Price Negotiation Memorandum –

Template and Guide

This Price Negotiation Memorandum will become an important part of your Contractor Purchasing System Review (CPSR), which leads to approval (or disapproval) of your company’s purchasing system.  Additionally, if you are required to obtain prior written consent to subcontract pursuant to FAR 52.244-2, the Price Negotiation Memorandum is required as part of your consent package submission.

This article presents an example template and explains how it meets the requirements set forth in FAR 15.406-3(a).  The requirements found at FAR 15.406-3(a) are required for government officials, not contractors.  This article is aimed at contractors.  Our approach to documenting negotiations attempts to remove duplication of information that would be found in other procurement documents.  Therefore, there is not a one-to-one match with what is written in the FAR.  However, the method found here will be accepted in CPSRs.

1.  Negotiation Purpose
(Price Negotiation Memorandum Template section 5, Explanation of Offers)

This first section is self-explanatory.  What is the purpose of your negotiation? Are you negotiating labor rates, labor hours, travel, fee, statement of work, data rights, payment terms, conditions, flow downs, delivery schedule, reporting requirements, etc. These may have been determined during the prenegotiation objective phase (see FAR 15.406-1 for prenegotiation details).

2. Description of the Acquisition
(Price Negotiation Memorandum Template Section 1, Acquisition Details)

If you have an existing document that explains the acquisition, refer the reviewer to that document. 

Otherwise, this section should describe the acquisition itself, i.e., what are you purchasing?  Typically, this section includes:

• Short description of the acquisition being negotiated
• Prime contract number or solicitation number
• Request for proposal (RFP) identification number
• Supplier proposal identification number
• Date of the RFP issued to the subcontractor/supplier
• Date of the subcontractor/supplier’s proposal. 

3.  Participants in Negotiations
(Price Negotiation Memorandum Template section 2, Participants and Dates)

It is recommended that you include the dates of negotiation and the method(s) of negotiations (i.e., face-to-face meetings, telephone calls, emails/letters).

For each participant, include the following:

• Name
• Position/title
• Organization represented

4.  Subcontractor/Supplier Business Systems Status
(Price Negotiation Memorandum Template section 2d, Significant Factors in Negotiations)

If applicable and/or required as part of an award to a subcontractor/supplier, document the status of a contractor’s systems.  For example, if you are issuing a cost-type subcontract, consideration should be given to whether your subcontractor/supplier has an approved/acceptable accounting system.  Your company’s procurement policies and procedures may prohibit you from issuing a cost-type award to a subcontractor/supplier who does not have an approved accounting system.  We recommend you refer to your company’s policies and procedures.  You should describe how these systems, if any, related to the negotiation and the extent to which they were considered.

5.  Exception to Certified Cost or Pricing Data
(Price Negotiation Memorandum Template section 3, Current Cost or Pricing Data)

If the subcontractor/supplier’s proposal exceeds the threshold for certified cost or pricing data, currently $2 million, and certified cost or pricing data is not required, you must identify and document the exception.  FAR 15.403-1(b) outlines the exceptions:

• Competition
• Price set by law or regulation
• Commercial product or service is being acquired
• Waiver by contracting officer  (NOTE:  A waiver issued to a Prime contractor must specifically include the subcontract.)
• Modification to a subcontract when such modification is for commercial products or services

6.  Certified Cost or Pricing Data Required
(Price Negotiation Memorandum Template section 3, Current Cost or Pricing Data)

When Certified Cost or Pricing Data is required by the subcontractor/supplier, you must document in your PNM:

(1) the extent to which you relied on the data submitted to negotiate the price;

(2) Since the quality of pricing data varies from company to company, identify any inaccurate, incomplete, or non-current cost or pricing data and any action taken by you as a result and whether any inaccurate, incomplete, or non-current cost or pricing data had an effect on the price negotiated; and

(3) if you were to determine that an exception applies after receipt of certified cost or pricing data then said data would no longer be considered certified.

7.  Summary of Subcontractor/Supplier Proposal
(Price Negotiation Memorandum Template section 4, Offer Summary)

We recommend this be done in a table format and broken down by cost element, i.e., labor categories/hours, labor rates, travel, material, ODCs, Indirects, etc.  You can add additional columns to document counteroffers and the final negotiated position on each cost element.

Not every negotiation is conducted at the cost element level.  Many are conducted at the bottom line.  The rule of thumb here is that if a cost analysis was conducted and there is visibility into cost element details, the first several rounds of negotiations should be documented at that level as well.

8.  Significant Factors
(Price Negotiation Memorandum Template section 2d, Significant Factor(s) in Negotiations; Template section 6, Details of Agreement by Line Item)

Identify and summarize the most significant facts or considerations that impacted both pre and final negotiations.  These could include field pricing assistance recommendations, audit reports and technical analysis, fact-finding results, terms, conditions, clauses, etc.  If there end up being any significant differences between the two positions, that should be documented here as well.

9. Impact of Direction on Negotiation
(Price Negotiation Memorandum Template section 2d, Significant Factor(s) in Negotiations)

This section refers to a case in which there is significant effect on the proposal by Congress, other agencies, or higher-level officials. In cases where this occurs a full discussion of the direction of said actors must be included as well as the specific effects it had on the project. Since there is no privity of contract between a subcontractor and the U.S. Government Customer, this section should address any effect that Prime and Subcontractor leadership had in the negotiation.

10.  Fee/Profit
(Price Negotiation Memorandum Template section 4, Offer Summary)

There are certain statutory limitations on fee between the USG and a Prime contractor depending on the type of contract and the work being performed of which you should be aware.  Refer to FAR 15.404-4(c)(4)(i).

When a cost analysis is being conducted, you must document the basis for fee/profit to include your pre-negotiation objective (if any), proposed, and final negotiated. It is important to note that pursuant to FAR 15.404-4(c)(1), when a price negotiation is not based on a cost analysis, analysis of profit is not required. 

11.  Documentation of Fair and Reasonable Pricing
(Price Negotiation Memorandum Template section 4, Offer Summary)

The point of this section is to show the relationship between what was determined as “fair and reasonable” prior to negotiations and what the final negotiated price ended up being.  The government requires attaching the cost or price analysis; however, it’s typical for contractors to simply display the analysis price.

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