Cost reasonableness... Its a term youll hear if you spend any time around contracting personnel, especially government contracting personnel. Its not enough that a cost claimed by a contractor is allowable and allocable. It must also be reasonable. Heres what the FAR Cost Principles Guide says on the subject: A cost is reasonable if, in its nature and amount, it doesnt exceed that which would be incurred by a prudent person in the conduct of competitive business. Example: An Alaska contractor had a lucrative opportunity to supply a critical item to a federal agency. A previous deal the agency had made with another vendor fallen through at the last minute, and the contracting office was looking for a quick replacement. There was considerable urgency in the requirement because some field exercises were scheduled to begin and personnel were already enroute. The contractor put in a quote but it exceeded the original by a rather large margin. His justification was the extremely short notice and tight delivery schedule, limited product availability that required reallocation of committed resources, and the need to reroute assets and personnel to accommodate the agencys request. Despite the need, the contractor didnt understand the contracting office had a duty to determine the reasonableness of costs. They responded to the quote with a request for cost and pricing data in support of the contractors price. He balked, they balked, and the deal fell through, all because of the inability to resolve the issues surrounding cost reasonableness. Maybe the contractor saw a windfall and was trying to take advantage of the situation. Maybe the contracting office didnt appreciate the hoops the contractor would have to go through to meet the requirement. Maybe it was a little of both, but in the end, both lost out. One factor that was surely in play was the agencys perception that the contractor, because of the situation, might not have been subject to effective competitive restraints. The FAR says no presumption of reasonableness shall be attached to the incurrence of costs by a contractor, so they werent about to swallow the contractors rationale without asking a few questions first. And under the Cost principles, the burden of proof for establishing reasonableness is on the contractor. This example demonstrates that even though a cost may be allowable, it might not be reasonable. The FAR is clear that establishing cost reasonableness is the contractors responsibility. Heres another example: A contractor needs to provide security service for a contract they were awarded and wants to do it in-house. The problem is, doing it in-house will cost much more than it would cost to contract that part of the requirement out. Security costs are an allowable and allocable cost thats necessary to the performance of the contract. But is it reasonable on the part of the contractor to expect the government to pay their much higher costs just because they want to use their own personnel? The answer, of course, is no. No, that is, unless the contractor can establish to the agencys satisfaction that the cost is reasonable under the circumstances. For example, perhaps they made a good faith effort to subcontract that part of the contract out, but were unable to find a reliable vendor that had adequate personnel available and the experience to do the job. Can you think of other reasons the contractors cost might be considered reasonable?
Posted on: Fri, 06 Jun 2014 23:22:46 +0000
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