FAR 15.405—Price negotiation.
Plain-English Summary
FAR 15.405 explains how contracting officers should conduct price negotiation and what the Government is trying to achieve in that process. It covers the purpose of cost or price analysis, the contracting officer’s duty to use judgment in reaching a fair and reasonable price, the role of audit and specialist advice, the need to consider contract type, cost, and profit or fee together, and the requirement to avoid agreeing on profit or fee before resolving cost and contract type. It also addresses what to do when the contractor will not accept a reasonable price or profit/fee and the contracting officer has exhausted authorized actions, including considering an alternative source and elevating the matter above the contracting officer. In practice, this section makes clear that price negotiation is not a mechanical exercise or a line-by-line dispute over every cost element; it is a judgment-based process focused on the total negotiated result. It also emphasizes documentation, especially when the contracting officer departs from significant audit or specialist recommendations or must escalate the action. For contractors, this means the Government may accept some elements and reject others, and the final deal will be judged on overall fairness and reasonableness rather than perfect alignment on every point.
Key Rules
Negotiate the total price
The purpose of cost or price analysis is to develop a negotiation position that helps the parties reach a fair and reasonable price. The contracting officer is not required to agree with every cost element, and the final negotiated price does not have to match the contracting officer’s initial position.
Use judgment and document it
The contracting officer is solely responsible for the final price agreement and must exercise judgment using audit input, specialist reports, and knowledge of the contractor’s purchasing system. If significant audit or specialist recommendations are not adopted, the contracting officer should explain the rationale in the price negotiation documentation.
Focus on the Government’s actual cost
The primary concern is the overall price the Government will actually pay, not isolated cost items. The contracting officer should keep the negotiation centered on the total result and avoid getting stuck on any single element.
Set contract type and price together
The contracting officer should negotiate contract type and price as related issues, considering risk and uncertainty for both parties. The goal is a contract structure and price that give the contractor the greatest incentive for efficient and economical performance while still being fair and reasonable to both sides.
Link profit or fee to cost and type
Profit or fee is only one part of the pricing equation and depends on the Government’s cost objective and the proposed pricing arrangement. The contracting officer must not agree on profit or fee until there is concurrent agreement on cost and contract type.
Escalate unresolved unreasonable demands
If the contractor insists on an unreasonable price or profit/fee and the contracting officer has taken all authorized actions, including assessing whether an alternative source is feasible, the matter must be referred to a higher level above the contracting officer. The disposition of the action must be documented.
Responsibilities
Contracting Officer
Develop the negotiation position from cost or price analysis, use judgment to reach a fair and reasonable final price, consider audit and specialist input, and document the rationale when rejecting significant recommendations. Negotiate contract type, cost, and profit/fee together, avoid agreeing to profit or fee before cost and contract type are settled, and escalate the action above the contracting officer if the contractor will not accept a reasonable result after all authorized actions are taken.
Contractor
Participate in negotiations and present pricing, cost, and profit/fee positions for the proposed contract. The contractor should understand that the Government may reject individual cost elements, that contract type and pricing are negotiated together, and that unreasonable demands may lead to escalation or consideration of alternative sources.
Agency / Higher-Level Authority
Receive and resolve referrals when the contracting officer cannot reach agreement after taking all authorized actions. The agency must support proper disposition and ensure the action is documented when elevated.
Audit and Specialist Personnel
Provide advisory recommendations, reports, and technical or financial input that inform the contracting officer’s negotiation position. Their recommendations are influential but not binding, and significant recommendations that are not adopted should be addressed in the negotiation record.
Practical Implications
Negotiation is about the whole deal, not every line item. A contractor can lose on some cost elements and still reach a fair and reasonable overall price.
Documentation matters when the contracting officer departs from audit or specialist advice. Weak rationale can create protest, audit, or file-review risk.
Contract type and profit/fee cannot be treated as separate afterthoughts. If they are negotiated in isolation, the final deal may be unbalanced or unsupported.
If the contractor holds out for an unreasonable price, the contracting officer must show that all authorized actions were tried before escalating, including checking whether another source is feasible.
The section reinforces that the contracting officer owns the final price decision. Contractors should expect a reasoned but independent Government judgment, not automatic acceptance of proposed costs or profit.
Official Regulatory Text
(a) The purpose of performing cost or price analysis is to develop a negotiation position that permits the contracting officer and the offeror an opportunity to reach agreement on a fair and reasonable price. A fair and reasonable price does not require that agreement be reached on every element of cost, nor is it mandatory that the agreed price be within the contracting officer’s initial negotiation position. Taking into consideration the advisory recommendations, reports of contributing specialists, and the current status of the contractor’s purchasing system, the contracting officer is responsible for exercising the requisite judgment needed to reach a negotiated settlement with the offeror and is solely responsible for the final price agreement. However, when significant audit or other specialist recommendations are not adopted, the contracting officer should provide rationale that supports the negotiation result in the price negotiation documentation. (b) The contracting officer’s primary concern is the overall price the Government will actually pay. The contracting officer’s objective is to negotiate a contract of a type and with a price providing the contractor the greatest incentive for efficient and economical performance. The negotiation of a contract type and a price are related and should be considered together with the issues of risk and uncertainty to the contractor and the Government. Therefore, the contracting officer should not become preoccupied with any single element and should balance the contract type, cost, and profit or fee negotiated to achieve a total result-a price that is fair and reasonable to both the Government and the contractor. (c) The Government’s cost objective and proposed pricing arrangement directly affect the profit or fee objective. Because profit or fee is only one of several interrelated variables, the contracting officer shall not agree on profit or fee without concurrent agreement on cost and type of contract. (d) If, however, the contractor insists on a price or demands a profit or fee that the contracting officer considers unreasonable, and the contracting officer has taken all authorized actions (including determining the feasibility of developing an alternative source) without success, the contracting officer shall refer the contract action to a level above the contracting officer. Disposition of the action should be documented.