Negotiation Memorandum

Negotiation Memorandum – Overview

A price negotiation memorandum must indicate what cost or pricing data you relied upon when negotiating contract price. Courts and BCAs have refused to support Government allegations of defective pricing when the contractor argued successfully that the Government did not rely on the defective cost or pricing data. The strongest evidence of reliance on cost or pricing data is a clear price negotiation memorandum.

Reliance exists when you directly or indirectly use offeror cost or pricing data to establish a contract price or a contract price negotiation objective.

Direct reliance occurs when you use cost or pricing data obtained directly from the offeror's proposal.

Indirect reliance occurs when you use audits, cost estimates, should-cost studies, technical evaluations, or any other evaluations which in turn considered the contractor's cost or pricing data.

Reliance is not limited by what you "should have known." For example, a contractor cannot argue that a careful comparison with another proposal by the company would have revealed an error.

Reliance is not negated by offeror price reductions or concessions made in the give-and-take of negotiations, unless the reduction or concession is specifically tied to updated cost or pricing data.

Reliance does not exist if you knew, at the time of price agreement, that specific data provided by the contractor were not accurate, complete, and current. In fact, FAR requires you to notify the contractor if you learn prior to price agreement that the cost or pricing data are not accurate, complete, and current.

FAR 15.406-3; Documenting the Negotiation is required of Contracting Officers in negotiations. Often times, the absence of details captured by a Contracting Officer will lead to assertions of defective pricing. As a result, best practice for contractors is to also capture the details of a negotiation. It is also best practice to distribute the negotiation memorandum to the customer/contracting officer. This does a couple things:

a. It allows for concurrence regarding the details of the negotiations, or clarification in the event of non-concurrence,

b. It also assist the customer/contracting officer in the capture of their required Negotiation Memorandum. If done in the same format, the contracting officer can simply copy many if not all of the details to their memorandum.

c. It also captures details while they are fresh in the minds of contractor personnel. Often times a post award audit may not happen until several years later, and personnel have either left the firm, or they simply cannot remember the details necessary to refute a defective pricing claim.

15.406-3 Documenting the Negotiation - Contracting Officer

The contracting officer (Primes should do the same) shall document in the contract file the principal elements of the negotiated agreement. The documentation (e.g., price negotiation memorandum (PNM)) shall include the following:

(1) The purpose of the negotiation.

(2) A description of the acquisition, including appropriate identifying numbers (e.g., RFP No.).

(3) The name, position, and organization of each person representing the contractor and the Government in the negotiation.

(4) The current status of any contractor systems (e.g., purchasing, estimating, accounting, and compensation) to the extent they affected and were considered in the negotiation.

(5) If certified cost or pricing data were not required in the case of any price negotiation exceeding the certified cost or pricing data threshold, the exception used and the basis for it.

(6) If certified cost or pricing data were required, the extent to which the contracting officer—

(i) Relied on the certified cost or pricing data submitted and used them in negotiating the price;
(ii) Recognized as inaccurate, incomplete, or noncurrent any certified cost or pricing data submitted; the action taken by the contracting officer and the contractor as a result; and the effect of the defective data on the price negotiated; or
(iii) Determined that an exception applied after the data were submitted and, therefore, considered not to be certified cost or pricing data.

(7) A summary of the contractor’s proposal, any field pricing assistance recommendations, including the reasons for any pertinent variances from them, the Government’s negotiation objective, and the negotiated position. Where the determination of a fair and reasonable price is based on cost analysis, the summary shall address each major cost element. When determination of a fair and reasonable price is based on price analysis, the summary shall include the source and type of data used to support the determination.

(8) The most significant facts or considerations controlling the establishment of the prenegotiation objectives and the negotiated agreement including an explanation of any significant differences between the two positions.

(9) To the extent such direction has a significant effect on the action, a discussion and quantification of the impact of direction given by Congress, other agencies, and higher-level officials (i.e., officials who would not normally exercise authority during the award and review process for the instant contract action).

(10) The basis for the profit or fee prenegotiation objective and the profit or fee negotiated.

(11) Documentation of fair and reasonable pricing.

(b) Whenever field pricing assistance has been obtained, the contracting officer shall forward a copy of the negotiation documentation to the office(s) providing assistance. When appropriate, information on how advisory field support can be made more effective should be provided separately.

Documenting the Negotiation - Contractor

Since the FAR required Negotiation Memorandum was designed with the intention of it being completed by the Contracting Officer, there are elements of that document that are not applicable. As such, USG contractors modify those requirements eliminating certain requirements and adding elements significant to a contractor. A Contractor’s Negotiation Memorandum would be similar to the one below.

1. The purpose of the negotiation.

2. A description of the acquisition, including appropriate identifying numbers (e.g., RFP No.).

3. The name, position, and organization of each person representing the contractor and the Government in the negotiation.

4. The current status of any contractor systems (e.g., purchasing, estimating, accounting, and compensation) to the extent they affected and were considered in the negotiation.

5. If certified cost or pricing data were not required in the case of any price negotiation exceeding the certified cost or pricing data threshold, the exception used and the basis for it.

6. If certified cost or pricing data were required, the extent to which the contracting officer and contractor:

• (i) Relied on the certified cost or pricing data submitted and used them in negotiating the price;

• (ii) Recognized as inaccurate, incomplete, or noncurrent any certified cost or pricing data submitted; the action taken by the contracting officer and the contractor as a result; and the effect of the defective data on the price negotiated; or

• (iii) Determined that an exception applied after the data were submitted and, therefore, considered not to be certified cost or pricing data.

7. A summary of the contractor’s proposal, any field pricing assistance recommendations, including the reasons for any pertinent variances from them, the Government’s negotiation objective, and the negotiated position. Where the determination of a fair and reasonable price is based on cost analysis, the summary shall address each major cost element. When determination of a fair and reasonable price is based on price analysis, the summary shall include the source and type of data used to support the determination.

8. The most significant facts or considerations controlling the establishment of the price. Please provide a summary for all the major cost elements.

• Direct Labor

• Direct Materials

• Other Direct Costs

• Indirect Rates

9. The basis for the profit or fee pre-negotiation objective and the profit or fee negotiated.

10. Documentation of fair and reasonable pricing.

EXCEL NEGOTIATION TEMPLATE

Please see the link below to download an excel negotiation template.

http://www.govcwiki.org/images/7/7b/Negotiation_Memorandum_Template.xlsx

Negotiation Memorandum

Contents