Negotiated Pricing

Negotiated pricing is a pricing method the Government of Canada uses when market pricing and commercial pricing are not possible. Instead of relying on prices set by a competitive market or published commercial price lists, the buyer and the contractor negotiate the contract price directly. CanadaBuys identifies market, commercial and negotiated pricing as the three methods for establishing prices for goods and services.

The most common form of negotiated pricing is cost-based pricing. Under this approach, a fair and reasonable price is made up of an accepted cost base, an appropriate profit margin and, where suitable, contract incentives. The term describes how the price is established, and it applies to both goods and services.

Where negotiated pricing sits among Canada's three pricing methods

Federal pricing guidance sets out an order of thinking. Market pricing relies on competition to establish the price. Commercial pricing relies on established prices for items sold to the general public or to other buyers. Negotiated pricing is the method used when neither of those two can be applied. The Practitioner's Guide for Procurement Pricing covers both market pricing and negotiated pricing, and it describes negotiated pricing as including non-competitive contract pricing and price negotiations in a competitive contract after award for specific pricing.

How a cost-based negotiated price is built

Establishing a negotiated contract price involves two steps: establishing a cost base and determining profit. The cost base can rely on actual costs, estimated costs or both. Costs are assessed under Contract Cost Principles 1031-2 and the criteria of being attributable, appropriate and reasonable, as set out in the CanadaBuys guidance on analyzing and negotiating costs.

Profit is then determined under the applicable principles. Before profit is negotiated, the offeror or contractor may be required to provide a schedule estimating working capital and fixed capital employed, together with supporting documentation. The CanadaBuys page on analyzing and negotiating profit describes this requirement. Where appropriate, contract incentives are added to complete the price.

When negotiated pricing is used

Negotiated pricing arises in a few situations in federal procurement, particularly in Public Services and Procurement Canada (PSPC) contracting and price-support work:

• Non-competitive contracts, where there is no effective market competition to establish the price.
• Competitive contracts where price negotiation takes place after award for specific pricing.
• Contracts where the price, or part of it, cannot be established through market, commercial or cost-based pricing, and an alternative pricing strategy is considered.

Canada's guidance recognizes two categories of pricing principles. Cost-based principles establish a cost base and add an appropriate profit. Alternative pricing principles may be used where cost-based pricing is unsuitable and the alternative is expected to provide better value. The CanadaBuys page on alternative pricing strategies explains this option.

Negotiated pricing and negotiated procurement are different things

The two terms are related but not interchangeable. Negotiated procurement describes a procurement process in which the buyer and supplier negotiate. Negotiated pricing is narrower: it concerns only how the contract price is established. A contract can involve price negotiation without the whole procurement being run as a negotiated process.

What negotiated pricing means for a supplier

A supplier whose contract is priced this way should expect to support its numbers. In practice, that can mean:

• Providing cost information that supports actual or estimated costs.
• Showing that proposed costs are attributable, appropriate and reasonable.
• Supplying documentation for the capital and working-capital amounts used in the profit analysis.
• Taking part in discussions about the cost base, profit and contractual risk.
• Providing any other information the solicitation or contracting officer requires for the pricing method in use.

Suppliers that keep clear cost records and can explain their assumptions are better placed to reach a fair and reasonable price with the contracting authority.