Innovation In Pricing: Pricing Techniques to Align With Acquisition Innovation
By Kevin Kostka
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Innovation in acquisition is arguably one of the most-discussed concepts in the current federal procurement space. How can we contract faster? How can we reach more non-traditional defense contractors (NDCs)? (1) How can we eliminate the droves of paperwork and “red tape” that have traditionally caused federal procurement to move at glacial speeds?
The list of questions goes on but there seemingly are plenty of specific answers provided through contract vehicles, which is wonderful. However, when someone mentions cost or pricing everyone seems to clam up.
While acquisition innovators are on a constant pursuit to shorten the timeline from “inception of need” to “product-in-hand,” the need for innovative and expedited pricing techniques is more prevalent than ever. In addition to shortening the acquisition life cycle – especially in the Other Transaction Authority (OTA) space – government acquisition has placed a specific importance in attracting cutting-edge technologies by contracting with NDCs.
The strategy of leveraging the amazing superpower that is the United States commercial technology sector can significantly enhance technology solutions that reach end users. However, when doing business with a commercial entity to procure cutting-edge technology, it can be challenging to obtain cost-level pricing data to make determine price reasonableness.
This brings up various questions on both sides of the equation (government practitioners and industry partners) of what data is necessary to provide and what techniques are best to determine price reasonableness on an accelerated timeline.
As detailed in Defense Federal Acquisition Regulation Supplement 252.215-7013, “supplies and services provided by a nontraditional defense contractor, as defined in DFARS 202.101, may be treated as commercial products or commercial services.” Given what the Defense Federal Acquisition Regulation Supplement (DFARS) says, it seems like a good idea to leverage commercial pricing techniques while partnering with NDCs. But what does that mean when the pencil hits the paper during the pricing evaluation of an innovative new technology from an NDC?
This article will help address some of these gaps and provide alternatives to some traditional and non-traditional pricing methods that allow practitioners to effectively and efficiently conduct meaningful analyses to keep pace with the accelerated contracting timeline inherent in innovative acquisitions.
While these may seem applicable only to government practitioners, industry providers can also benefit from this information. When teaming with the government on acquisitions, consider providing data that allows your government counterparts to conduct some of these analyses below. It will help pave a smooth road to a contract award.
The Classic Approach
You may be saying, “Wait a minute, are you about to reference Federal Acquisition Regulation (FAR) Part 15 Price Analysis techniques in an innovation article?” The short answer is, “Yes.” These techniques may seem “old hat,” but they are highly effective ways to expeditiously determine price reasonableness. Also, given their origin within the FAR, there should be a certain level of comfort (on both the industry and government side) when relying on these techniques to determine price reasonableness.
Following are several techniques to consider:
Comparison of proposed prices to historical purchases (FAR 15.404-1(b)(ii).
While sales data may be limited, if industry partners can demonstrate successful sales on the open marketplace, this helps make the case that the proposed price has been previously determined to be reasonable. Historical sales may not be an all-encompassing answer when determining price reasonableness from a government evaluation perspective, but if coupled with other price analysis it helps build a solid case for making such determination.
Use of parametric estimating methods to conduct price analysis (FAR 15.404-1(b)(iii).
While an exact “apples to apples” price comparison may not be plausible for a new/novel technology, a similar solution may exist (with pricing data) that could be drawn as a comparison. Leveraging this type of analysis may require creativity when linking the new technology to the comparative technology, but this type of comparison when adequately justified serves as a completely viable measure of price reasonableness.
Comparison of proposed prices to competitive list prices (FAR 15.404-1(b)(iv).
It is possible that the contemplated solution/item could have been previously sold on the commercial marketplace and exists in an industry partner’s commercial pricing catalog. Additionally, if any direct labor component needs to be determined reasonable, any labor rate schedules (GSA or similar) that are commercially published could be used as a basis for the proposed fully burdened labor rates. If an industry partner doesn’t have a commercially published labor rate schedule, utilizing the CALC+ Quick Rate Hourly Ceiling Labor Rates tool (published by the General Services Administration) is a great way to quickly assess the reasonableness of fully burdened labor rates from either the government or industry side.
Comparison of proposed prices to information obtained through market research (FAR 15.404-1(b)(vi).
If the pricing of a solution can be justified by comparing it to the pricing of similar solutions available on the market, this can be used as an additional measure of reasonableness when determining a price. This methodology is useful if only limited price-level data is available, but should be coupled with another analysis if possible.
A New Approach
What if traditional pricing techniques cannot provide answers? These additional techniques may be useful:
Inherent competition on rapid acquisition platforms.
Acquisition innovation is cool and there are many extremely intelligent people who specialize in bridging the gap between government and industry partners such as those who operate the Tradewinds Solutions Marketplace (TSM) and the MicroMarket. The TSM is the premier offering of Tradewinds, the Department of Defense (DoD) suite of tools and services designed to accelerate the procurement and adoption of artificial intelligence (AI)/machine learning (ML), data analysis, and analytics capabilities. The TSM is an open call to industry, which solicits 5-minute video pitches for new and novel AI/ML technologies. The MicroMarket works on a similar principle to the TSM in the fact that it is an open call to industry specific to requirements that fall under the current Micro Purchase threshold. (2)
Since the TSM and MircoMarket are open calls to industry, it is reasonable to assume that there are competitive forces at work within the marketplace. Given the premise of competition, the government can surmise that solution providers who have participated (and been successful in the marketplace) have pricing that considers the fact that they are competing with other solution providers. This fact does not preclude the government from conducting additional price reasonableness analyses. However it does assist in developing a multifaceted, well documented determination of price reasonableness. Participation in marketplaces such as the TSM or MicroMarket are a great way to creatively assess solutions (and associated pricing) when operating in the innovation space.
Value analysis of proposed price.
What is the “value” of purchasing this solution versus designing, developing, testing, etc. from the ground up? This argument can be made from either the government or industry side. However if an industry partner is able to provide the government with the necessary justification (e.g., tangible data such as time or dollar investments to make a solution viable), that can assist the government in determining price reasonableness by looking at the value of purchasing a solution as opposed to developing or reverse-engineering a solution.
Time/value consideration.
How much time should be spent reviewing a price proposal versus the return on investment? In establishing a process for reviewing the proposed price, the government can consider the amount of effort associated with that review. For example, a full in-depth price and cost analysis could take a contracting team months to complete and could cost a few hundred thousand dollars. If the expected savings in negotiated price is anticipated at one third of the cost to evaluate it, is it worth the time and monetary investment to conduct such analyses? This is a good concept to remember, especially when contemplating awards made for new and novel defense technologies, since keeping an efficient schedule benefits all parties involved. Again, this shouldn’t be the only determination of price reasonableness made, however if coupled with other techniques, this helps build a solid price reasonableness case.
Price estimate consideration.
From a government perspective, buyers can think about pricing a contractor’s proposal just like a cost estimator would prepare a cost estimate. It is likely that an independent government cost estimate may not exist when making an award in the innovation space. Alternatively, the contracting team could leverage technical expertise from cost/price analysts, cost estimators and technical experts to develop a Rough Order of Magnitude (ROM) for the solution being contemplated for award. Industry partners can also assist by providing their own ROM to assist the government in its analyses and determination of price reasonableness.
As illustrated above, there are various ways to “innovate” when it comes to pricing in the acquisition innovation space; some are creative uses of proven methods and some require a little more “out of the box” thinking. So next time you are working toward the award of an agreement in the innovation space and someone mentions cost or pricing, there’s no need to clam up anymore as there are plenty of ways to innovatively assess price reasonableness. CM
Kevin Kostka serves as a consultant advisor for NL1GHTN Acquisition Advisors in the areas of federal acquisition, cost and pricing, negotiation, and budget strategy. In his role at NL1GHTN Acquisition Advisors, he also serves as the Marketplace Manager for the Applied Research Institute (ARI)’s Counter Unmanned Aircraft Systems (C-UAS) Solutions Marketplace. Kostka also maintains a role as an adjunct professor at George Mason University School of Business, where he teaches as part of the Executive Development Contract Execution and Administration courses. He has over a decade of practical experience as a Price/Cost & Budget Analyst for multiple defense agencies, including the Army Contracting Command – Warren, the Army Combat Capabilities Development Command (DEVCOM) Ground Vehicle Systems Center (GVSC), and the Defense Logistics Agency – Warren. Kostka’s vast experience touches all types of federal contracts and agreements with a special focus on source selection, cost-type contracting, services acquisition, and sustainment. The vast majority of his experience resides in large-source selections for both services/support and supply contracts. In his time as a Cost/Price Analyst, Kostka evaluated more than $5.3 billion in total proposal value spanning various contract types and competitive statuses, while maintaining a total negotiated savings in excess of $135 million He holds a Bachelor of Sciences from Oakland University in Rochester, Michigan.
REFERENCES
“Evaluating Price: Other Transactions (OTs)” Authored by DCMA Commercial Item Group www.dcma.mil/commercial-item-group
FAR Subpart 15.404-1(b) “Price Analysis”
DFARS 252.215-7013
ENDNOTES
1 10 USC 3014 - “Nontraditional Defense Contractor”
2 See FAR part 2.101 and 13.2
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