Negotiated Procurements

Negotiated Procurement is the method for selecting a contractor without formal advertising and formal price competition. The rules and regulations for employing the negotiation method specify that the selection of a contractor will be made to the best advantage of the Government, price and other factors considered.

Theoretically, factors other than the lowest bid can play the major role in the selection process. In practice, however, there is a regulation requiring the Government to justify the choice of someone other than the low bidder. This gives the low bidder more of an advantage than the regulations would lead the casual observer to believe.

In procurement by negotiation, the Department of Defense seeks to interest a large number of qualified bidders. Negotiation supplants formal advertising as a procurement method when one, or both, of the following conditions exist:

(1) the Government and the bidders need to be able to discuss the procurement, either before or after contractor proposals are submitted, in order to assure that there is an adequate understanding of specifications; and/or
 (2) there are some conditions (e.g., highly specialized technology or a highly classified procurement) that make it necessary to restrict the number of bidders.

Under current Government procedures for negotiation, the invitation for bid (IFB) is replaced by the "request for proposal" (RFP). In the request for proposal, the Government asks interested contractors to submit proposals outlining

(1) technical and
(2) management approaches for a specific program, and
(3) cost estimates for the work.

When the proposals are received, the Government program manager and staff, the contracting officer, and other Government personnel with relevant specialties evaluate the proposals. They then conduct negotiations with those firms whose offers are considered technically acceptable and whose estimated costs fall within a reasonable range.

The negotiations involve analysis, investigation, exploration, and bargaining with respect to costs, profit, performance requirements, delivery schedules, and provisions for future changes. Rarely, if ever, does the Government accept contractor proposals without any discussion.

In negotiation, unlike formal advertising, the contracting officer may use a fixed-price, incentive, or cost-reimbursement contract.

Only firm fixed-price contracts are used in formally advertised procurements.

The procedures for negotiated procurements are similar in many ways to formal advertising procedures. Whenever possible, negotiated procurements are competitive. But unlike formal advertising, the competition in negotiated procurements may or may not involve price. For example, contractors may compete to provide the most comprehensive and credible technical plan for the work to be performed, or the lowest cost estimate within a range believed to be acceptable to the Government—intending to negotiate the price to a higher level at a later date.

Proposals made under negotiating procedures are not opened and read in public, as they are in formal advertising. As in formal advertising, however, the terms of each proposal are recorded, and each proposal is evaluated against the requirements of the RFP.

It is simply not practical for many Government procurements to be conducted through formal advertising. Contracts for research and development programs, for example, normally are awarded through negotiation because the Government wants to evaluate contractors' technical capabilities, technical approaches, and management ability, as well as costs.

 Procurement by negotiation allows the Department of Defense to select the contractor who seems best prepared to meet all the requirements of the program, and to meet them on the terms most satisfactory to the Government. Furthermore, negotiation enables the Government to be relatively flexible. For example, vital skills, or a wartime production base, consisting of one, two, or more contractors in essential fields (e.g., aircraft, missiles, or ammunition), may be developed and maintained through so-called educational orders designed to assist contractors in developing the capabilities to produce an item.

Nonetheless, by law, negotiation is intended to be the exception rather than the rule in defense procurement.

A procurement may be accomplished through negotiation only if the procurement falls into one of the following 17 categories:

  1. A national emergency;

  2. Public exigency;

  3. Purchases not in excess of $2,500;

  4. Personal or professional services;

  5. Services of educational institutions;

  6. Purchases outside the United States;

  7. Medicines or medical supplies;

  8. Supplies purchased for authorized resale;

  9. Perishable or nonperishable subsistence supplies;

  10. Supplies or services for which it is impractical to secure competition by formal advertising;

  11. Experimental, developmental, or research work;

  12. Classified purchases;

  13. Technical equipment requiring standardization and interchangeability of parts;

  14. Technical or specialized supplies requiring substantial initial investment or extended period of preparation for manufacture;

  15. Negotiation after advertising;

  16. Purchases in the interest of national defense or industrial mobilization;

  17. Procurement otherwise authorized by law, (e.g., architectural or engineering services for preparing specifications for public works, utilities, naval vessels, or aircraft construction.)

Permission to conduct a procurement through negotiation is usually obtained by a contracting officer submitting written determinations that justify the exception. The determinations must then be signed by the contracting officer, the head of the procuring activity, or the Secretary of a military department, depending on the dollar amount of the procurement. Prior to World War II virtually all defense procurement was accomplished by formal advertising.

In every year since the beginning of the Korean War, more than 80% of all military procurement dollars have been awarded through negotiation. Almost two-thirds of the negotiated contracts have been approved under three of the 17 negotiation exceptions:

  • Exception 14:

    • Technical or specialized supplies requiring substantial initial investment or extended period of preparation for manufacture.

  • Exception 11:

    • Experimental, developmental, or research work.

  • Exception 10:

    •  Supplies or services for which it is impractical to secure competition by formal advertising.

Senior officials in the Office of the Secretary of Defense believe that rapid changes in world events and available technology will continue to make negotiation the primary method of defense procurement. At the present time, the negotiation method is used for most major weapon systems for which the military services know little more than the desired performance characteristics.
These often include, for example, aircraft, engines, complex electronic systems, and missiles.
Proposals from contractors are as much suggestions of how work can be performed as they are price quotations.

During the 1950s and 1960s, Congress frequently criticized the Department of Defense for extensive use of negotiated procurements rather than formal advertising. Defense Department personnel normally attributed this criticism to political expediency or the failure of Congress to understand the nature of the procurement process. By 1969, however, members of Congress had begun to realize the need for negotiated procurement. In 1969 the House of Representatives' Government Operations Committee, in considering the establishment of a Commission on Government Procurement, made the following observations:

The procurement laws call for advertised bidding as the preferred method, but only ten to twelve percent of the procurement dollars are spent in this manner.

To justify negotiated bidding, which is the exception in the laws but the rule in practice, determinations and findings have to be made in a wide variety of procurement categories excepted from advertised bidding and frequently these determinations are routine and relatively meaningless but consume large amounts of time and paperwork.

Whereas competitive advertised bidding is long established and continues to be beneficial and should be vigorously pursued, the Government's interests are not protected by attempting to purchase through advertised bidding when the conditions or circumstances for such bidding are inappropriate. It would seem that in view of the large and continuing volume of Government procurement which has to be negotiated rather than advertised, new statutory rules can be written to clarify and strengthen competitive negotiations, and to closely regulate sole-source negotiations and contracts.

Regardless of whether formal advertising or negotiation is employed, the stated objective of the procurement process is to encourage efficient and optimal performance. In the pursuit of this objective, a variety of procurement plans and innovations have been attempted. Development and production programs in the late 1950s and early 1960s were often "concurrent"—overlapping. Concurrency between development and production programs created such uncertainties that contractors refused to consider contracts with firm fixed prices. Consequently, cost-reimbursement and incentive contracts were used to reduce the risks for contractors.




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