication

Research study. Research anddevelopment of theprototype for amajor system.

Large scale researchstudy.

PrincipalLimitationIn FARParts 16 ,32 , 35 , and52

The contractor must have an adequate accounting system. TheGovernment must exercise surveillance during performance toensure use of efficient methods and cost controls. Must benegotiated. Must be justified. Statutory and regulatorylimits on the fees that may be negotiated. Must include theapplicable FAR Limitation of Cost clause.

Variants Completion orTerm.

Comparison of Major Types of ContractsCost or Cost Sharing

(C/CS)Time & Materials

(T&M)Principal

Risk to BeMitigated

Labor hours, labor mix, and/or material requirements (among

other things) necessary to perform are highly uncertain andspeculative. Hence, the Government assumes the risksinherent in the contract, benefiting if the actual cost islower than the expected cost; losing if the work cannot becompleted within the expected cost of performance.

Use When The contractor expectssubstantial compensatingbenefits for absorbing part ofthe costs and/or foregoingfee, or

The vendor is a nonprofitentity.

Hourly labor rates can befirmly defined at contractaward but hours required tocomplete the required taskcannot.

Elements Estimated cost

If cost sharing, agreement onthe Government's share of thecost

No fee

Ceiling price

Per hour labor rate that alsocovers overhead and profit

Provisions for reimbursingdirect material costs plusmaterial handling cost

ContractorIs ObligedTo

Make a good faith effort tomeet the Government's needswithin the estimated cost inthe Schedule.

Make a good faith effort tomeet the Government's needswithin the "ceiling price."

ContractorIncentive(Other ThanMaximizing Goodwill ) 1

Cost sharing shares the costof providing a deliverable ofmutual benefit.

Fixed rate and flexible hoursto perform a task with unknownelements.

A TypicalApplication

Joint research witheducational institutions.

Emergency repairs to heatingplants and aircraft engines.

PrincipalLimitationsIn FAR

The contractor must have anadequate accounting system.The Government must exercise

Contracting officer mustdetermine in writing that noother contract type is

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Parts 16 ,32 , 35 , and52

surveillance duringperformance to ensure use ofefficient methods and costcontrols. Must be negotiated.Must be justified. Mustinclude the applicable FARLimitation of Cost clause.

suitable. Labor rate must benegotiated and justified. TheGovernment must exerciseappropriate surveillance toensure efficient performance.Contract must include aceiling price.

Variants Labor Hour

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 Panelwith fee determined by a Fee Determining Official. Feedeterminations are not subject to contract disputesprovisions.

Note 3 - The CPFF contract is commonly used in situationswhere the Government is more interested in technicalexcellence than cost control. However, you must be awarethat higher cost does not necessarily equal technicalexcellence. Contractors may attempt to shift unnecessaryresources to CPFF contracts to control costs on othercontracts.

2.2.2 - Review Applicability Of Socioeconomic Requirements

Introduction. The Government has establishedsocioeconomic programs to achieve national social andeconomic goals, but these programs can also limit potentialsources. As you implement these programs, always considerthe probable effect on competition and contract pricing.

Consider Small Business Program Effects. The single mostimportant socioeconomic program affecting competition isthe small business program. The following table summarizes

four elements of the program related to mandatory sources.Particularly notice the situations where you shouldquestion the various requirements that limit competition orproduce prices that are not fair and reasonable.

Sourcing Requirement Question When...Total Small Business Set-Aside ( FAR19.502-2(a) )

There is a reasonable expectationthat:

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An acquisition must be reserved forexclusive participation by smallbusiness when there is a reasonableexpectation that the requirementscan be met by small business.

Offers WILL NOT be obtained from atleast two responsible smallbusiness concerns (The two concernsmust offer products from differentsmall business concerns unless the

requirement is waived by SBA.) ORTHAT

Award(s) WILL NOT be made at fairmarket prices.

Partial Small Business Set-Aside( FAR 19.502-3 )A portion of the acquisition isreserved for participation by smallbusiness when a total set-aside isnot appropriate and the requirementis severable into two or moreeconomic lots.

There is a reasonable expectationthat ONLY two firms (one large andone small) with performancecapability will respond to thesolicitation.

HUBZone Set-Aside ( FAR 19.13 )An acquisition exceeding thesimplified acquisition thresholdmust be set-aside for HUBZone smallbusiness concerns when there is areasonable expectation that:

Offers will be received from two ormore HUBZone small businessconcerns; and

Award will be made at a fair andreasonable price.

There is a not reasonableexpectation that:

Offers will be received from two ormore HUBZone small businessconcerns; and

Award will be made at a fair andreasonable price.

Very Small Business Set-Aside ( FAR19.9 )If a contracting office is locatedin a designated Small BusinessAdministration district isacquiring supplies or contracts forother than supplies will beperformed in a designated district,the contracting officer must setaside requirements estimated to begreater than $2,500 but not greaterthan $50,000 for for very smallbusiness concerns as long ascompetitive offers are expectedfrom two or more offerors that meetset-aside requirements.

There is no reasonable expectationthat offers will be received fromtwo or more acceptable offerorsthat are competitive in terms ofmarket prices, quality, anddelivery.

8(a) Program ( FAR 19.8)Contracts may be awarded to theSmall Business Administration (SBA)for performance by eligible 8(a)firms. The SBA subcontracts may beawarded on a non-competitive orcompetitive basis.

There is a reasonable expectationthat the contract price will exceeda fair market price. The negotiatedcontract price and estimate of afair market price are subject tothe concurrence of the SBA.

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Consider Effects of Other Mandatory SourcePrograms. There are a number of other socioeconomicprograms that limit the sources that you can consider for aparticular acquisition. The three most important programsare considered in the following table. Again notice thesituations where you should question the variousrequirements that limit competition.

Mandatory Sources

Socioeconomic SourcingRequirements

Question when the price ofthe required source exceeds

open market pricesFederal Prison Industries(FPI) or UNICOR Mandatorysource for supplies of theclasses listed in the

Schedule of Products Made inFederal Penal andCorrectional Institutions.FAR 8.6

The contracting officer mayrefer the matter to thecognizant product divisionidentified in the Schedule

or to the FPI Washingtonoffice for resolution.

Committee for Purchase fromthe Blind and Other SeverelyHandicapped Mandatory sourcefor supplies and servicesidentified in theProcurement List.FAR 8.7

Ordering offices may makerecommendations to theCommittee at any time forprice revisions.

2.2.3 - Match Payment And Finance Terms To MarketConditions

Introduction. Under cost-reimbursement contracts,contractors are typically reimbursed for costs incurred ona monthly basis. Under fixed-price contracts, payment ismade in a lump sum at contract completion unless otherfinancing terms are provided for in the contract.Sometimes, you can attract a greater level of competition

and lower-priced offers by providing financing. However thecosts of extending such financing must be considered.

Contractor Financing. Requiring contractors to fund theentire contract may severely limit competition,particularly with large contracts and long performanceperiods. Any firm that does submit an offer will probablyoffer a higher price to cover the cost of working capital.

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Recognizing the potential effects of required contractorfunding on competition and pricing, you may want toconsider other financial terms.

However, there are negative aspects to Government

funding. Government funds are not free. The Government mustalso pay interest on borrowed capital. In addition, whenthe Government provides working capital support, thecontractor has both the funds and the product. In the eventof contractor default or bankruptcy, the Government maylose both the product and the funds.

Simplified Acquisition Financing. Unless agencyregulations otherwise permit, you must not provide contractfinancing for purchases made under the authority of FARPart 13 (see FAR 32.003 ).

Customary and Unusual Financing. Financing methods can bedivided in several different ways. As you make financingdecisions, the most basic division is into customary andunusual financing methods ( FAR 32.001 ).

Customary contract financing is financing deemed byyour agency to be routinely available for fixed-pricecontracts. Most customary contract financingarrangements should be available for your use withoutspecific reviews or approvals by higher management( FAR 32.113 ).Unusual contract financing is financing not deemed tobe customary contract financing by your agency.Unusual contract financing is financing that is legaland proper under applicable laws, but your agency hasnot authorized you to use it without specific reviewsor approvals by higher management ( FAR 32.114 ).

Customary Financing Methods for Non-Commercial Items. Thefollowing table outlines customary methods for financingnon-commercial items in accordance with FAR Part 32 andagency regulations:

Customary Financing Methods for Non-Commercial ItemsFinancing

of... Description Requirement for Use

Shipbuilding,or shipconversion,alteration,

Progress payments arebased on the stage orpercentage ofcompletion.

Use in accordancewith agency guidance.

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or repairusingprogresspaymentsbased on a

percentage orstage ofcompletion( FAR32.113(a) )Constructionor architect-engineerservicesusingprogresspaymentsbased on apercentage orstage ofcompletion( FAR 32.103and ( FAR32.113(b) )

Progress payments arebased on the stage orpercentage ofcompletion. Up to 10percent of theprogress payment maybe withheld ifprogress is notsatisfactory duringany payment period.

Mandatory forconstructioncontracts andarchitect-engineercontracts.

Supplies orservicesawarded undersealedbidding,competitivenegotiation,or sole-sourcenegotiation,usingprogresspaymentsbased oncosts.

( FAR32.113(c) and(d) and FAR32.501-1 )

Payments are madebased on costsincurred as workprogresses. Paymentsmay be customary orunusual. The customaryrates for large andsmall business arefound in FAR 32.501-1.

Customary progresspayments may beincluded when thecontract exceedsminimum dollaramounts, firstdeliveries will notbe made for asubstantial timeafter work begins,and there will beperformanceexpenditures prior todelivery.

Supplies orservicesawarded undera sole-source

Performance-basedpayments can be basedon a single item orthe entire contract.

Performance-basedpayments preferredover progresspayments when

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contractingofficerconsidering FARrequirements.

Supplies orservicesthrough anyappropriatecombinationof advancepayments,guaranteedloans, andeitherperformance-basedpayments orprogresspayments (butnot both)( FAR32.113(g) )

Any combination ofthese financingmethods can be used aslong as performance-based payments andprogress payments arenot used together onthe same contract.

The requirementsoutlined in theblocks above for eachtype of paymentconsidered forcombination applyhere.

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

Specifically, you may use commercial interim paymentsand commercial advance payments when the followingconditions are met:

The contract item financed is a commercial supply orservice;The contract price exceeds the simplified acquisitionthreshold in FAR Part 13;You determine that it is appropriate or customary inthe commercial marketplace to make financing paymentsfor the item;This form of contract financing is in the bestinterest of the Government;You obtain adequate security to protect the Governmentfrom financial loss;

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Prior to any performance of work under the contract,the aggregate of commercial advance payments shall notexceed 15 percent of the contract price;You award the contract on the basis of competitiveprocedures or, if only one offer is solicited,adequate consideration is obtained (based on the timevalue of the additional financing to be provided) ifthe financing is expected to be substantially moreadvantageous to the offeror than the offeror's normalmethod of customer financing; andYou obtain concurrence from the payment officeconcerning liquidation provisions when required.

Customary Financing Methods. The following table outlinescustomary commercial methods for contract financing inaccordance with FAR Part 32 and agency regulations:

Customary Financing Methods for Commercial Items

Financing Method Description SpecialConsiderationsCommercial advancepayments( FAR 32.202-2

Payments madebefore theperformance of anywork under thecontract.

Aggregate ofpayments shall notexceed 15 percentof the contractprice. Payments arenot subject to therequirementscovering advancepayment for non-commercial items.

Commercial interimpayments( FAR 32.202-2 )

Payments made tothe contractorafter some workhas been done, butbefore the item isdelivered.

Includes allpayments that arenot advancepayments ordelivery payments.

Do not automatically include financing in commercialitem contracts. Consider customary commercial financingarrangements as part of your market research. Inparticular, consider:

The extent to which other buyers provide contractfinancing for purchases in that market;The overall level of financing normally provided;

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The amount or percentages of any payments equivalentto advance payments;The basis for any payments equivalent to commercialinterim payments as well as the frequency, and amountsof percentages; andMethods of liquidation of contract financing paymentsand any special or unusual payment terms applicable todelivery payments.

2.2.4 - Furnish Government Property

Introduction. Government-furnished property can be usedin several ways to encourage competition and assure overallprice reasonableness.

Description. The term property includes facilities,material, special tooling, special test equipment, andagency peculiar property. Different types of property canbe used to affect competition and pricing.

Overview of Government Property. The table below providesan overview of the various types of Government property andhow each type can be used to affect competition andpricing.

Furnishing Government PropertyType of

Property DefinitionCompetition and Pricing

ConsiderationsFacilities( FAR45.302 )

Plant equipment and realproperty for production,maintenance, research,or testing furnished asGovernment facilitiesunder situationsidentified in FAR45.302.

Making facilitiesavailable cansignificantly increasecompetition for majorproduction efforts,while eliminating theneed for duplicativeinvestment bycompetitors.

Material( FAR45.301 )

Property that may beincorporated into orattached to adeliverable end item orthat may be consumed orexpended in performing acontract. It includes

Providing Governmentmaterial can enhancecompetition in severalsituations. Breakout ofkey components canincrease competition andreduce component prices.

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assemblies, components,parts, raw and processedmaterials, and smalltools and supplies thatmay be consumed in

normal use in performinga contract.

Furnishing proprietarycomponents can increaseeffective competition onlarger systems.

SpecialTooling( FAR45.101 )

Jigs, dies, fixtures,molds, patterns, taps,gauges, other equipmentand manufacturing aids,components of these, allitems, and replacementof these items, whichare of such specializednature that, withoutsubstantialmodification, oralterations, their useis limited to thedevelopment orproduction of particularsupplies or partsthereof, or toparticular services. Itdoes not includematerial, special testequipment, facilities(except foundations andsimilar improvementsnecessary for installingspecial tooling),general or specialmachine tools, orsimilar capital items.

Government provision ofspecial toolingincreases competition byreducing the need forinvestment that can onlybe used on one contractor project. Governmentownership and right tomove tooling limitproducer ability toobtain a lock on thecompetition because ofunique tooling capacity.

SpecialTestEquipment( FAR

45.101 )

Single or multipurposeintegrated test unitsengineered, designed,fabricated, or modified

to accomplish specialpurpose testing inperforming a contract.It consists of items orassemblies of equipmentincluding standard orgeneral purpose items orcomponents that are

Like special tooling,Government provision ofspecial test equipmentincreases competition by

reducing the need forinvestment that can onlybe used on one contractor project. Governmentownership and right tomove test equipmentlimit producer abilityto obtain a lock on the

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interconnected andinterdependent so as tobecome a new functionalentity for specialtesting purposes. It

does not includematerial, specialtooling, facilities(except foundations andsimilar improvementsnecessary for installingspecial test equipment),and plant equipmentitems used for generalplant testing purposes.

competition because ofunique tooling capacity.

2.2.5 - Consider Warranty Requirements

Introduction. A warranty is a promise or affirmationgiven by a contractor to the Government regarding thenature, usefulness, or condition of the supplies, orperformance of services furnished under a contract (see FAR46.701 and 46.702 ).

The principal purposes of a warranty in a Governmentcontract are to:

Delineate the rights and obligations of the contractorand the Government for defective work.Foster quality performance.

Commercial Warranties. Take advantage of commercialwarranties (including extended warranties, whereappropriate and in the Government's best interests) offeredby the contractor for the repair and replacement ofcommercial items ( FAR 46.709 ).

In solicitations for commercial items, require offerorsto offer the Government at least the same warranty terms,including offers of extended warranties, offered to thegeneral public in customary commercial practice. You mayspecify minimum warranty terms, such as minimum duration,appropriate for the Government's intended use of the item.

Assure that any express warranty the Governmentintends to rely upon meets the needs of the

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Government. Analyze any commercial warranty todetermine if--

o The warranty is adequate to protect the needs ofthe Government (e.g., items covered by thewarranty and length of warranty);

o The terms allow the Government effectivepostaward administration of the warranty; and

o The warranty is cost-effective.In some markets, customary commercial practice mayexclude or limit the implied warranties contained inthe Government contract terms and conditions forcommercial contracts. In such cases, ensure that theexpress warranty provides for the repair orreplacement of defective items discovered within areasonable period of time after acceptance.Include express warranties in the contract byaddendum.

Use of Other Warranties. Warranties generally are notmandatory. Use must be approved in accordance with agencyprocedures. In determining whether a warranty isappropriate, you must consider the:

Nature and use of the supplies or services;Warranty cost including contractor charges and thecost of Government enforcement and administration;Government's ability to administer and enforce thewarranty;Customary trade practice; andReductions in the cost of Government contract qualityassurance.

( FAR 46.703 and 46.704 )

Effect of Warranty on Competition and Pricing. Byagreeing to a warranty, contractors accept the risk ofdeferred liability. That acceptance of risk has associatedcosts. Contractors unwilling to accept that risk will drop

from the competition. Others may increase their price tocompensate for the risk.

Before you include a warranty provision in asolicitation, you must evaluate the benefits of thewarranty against the effect on competition and price. To dothat, you must understand the relationship between warrantyrequirements, competition, price, the nature of the

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product, and trade practice. Warranty requirements that areunreasonable, given the nature of the product, will reducecompetition and increase price. Requirements whichsignificantly exceed trade practice will reduce competitionand increase price.

Control Warranty Costs. Work with the requiring activityto identify and eliminate warranty requirements that arenot in the best interest of the Government. In youranalysis, consider the following guidelines:

For commercial items, use commercial rather thanGovernment-unique warranties.For non-commercial items, tailor warranty requirementsto mirror existing trade practices.When a Government-unique warranty is required, solicitthe warranty as a separately priced line item, whichthe Government may or may not exercise.If you are unsure about the benefits of an extendedwarranty, solicit offerors on the extended warranty asa separately priced option (especially for distantfuture years).

2.2.6 - Optimize Price/Technical Trade-Offs

Technical Factors that Can Reduce Competition. Thefactors already considered in this chapter have thegreatest effect on competition and contract price. Thereare, however, many other technical and business factorsthat can reduce competition and increase prices. Theseinclude:

Security requirements;Payment provisions that increase contractorinvestment;Packaging requirements that require survival underextreme conditions;

Unclear instructions, certifications, and notices tobidders/offerors;Unclear source selection criteria; andConflicting and restrictive general contract clauses.

Technical Factors and Price. Technical factors couldinvite offerors to submit higher prices as the tradeoff for

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a technically superior offer. Key questions to askregarding proposed technical evaluation factors:

Will the technical evaluation factor unnecessarilyforce the acquisition into a higher-priced market

segment?Will the technical factor constructively amend thespecifications to require more than the Government'sactual minimum needs?Given the likely effect on contract price, is thefactor truly necessary to minimize the technical orbusiness risks inherent in the contract requirements?Will use of the technical factor likely result in a"greater value" for the taxpayer?

2.3 - Publicizing The Acquisition

Introduction. Publicizing the contract action is one ofthe most important considerations in maximizingcompetition. If the solicitation never gets into the handsof potential offerors, competition cannot occur.

As you decide how to publicize the buy, consider thepotential effect on competition and contract price. If youcan obtain dozens of competitive offers through a notice inthe Commerce Business Daily (CBD), you probably do not needto be too concerned about more aggressive means ofpublicizing the buy. However, if the CBD notice is notlikely to reach the strongest competitors, select themethod of publicizing most likely to reach them.

As you publicize the buy, remember to allow enough timeto receive requests for the solicitation. Of course youmust also allow enough time after the solicitation isissued for firms to prepare appropriate offers.

Methods of Publicizing the Buy. The following table

presents a variety of different methods for publicizing anacquisition buy and situations where the method can providethe most useful results in increasing competition.

Method OfPublicizing Description Situations For Use

Posting aNotice in the

An unclassifiednotice of the

Unless exempt underFAR 5.101(a)(2)(ii)

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ContractingOffice( FAR 5.101 )

solicitation or acopy of thesolicitation.

Primary purpose is to

reach local sourceswilling to visit thecontracting office atleast once a week.

Especially useful inproviding notice ofrequirements to localsmall business.

(e.g., oral or FACNETsolicitation), noticeis required for allcontract actions over$10,000 but not over

$25,000.

Posting for actionsover $25,000 isuseful and may berequired by youragency.

CommerceBusiness Daily(CBD) Synopsisof ProposedContractActions( FAR 5.201 and5.207 )

A synopsis ofupcoming acquisitionsfollowing the formatin FAR 5.207. Primarypurposes are toimprove smallbusiness access toacquisitioninformation andenhance competitionby identifyingcontracting andsubcontractingopportunities.Designed to reachinterested nationaland internationalsources. Especiallyuseful in providingnotice of largerrequirements thatwill attract distantsources.

Required for allnonexempt supply andservice contractactions over $25,000.

CommerceBusiness Daily(CBD) Synopsisof ContractAwards( FAR 5.207 and5.301 )

A synopsis ofcontract awardsfollowing the formatin FAR 5.207.

Required for allnonexempt supply andservice purchaseactions over $25,000subject to TradeAgreements Act, orlikely to result inany subcontracts.

Handouts( FAR

Listings or synopsesof proposed contracts

Particularly usefulwhen the you want to

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5.101(b)(1) ) publishedperiodically,normally once a week.

May be posted much

like notices requiredfor contractingoffices or in otherlocations convenientfor local sources.

bring uniquerequirements to theattention of localsources.

By providing theinformation in ausable format,handouts makecollectinginformation easierfor potential sourcesand may increasecompetition.

AssistingTradeAssociationDissemination( FAR5.101(b)(2) )

Handouts or similarpublications may bedistributed to localtrade associationswith a membershippotentiallyinterested incontracting toprovide requiredgoods and services.

Particularly usefulwhen you want tobring uniquerequirements to theattention of firms inthe trade that maynever have consideredGovernment business.

FederalAcquisitionComputerNetwork(FACNET) orAnother Meansof AccessThrough theSingleGovernmentwidePoint of Entry( FAR5.101(b)(1) )

FACNET or anotherpoint of entrydesignated by theAdministrator of theOffice of FederalProcurement Policythat allows theprivate sector toelectronically accessprocurementopportunitiesGovernmentwide.

Use electroniccommerce wheneverpracticable or cost-effective.

Announcementsto Mass MediaWithout Cost( FAR5.101(b)(1) )

Announcements can bemade in the form ofnews releases tonewspapers,magazines, or othermass media withoutcost.

Announcements mayeven emphasize the

Particularly usefulwhen you want toreach firms that maynever have consideredGovernment business

Announcements may bemade about anysignificant proposedpurchase, but larger

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public service thatwill be performed byfirms competing tomeet Governmentrequirements.

requirements andtraditionally non-competitiverequirements willlikely be considered

the most newsworthy.PaidAdvertisements( FAR5.101(b)(4) )

Paid advertisementscan be tailored toget the exact messagethe Government wantsto send to businessesin the identifiedtarget area, whetheror not the businessis specificallytrying to identifyGovernmentrequirements.

You may use a singlenewspaper or severalnewspapers in aregion.

You may place ordersfor paid advertisingdirectly with themedia or through anadvertising agency.

Use only when youanticipate that youcannot otherwiseobtain effectivecompetition.

Do not place anyadvertisementsproposed contracts ina newspaper publishedand printed in theDistrict of Columbia(DC) unless suppliesor services will befurnished or laborperformed in DC oradjoining counties ofMaryland andVirginia.

Prior to using paidnewspaperadvertisements, youmust obtain approvalfrom the agency heador designee.