Fair and Reasonable Price

A fair and reasonable price is a price that is acceptable in relation to the goods or services being procured and provides value for money. Buyers support that conclusion with appropriate market, price, cost or other analysis. It is a standard that a buyer must be able to justify, not a fixed mathematical formula.

The term is not an abbreviation. It appears in procurement policy, defence contracting rules and audit guidance. Buyers judge reasonableness from evidence such as competing bids, market or catalogue prices, historical prices, government estimates, proposed costs and profit. Where competition sets the price, the standard is usually met through the competitive process itself. Where it does not, the buyer needs documented analysis.

How buyers test a price: price analysis and cost analysis

The U.S. government describes price analysis as the preferred method for deciding whether a proposed price is fair and reasonable. Benchmarks include other bids, the government's own estimate, catalogue or market prices, and prices previously paid for the same or similar products. This description appears in the Canadian Trade Commissioner Service's guidance for contractors on how the U.S. buys.

Cost analysis looks inside the price. The buyer examines proposed labour, materials, overhead and profit. It is used when price analysis is not appropriate, such as in some research-and-development or cost-reimbursement procurements.

Fair and reasonable price in NATO and defence procurement

NATO procurement policy requires an open and fair competitive bidding process that ensures non-discrimination, equal treatment of eligible vendors and a fair and reasonable price to NATO. The wording is set out in the NATO procurement policy.

NATO Allied Command Transformation describes the evaluation of a fair and reasonable price as a cost realism analysis. That analysis asks whether a bidder's price is realistic for the required work or items, and not overly optimistic or unrealistically low. It is set out in the ACT General Terms and Conditions. A price can therefore fail the test by being too low as well as too high.

Other defence buyers use the same standard. The U.S. Department of Defense requires contracting officers to buy supplies and services from responsible sources at fair and reasonable prices. Its pricing guidance names accurate, complete and current data from offerors as a means of establishing that price where the Truthful Cost or Pricing framework applies. The United Kingdom's Single Source Regulations Office must pursue both value for money for government and a fair and reasonable price for contractors on qualifying single-source defence contracts, as set out in the enabling legislation.

The concept in Canadian federal non-competitive contracts

In Canada, the term appears in federal procurement audit material, particularly for non-competitive contracts. The Public Service Commission of Canada states that, for these contracts, validation that the price is fair and reasonable should be supported by documentation describing what services are included in the price. The statement is in its audit of procurement.

This shows how Canadian contracting authorities apply the concept: where ordinary competitive price comparison is unavailable or insufficient, the file must hold evidence that the price is justified. The documentation requirement falls on the contracting authority, but the supplier's information is what makes it possible.

What it means for a supplier bidding on Canadian public contracts

• Identify clearly the goods or services included in your price.
• Explain the basis of the price, whether market rates, catalogue prices, prior contracts or a build-up of labour, materials, overhead and profit.
• Keep supporting commercial or cost information on hand so the contracting authority can validate the price.
• In defence and NATO work, price realistically. An unrealistically low price can be challenged under cost realism analysis.