Pricing Policies in Government Contracts

Abstract

The federal government is the largest purchaser of goods and services in the nation.' In this capacity, the government buys all types of items from pencils to spacecraft. However, the bulk of the money spent by the government is for custom-made goods or specialized services which are furnished to meet specific requirements of the various agencies. In this type purchasing, the pricing of goods and services cannot be arrived at by normal techniques in a market where sellers manufacture goods for anticipated demand. There the seller establishes the price based on competitive conditions and the buyer buys at his option. However, there is little bargaining over price. In the pricing of custom-made goods, on the other hand, the buyer becomes much more intimately involved in the determination of price. It is this position in which the federal government has found itself to a greater and greater extent in the past few years.2 As this has occurred, the government has discussed and promulgated a substantial amount of policy governing the participation of government procurement personnel in the pricing of the goods and services it buys. The purpose of this article is to analyze the techniques that are being used, the changes that have been made in this area in the past few years, and some of the possible results of the current pricing policies. In the past three years the Department of Defense, by far the largest purchaser in the government, has undertaken a major program of reviewing its pricing techniques and of revising them to accomplish new purposes. As a result of this effort, the Department of Defense has issued several important changes of policy and numerous statements clarifying its intent in changing the policy. This information contains the clearest statement of what the problems of the government are in this area and what current actions are being taken to solve these problems. This article will therefore deal primarily with these Department of Defense policies, since they represent the most significant effort to resolve the problems in pricing. It should be understood, however, that the other government agencies with major procurement