Published by MBA Skool Team, Last Updated: May 21, 2015
What is Fair and Reasonable Price?
A fair and reasonable price is the selling price for a service or good that is fair to both the buyer and the seller, who are involved in the transaction. The price is determined by judgement taking into consideration the economic realities of the marketplace and the bargaining power of both the parties. The price also takes into consideration the performance, quality, delivery time, supply, etc. The price so set is such that the seller is able to sufficiently cover his costs and realise a reasonable profit. In case of government contracting, the reasonable price is subject to regulatory and statutory limitations.
According to the Federal Acquisition Regulation, “A cost in its amount and nature is known as reasonable, if it does not exceed the cost which would be incurred in the conduct of the business.”
Fair and reasonable pricing dramatically affects the government outcomes. Its interpretation determines how billions of dollars are spent, stock prices are valued, jobs are created, services and goods are delivered and how disputes are resolved.
Techniques to determine the fair and reasonable price:
1. Commercial sales practices: Information regarding the following is required:
a. Commercial discount practices
b. Commercial pricing
c. Estimated sales
d. Proposed pricing
2. Price analysis: Price analysis is the predominant method used while establishing the price as fair and reasonable for commercial items. It is basically the value comparison. Comparison is dependent upon available resources and data available to the Contracting officer. It is usually a kind of comparison with other prices. Additional data may be taken by the Contracting officer from the vendor to determine if the price is reasonable or not.
3. Market research: This method is critical as it is important to understand the market in order to establish the reasonable price.
Hence, this concludes the definition of Fair and Reasonable Price along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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