The Future of Fair and Reasonable Pricing Policy

by | Feb 1, 2024 | Insights, Procurement and Pricing

In public procurement, pricing decisions are governed by the ‘Fair and Reasonable’ litmus test; however, procurement regulations (i.e., the FAR) don’t explicitly define ‘Fair and Reasonable’. While buyers and sellers likely have different ideas about what constitutes a fair price for an item of supply, the fundamental market premise is that buyers want to be able to find the right product, at the right price, and suppliers want to deliver!

Pricing requirements and objectives change over time and are influenced by market and economic conditions. Most recently, we saw how the sharp rise in inflation coupled with supply chain shortages and shifting demand caused by the COVID-19 pandemic, affected GSA’s ability to keep up with supplier price changes.

As the government has aligned itself with commercial purchasing practices, they have also started to leverage lessons learned from the commercial marketplace; for example, allowing market forces to determine the price and availability of goods. So, what does the future of fair and reasonable pricing (and practice) look like for eCommerce Suppliers?

    • GSA schedules currently contain numerous clauses that govern economic price adjustments. MV–22–02, an acquisition memo issued by GSA in 2022 (extended through March 2024) suspended the restrictions in these clauses, such as price caps and limits on how many, and how often, a Supplier may request a price increase. GSA is now pursuing a proposed rule to eliminate outdated economic price adjustment rules and establish a single, simplified provision governing price changes. The proposed contract language will make it easier for Suppliers to seek a price adjustment and respond quickly to the market conditions impacting their business.
    • GSA recently announced an update to how market threshold pricing will be established. Threshold pricing is used to evaluate and negotiate commercial item pricing by comparing a Supplier’s proposed price to the wider market (for the identical item). The new pricing rules rely more heavily on the median price (vs. low price) and incorporate Transactional (TDR) and commercial web pricing data points when available. Additionally, threshold pricing is demand weighted with price targets set more aggressively for frequently purchased or ‘high demand’ SKUs. GSA has also sought to address price changes driven by inflation by building in an inflation adjustment based on the Consumer Price Index. To help alleviate Supplier confusion over changes in pricing policy, GSA has made the model publicly available via the interact site.
    • GSA is also pursuing policy changes to reinforce its goal of achieving ‘best value’ in procurement decisions by balancing price and non-price factors (i.e., service, risk, etc.). The agency is seeking to replace the ‘lowest overall cost alternative’ language with ‘best value’ in the Competition in Contracting Act’s competitive procedures. The proposed changes were submitted to Congress for review in November 2023.
    The most important takeaway is that GSA is working to build much needed flexibility into the acquisition process empowering Contracting Officers and Suppliers to work together make smarter decisions that better represent practices in the commercial marketplace. They are also clearly committed to increasing transparency across the supply chain to achieve better buying outcomes for their customers.

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