5.062 Price Reasonableness by Price Analysis Methods for Purchases Greater than $5,000, Less than $25,000

Purpose: To demonstrate that a purchase is made with appropriate consideration for price the following methods of determining price reasonableness shall be performed before a purchase order is issued with a dollar value of $5,000, but less than $25,000. This procedure addresses use of price reasonableness methods by departments authorized to issue purchase orders up to $25,000.00.

Action: Procedure is to be following for purchases that are above $5,000 but less than $25,000.

Responsible Parties: Departmental BuySite Users

Variation in methods: In performing a price analysis, that is, determining a price to be fair and reasonable without examining the individual components of the price, the purchaser has a wide selection of methods. Which method is used and its suitability depends on the facts or information of the individual purchases.

Methods: What follows is a listing of the most common methods or criteria used to determine a price to be fair and reasonable by price analysis.

a. Price Competition

When two or more acceptable offers are received and the lowest price is selected, the price of the lowest offer can be concluded to be fair and reasonable. It is noted that generally where the difference in prices between the two offers ranges up 15%, the price competition is said to exist. A price which is very low must be checked to assure that the seller understands what he is selling and has made no errors. Example: Seller A proposes a price of $2,592.00; Seller B, a price of $2,550.00 and Seller C, a price of $1,400.00. Seller C is low but the difference is too great. This must be checked to see if Seller C is proposing the same item and has made no errors in his/her pricing. If selection is made to other than the low, acceptable offer, the price must be determined to be fair and reasonable by other means.

b. Catalog or Established Price List

Where only one offer is received and the seller has a published or established price list or catalog which sets forth the price of a commercial item, this fact can be used to find the price fair and reasonable. The catalog should be current (within one year, generally). It is a good idea to obtain a name of another recent purchaser and confirm that this is the price paid. Often, discounts off of the price list are offered. If this is the case, it should be noted in the written analysis. The item to be purchased should generally be a commercially produced one sold to the general public in substantial quantities.

c. GSA Contracts or Pricing Agreements

The Federal Government often enters into contracts with various companies as to the prices of items which will be sold to the Government. These are presumed to be fair and reasonable. If a Seller cites a GSA contract price, that is adequate to determine the price fair and reasonable. The actual price may be lower than the GSA due to discounts, if this is the case, it should be noted in the written analysis.

d. Price Based on Prior Competition

It may be that only one Seller will propose. If this is the case and the item was previously purchased based on competition, this may be acceptable. If such cases, you want to cite the price of prior purchase and note if it was competitive or based on catalog price or other. An increase in price, with no current catalog or competition, should be about the current rate of inflation.

e. Comparison to a Substantially Similar Item

Often an item is very similar to a commercial one but has added features which are required. If the Seller can provide the price of the base item, by a catalog, and then state the costs of the additional features, the purchaser can then find the price reasonable based on these two factors. The reasonableness of the extra cost can be checked from other purchasers who had the extras or some of them or based on an evaluation of the extra cost by technical personnel.

f. Sales of the Same Item to Other Purchasers

If the Seller has no catalog but has sold the same item to others in the previous six (6) months, the price can be determined to be fair and reasonable by verifying with those other purchasers what price they paid. This must be noted in the written documentation with name, telephone and date of confirmation.

g. Comparison to Prices with Other Similar Items

If an item is generic, there may be a number of similar made products, such as computers. If the low price for a computer is $1800.00, then a call to another firm asking for a price on a similarly configured machine can be used. Say the other is $1925.00; that can be used.

h. Market Prices

Where an item has an established market price, verification of an equal or lower price also establishes the price to be fair and reasonable. Example: the purchase of metals, such as lead, gold, silver or commodities, such as grains.

i. Historical Prices

If the purchaser has a history of the purchase of the item over several years, use of this information, taking into account inflation factors, can be used to determine a price fair and reasonable.

j. Independent University Estimate

If an independent estimate of the item has been prepared and other method or information is available, a price can be compared to the estimate and if it compares favorably, this can be a basis to find a price fair and reasonable. The estimate, however, must be independent. Use of a seller’s pricing to make an independent estimate is NOT independent.


DOCUMENTATION: Each price analysis for purchase orders having a dollar value of $5,000 and greater must be documented. Documentation and determination of price reasonableness is to be provided by use of form PF5.062.2 – Record of Purchase Price Reasonableness Determination[Word].