Price Negotiation Memorandum - Key to Smarter Contract Details

The PNM serves as a formal record of the negotiation process, providing justification for the agreed contract terms. In this article, we walk through its essential components and offer a ready-to-use PNM template to assist your drafting.

What is a Price Negotiation Memorandum?

Price Negotiation Memorandum ("PNM") is a form of government contract documentation that records the price agreement reached during negotiations for government contracts, particularly those not based on adequate price competition. It serves as a crucial record to ensure that negotiation objectives have been developed, leading to the purchasing of supplies and services at fair and reasonable pricing.

The Price Negotiation Memorandum is required under Federal Acquisition Regulations (FAR) 15.406-3. The FAR outlines the policies and procedures for negotiating costs in government contracts, including prime contracts, subcontracts, and contract modifications. Contract officers must ensure purchases are made at fair and reasonable pricing, using certified cost or pricing data when required. In the absence of adequate price competition, contracting officers must utilise price analysis, cost analysis, and cost realism analysis to evaluate proposals.

The Price Negotiation Memorandum outlines the negotiation objectives, the agreed-upon price, and the rationale behind pricing decisions. The Contracting Officer is required to document all factors of price negotiation. Under FAR 15.406-3, the Price Negotiation Memorandum must include the following:

• Purpose - The purpose of the negotiation

• Description -  The description of the acquisition, and appropriate identifying numbers (if applicable)

• Negotiators - The name, position, and organisation of each person representing the contractors and the Government in the negotiation

• Current status - The current status of any contractor systems to the extent they affected and were considered in the negotiation

• Cost/pricing data - Certified cost or pricing data (if required under FAR 15.403-4)

• Exception (if applicable) - If certified cost or pricing data is not required, the exception used and the basis for it

• Contractor’s proposal - A summary of the contractor's proposal, any field pricing assistance recommendations, including the reasons for any pertinent variances from them

• Cost elements - If the determination of a fair and reasonable price is based on cost analysis, each major cost element

• Data source - If the determination of a fair and reasonable price is based on price analysis, the source and type of data used to support the determination

• Negotiation factors - The most significant facts or considerations controlling the establishment of the pre-negotiation objectives and the negotiated agreement

• Explanation - If there are any significant differences between the two positions, an explanation of such differences

• Influences - The impact of direction given by Congress, other agencies, and higher-level officials (if applicable)

• Basis - The basis for the profit or fee pre-negotiation objective and the profit or fee negotiated

• Documentation - Documentation of fair and reasonable pricing

When to use a Price Negotiation Memorandum?

If you are doing business with the US federal government, the Federal Acquisition Regulations require documentation of the negotiation process. Documenting negotiations with a Price Negotiation Memorandum is a critical step in the acquisition process. The government is responsible for documenting its negotiations with a Prime awardee. However, it is the prime contractor's duty to record the award negotiations with a supplier or subcontractor.

A prime awardee is the lead contractor that has been awarded a federal contract directly by a government agency. As the lead contractor, the prime awardee holds full accountability for contract performance and reporting requirements associated with the award [1].

Need a starting point? Our customizable PNM template can help you apply these tips with confidence.

What is "fair and reasonable pricing"?

The Federal Acquisition Regulations do not give a clear and precise definition of "fair and reasonable pricing". Nevertheless, "fair and reasonable pricing" remains a prerequisite for a contracting officer to award contracts or place orders. Below are common factors taken into account when determining whether the price is fair and reasonable [2]:

• The difference between the supplier/subcontractor's proposed price and the negotiated price

• Previous Government and commercial contract prices of the same/similar products/services

• Findings of market research

• Government cost estimate

Are there any price negotiation strategies?

Definitely! Here are some negotiation tips that you might want to know when you negotiate price. 

✔ DO get familiar with your own priorities and position. Before entering the meeting room and meeting your counterparty, you should have a clear picture of your goals, what you are willing to compromise on, and your bottom line. This enables you to negotiate with confidence and prevents accidentally agreeing on unfavourable terms.

✔ DO try to understand what your counterparty wants. Knowing what their ranked priorities are before the negotiation is like seeing through their cards at a poker table. When they’re pushing hard on one priority, expose trade-offs and force them to weigh their priorities.

✘ DON’T get personal. In business negotiations, letting our emotions get the best of us often does more harm than good. It impairs our decision-making and shifts the conversation from collaborative to combative. Instead, stay calm and focus on building long-term relationships. Keeping things friendly and professional often leads to a win-win situation.

✘ DON’T be a victim of logical bias or fallacies. They may cloud our judgment and lead us to make unfavourable decisions. Here are the two most common fallacies during negotiation:

1. 1. False dilemma: Also referred to as a false dichotomy, it refers to the situation where two options are presented as the only ones available, forcing one to choose between two unfavourable extremes when there are actually other possibilities.
   2. Anchoring bias: People tend to rely heavily on the first piece of information they are provided on a subject. That’s why price-setters usually set high initial prices and then offer discounts to make the deals look more attractive. Beware of this pitfall and trust your own research and valuation.

How to write a Price Negotiation Memorandum?

To write a Price Negotiation Memorandum document, include the following key sections:

I. Acquisition details

Briefly describe what the acquisition is about, i.e., what is being bought, what are the quantities, etc. If there is an existing document/contract related to the acquisition, refer to the document and include the corresponding identifying number (e.g., RFP number).

II. Negotiation Purpose

To justify why the work is being outsourced, a clear rationale should be shown. In the 'Negotiation Process' section, state the agency’s service requirements, location, term, and any mandatory specifications. Use clear, factual language and avoid subjective descriptions.

III. Certified Cost or Pricing Data

Generally, certified cost or pricing data is required in the Price Negotiation Memorandum. You must document the relevant data and the extent to which the data is relied on to negotiate the price.

Under FAR 15.403-1, there are certain exceptions from certified cost or pricing data requirements:

• Competition
• Price set by law or regulation
• Acquisition of a commercial product or service
• Waiver by the contracting officer
• Modification to a subcontract when such modification is for commercial products or services

IV. Procurement Situation

In this section, if there are other external factors which significantly affected the negotiation, such factors should be discussed in detail in the Price Negotiation Memorandum, including the specific effects they had on the project. Such external factors may include time pressures or outside influences.

V. Supplier/subcontractor Proposal

You should include the supplier/subcontractor's original proposal in the Price Negotiation Memorandum. This is best done in a table format, breaking down the total cost of each element. The negotiation objective and final agreed price should be shown alongside the prices proposed by the supplier/subcontractor. If necessary, further breakdowns of each cost element can be included in the appendix.

Example

For a prime contractor negotiating a subcontract, a PNM should include:

1. Acquisition details: what the subcontractor will provide, with relevant contract titles, identifying numbers, etc.
2. Negotiation purpose: why the work is being outsourced, what are the mandatory requirements, etc.
3. Certified cost or pricing data: cost/pricing data relied on during the negotiation, and their sources.
4. Procurement situation: state the procurement history of similar work, and any outside influences which affected the negotiation.
5. Subcontractor proposal: what the subcontractor originally offered, and the difference between that and the final agreed price.

Final thoughts

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