Pricing - Proprietary Products

Transcription

1 Pricing - Proprietary Products Constraints None. Authoritative Guidance Summary 1. Proprietary products are ones designed and developed by a company at their own cost and risk. 2. Companies are sometimes reluctant to permit an examination of their prices on the grounds that the prices have been established in the commercial market. 3. When procuring non-competitively one of two approaches may be adopted according to circumstances: a. Where the Ministry of Defence (MOD) is one among a number of purchasers for a particular product, reliance should be placed as far as possible on the commercial pressures of the market to determine fair and reasonable prices; and b. Where MOD is the prime purchaser of a particular product every effort should be made to secure the inclusion of DEFCONs 643, 648/648A, 650/650A, 651/651A, 695, 696 and 652 and 127 where appropriate so that the reasonableness of the prices can be established as far as possible in the normal way. 4. Acquisition teams must ensure, where a direct recovery of Private Venture Research and Development (PV R&D) expenditure is included in the price, that recovery of that expenditure is disallowed from overheads. Authoritative Guidance 5. Proprietary products are those designed and developed by a company at their own cost and risk. Such products can meet defence needs satisfactorily. 6. As part of the procurement and support strategy, acquisition teams will consider whether to source such items competitively or non-competitively. MOD's preferred policy is to utilise competition but this may not always be possible. If proceeding non-competitively the acquisition team will also need to consider how to establish fair and reasonable prices in accordance with the 1 of 5

2 No Acceptable Price No Contract (NAPNOC) principle in circumstances where companies may be reluctant to permit an examination of their prices. Non-Competitive Pricing 7. The full rigours of price investigation are not precluded by the 1968 Profit Formula Agreement which has now been carried forward in the 2003 Profit Formula Agreement although there are limitations (paragraph 10 of the 1968 Agreement) on the use of DEFCON 648/648A (Availability of Information) in those cases where a genuinely competitive general market price for proprietary products exists. MOD One Among A Number Of Purchasers 8. Where MOD is one among a number of purchasers for a particular product, reliance should be placed as far as possible on the commercial pressures of the market to determine fair and reasonable prices. In such circumstances, the acquisition team should satisfy itself that the following prerequisites are met: a. there are other competing products (i.e. products serving the same purpose) marketed by at least one other supplier large enough to be a threat to the contractor's market (foreign sources may be taken into account provided there is evidence that direct competition exists between him and such sources); b. prices charged to commercial customers can be established from a published price list or, for example from copies of invoices issued by the supplier to customers outside the public services; and c. the goods are sold in the United Kingdom (UK) in reasonable quantities outside the public sector. 9. When pricing on this basis it does not necessarily follow that list prices or discounts offered by the supplier should automatically be accepted. In negotiating the level of discount acquisition teams should: a. satisfy themselves that discounts offered are at least as good as those available under best customer terms; b. consider whether the price and discount offered to commercial customers includes services that MOD does not require (conversely MOD may require additional services (e.g. more rigorous testing)); c. ensure the level of discount negotiated takes account of the volume of the MOD's purchases from the contractor, and its special 2 of 5

3 position as a Government purchasing department (e.g. there should be no 'bad debt' risk provision in prices); d. consider the potential benefits of interim payments to the contractor; and e. establish whether the contractor's 'commercial' overheads contain elements not allowable under Government accounting conventions. 10. For orders of very large value (say in excess of 1M (one million pounds sterling)), contractors should be asked to demonstrate through certification by their statutory auditors or by inspection of their books that the discount allowed to MOD is at least as large as that allowed to any other customer. For other orders (except those of very small value) a certificate to this effect should be sought from the contractor's Chief Accountant. MOD The Prime Purchaser 11. Where MOD is the prime purchaser of a particular product every effort should be made to secure the inclusion of appropriate DEFCONs including 643, 648/648A, 650/650A, 651/651A, 695, 696 and 652 (Remedy Limitation) and DEFCON 127 for lower value contracts below 250K (two hundred and fifty pounds sterling) so that the reasonableness of the prices can be established as far as possible in the normal way. 12. Contractors may sometimes refuse to accept the inclusion of these conditions. If so efforts should be made to negotiate contract specific conditions incorporating as many of the provisions of the relevant DEFCONs as the contractor will accept subject to sufficient rights being secured to ensure information for the agreement of fair and reasonable prices and, as far as possible, for the objectives of post costing to be met. In some cases, where it may be inappropriate to seek post costing information related to individual contracts, acquisition teams should seek to secure annual profitability statements for the product range(s) concerned as part of a general understanding reached with the company in question. 13. When contract specific conditions are agreed the acquisition team taking the lead role with respect to particular product should: a. inform other acquisition teams who buy from the company; b. inform Cost Assurance and Analysis Service (CAAS) (formerly known as Cost Assurance Service (CAS)); and 3 of 5

4 c. make clear to the contractor concerned that the specific conditions agreed will only be used for the proprietary products concerned - standard DEFCONs will continue to apply for other requirements. 14. Exceptionally cases may arise where commercial competition does not exist and the contractor is unwilling even to accept contract specific conditions that extend to MOD the facility to agree prices on the basis of DEFCON 643 (Price Fixing) or equivalent. In such cases, where the value of the contract is in excess of 250K (two hundred and fifty thousand pounds sterling), acquisition teams should press for price breakdowns in a form that will permit consideration of the reasonableness of the elements included. Information on overhead rates and Cost of Production:Capital Employed (CP:CE) ratios should also be sought. As described in paragraph 12 above the contractor should be asked to provide a certified statement to enable commercial officers to satisfy themselves that the overhead and profit elements are not unreasonable. It may be possible to obtain annual profitability statements for the product range concerned. In lower value cases it should only be necessary to form an overall judgement without asking for a price breakdown although advice may be required from the acquisition team. Private Venture Research And Development 15. Accounting conventions for non-competitive contracts allow contractors to recover Private Venture Research and Development (PV R&D) expenditure either: a. in the agreed overheads chargeable on MOD contracts; or b. as a direct charge to MOD in the price of a contract. 16. In order to ensure that PV R&D expenditure recovered as a direct charge under the terms of a contract is not recovered through agreed overheads, the following narrative condition (or similar) should be included in the contract: 'Any costs incurred by the Contractor in addition to the sum stated at.. shall not be recoverable against any non-competitive contract placed by the Authority either as a direct or indirect charge.' 17. The CAAS must be made aware of the arrangement to ensure the condition is complied with. For this reason a copy of the contract must be sent to the appropriate CAAS branch marked 'Restriction on MOD Funding'. 4 of 5

5 Special Pricing Agreements 18. Where frequent purchases of different products are made from a contractor, the acquisition team that is the 'major user' should take the lead in seeking a Blanket annual certificate, signed by the company statutory auditor, in respect of the discounts allowed on his commercial price lists. It should be made clear to contractors that in seeking such certificates MOD is not committing itself to accepting the discount terms. Details of such certificates should be notified to other interested acquisition teams and the policy sponsor. It will remain the responsibility of individual acquisition teams buying items covered by a Blanket certificate to satisfy themselves that the items are subject to commercial competition and that the prices agreed, taking account of any unusual features and/or allowing for any discount, are fair and reasonable. 19. In some instances, particularly where the contractor supplies a wide range of goods on a regular basis, it may be possible to negotiate a global agreement to govern pricing, tailored to fit the stores and other circumstances. Or to secure an agreement (generally confidential) under which equipment is priced in accordance with the contractor's commercial practice subject to an annual rebate on the value of goods supplied during each financial year. The rebate is usually on a sliding scale linked to annual offtake or to the profitability of the company's Government business, as certified by the company's auditors. Further Reading Pricing - Industry Accounting topic Pricing - Government Profit Formula topic Pricing - NAPNOC topic Pricing - Post Costing topic 5 of 5