# IG5336.9201-ch5 Unit Price Evaluation

CHAPTER 5
Unit Price Evaluation

Construction Indefinite-Delivery Contracts (IDC) Using a Unit Price Evaluation Tool

5.1. Introduction. There are three types of indefinite-delivery contracts (IDCs): definite-quantity contracts, requirement contracts, and indefinite-quantity contracts. The first type listed is rarely used in the construction area while the other two types are very common. The appropriate type for construction will depend on whether the exact times and/or exact quantities of future requirements will be known at the time of contract award. Pursuant to 10 U.S.C. 2304d and section 303K of the Federal Property and Administrative Services Act of 1949, requirements contracts and indefinite-quantity contracts are also known as delivery order contracts or task order contracts. Reference FAR 16.500 for a complete discussion of the advantages of the three types of IDCs.

5.2. What is the Problem?

5.2.1. Price evaluation requires more than just a cursory bottom line check and price decisions based on such methodology are particularly problematic for requirements and indefinite delivery-indefinite quantity (IDIQ) type contracts. Given that the quantities are generally the Governments best estimates, and the Government may order all, more, some, or none, proposed prices that are too high or too low may put both parties at risk.

5.2.2. Unless the Government has provided for volume breaks, sliding scale pricing, or specified unique ordering combinations with associated minimum quantities, offerors must look at each contract line item number (CLIN) individually as a single requirement. Consequently, the Government must evaluate each CLIN as a single requirement. Suppose the Government estimates it will purchase 50 CY of asphalt and then actually purchases 800 CYs. If the offeror anticipated the Government’s requirement would be no more that 50 CY, and he bid “high” for that item so he could bid “low” on something else, the Government ends up paying a premium price when it orders 800 CY. On the other hand, if the offeror bids too low for an item and the Government purchases more than the anticipated quantity the contractor could end up bankrupt or in default because he does not have the plant, equipment, financial or manpower resources to support huge quantity overruns.

5.3. Where to Start? The starting point is with the independent government estimate, or IGE (see Chapter 1). The research performed in developing the IGE should be documented and the documentation provided to the contracting officer (CO) along with the requirement for purchase action. Keep in mind that during the evaluation process, the Government may need to revisit both the quantities and usage of some of the items described in the research. In a strong competitive environment, a detailed evaluation will nearly always expose questionably high or low prices. It will also bring to light gross miscalculations in the Government’s estimate and/or errors or misunderstandings regarding project requirements or the project specifications.

5.4. What Is A Unit Price Evaluation Tool. It is a decision tool to help the CO thoroughly and expeditiously analyze prices and decide which items to discuss with which offerors. The attached Excel spreadsheet is an example of a Unit Price Evaluation Tool. Formulas have been embedded throughout the spreadsheet to aid in this analysis. Using this tool, the CO can compare every offeror’s price to both the IGE and the prices of other offerors. All prices are then displayed graphically clearly revealing variances or similarities between proposed prices and the IGE.

5.5. What is the Process?

5.5.1. Create an abstract using the excel spreadsheet format provided as an attachment to this chapter. Lower control limit (LCL) and upper control limit (UCL) variances from the IGE are then developed and identified in the spreadsheet. These variances account for normal market price fluctuation. When selecting the variance percentages, you need to substantiate the reason for the limits selected. For example, if the requirement is for a one year contract for paving and the prices of the six competitors in the last competition were consistently within 8% of each other that could indicate that anything over 8% may be too high or too low (Note: The last competition data is only one data point for analysis).

5.5.2. After you have “constructed” your spreadsheet and computed the LCL and UCL, the next step is to stratify the abstract by dollar thresholds to make the results easier to interpret. A chart of 100 items ranging from $.03 to $3,000 per unit is unmanageable. The abstract may be stratified by using the Government estimate as the set point to establish ranges. When you are done you should have created a series of different Excel worksheets which will be used to stratify the abstract by dollar thresholds, e.g., <$3, $3.01-$10, $10.01-$50, etc. The graphs generated by the data can then be displayed in several charts allowing the Government to visually identify variances in the information provided. The number of graphs used to display the data will depend upon the number of stratifications, the number of offerors and the number of items under evaluation.

5.5.3. Once the charts are populated with the prices of all offerors, pick a data sheet and highlight the information. You will be able to create an Excel Chart from the information populated in the spreadsheet. Once created, the chart will reflect the IGE with the LCL and UCL variances and the prices of all offerors, exposing variances among the offerors. At a glance, you can now look for those specific CLINs that warrant further investigation. The latter items will become your primary focus areas for the rest of the analysis.

5.6. What to Look For?

5.6.1. As you populate the data base with offeror prices, look for “trigger” points, e.g., prices falling outside the established LCL and UCL variances. Flag items within the variance as candidates for acceptance without discussion (see FAR 15.306). Items outside the variance are also flagged and are candidates for discussion.

5.6.2. Variances outside the LCL and UCL may indicate misunderstandings, mistakes, or buy-in. For example, the IGE for CLIN 25 on the attached spreadsheet is higher than the prices proposed by any offeror. This might lead the CO to question the validity of the IGE or the validity of the specifications, either of which could result in identification of an area for discussion. You should end up with a unique listing for each Offeror. Sometimes, it may be necessary for the Government to amend the RFP to clear up ambiguities within the specific work description.

5.7. When Is “Enough” Enough? The CO is responsible for determining that a price is fair and reasonable based on a comparison of competitor prices, comparison of prices to previous contracts or market prices, or using other techniques described in FAR 15. The process is complete when the CO is confident he/she has:

5.7.1. Thoroughly evaluated the prices to include the identification of any risk assumed by acceptance of any potentially over or under priced items; and

5.7.2. Thoroughly documented the price analysis.