How prices are estimated on an offer

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1. Estimated price and billed price

Pricing policy for a Letter of Offer and Acceptance (LOA) does two jobs, under Chapter 7 of Volume 15 of the Financial Management Regulation (FMR) (FMR Vol. 15, Ch. 7, para. 3.0). It sets how costs are determined when the purchaser is billed, and how the estimate on the offer is developed. The key difference between the two is how firm each one is. On the offer, the estimated price is meant to be a reasonable approximation of what will ultimately be billed, including the Comptroller’s inflation indices and other factors (FMR Vol. 15, Ch. 7, para. 3.2.1). Amounts other than unit prices are rounded to the next whole dollar.

The billed price comes later (FMR Vol. 15, Ch. 7, para. 3.3). On the billing statement, once actual costs are known and reported, the price should be firm and exact, apart from transactions carrying an estimated price code. It is shown in dollars and cents. How the billing statement works is covered in the billing statement and delivery listing.

2. What the statutes require

The regulation restates the statutory pricing rules (FMR Vol. 15, Ch. 7, para. 3.1.1). For articles from stock not to be replaced, the purchaser pays not less than actual value. For articles to be replaced, it pays the estimated replacement cost less depreciation, and for services, the full cost to the government, except training sold to certain purchasers at additional cost (FMR Vol. 15, Ch. 7, para. 3.1.1.3). The selling price must include charges for administrative services, a proportionate share of nonrecurring development and production costs of major defense equipment, and ordinary inventory losses on articles stored at the purchaser’s expense (FMR Vol. 15, Ch. 7, para. 3.1.2).

For new procurement, the purchaser pays the full contract amount and any damages and costs from cancellation, known as termination liability, in American dollars (FMR Vol. 15, Ch. 7, para. 3.1.3). The same full-cost rule applies to design and construction services (FMR Vol. 15, Ch. 7, para. 3.1.4). An offer may include only prices for the articles and services sold, and may be adjusted only as the chapter allows, such as for inflation or contingencies (FMR Vol. 15, Ch. 7, para. 3.2.1).

3. Defined order and blanket order estimates

Defined order offers cover specified articles or services, usually systems, with orders normally placed after implementation (FMR Vol. 15, Ch. 7, para. 3.2.2). Implementing agencies (IAs) should have cost estimates for such systems, but must validate them for the configuration to be delivered (FMR Vol. 15, Ch. 7, para. 3.2.2.1). For different configurations, the IA should obtain contractor estimates. Prices for delivery years ahead are inflated with the Comptroller’s indices, and any other factors must be documented and justified for approval before the offer is finalized (FMR Vol. 15, Ch. 7, para. 3.2.2.2).

Blanket order offers cover categories of articles or services with no definitive list of items or quantities (FMR Vol. 15, Ch. 7, para. 3.2.3). For hardware support, the price may rest on a listing of parts or a percentage of the cost of the supported system, or may simply be a dollar value line up to the ceiling in the request (FMR Vol. 15, Ch. 7, para. 3.2.3.1.1). Because the source of supply may be unknown, analysts make assumptions about sources and values to apply the right charges (FMR Vol. 15, Ch. 7, para. 3.2.3.1.2). Agencies with an ordering history may derive a ratio of procured to stock items to apply surcharges more precisely.

4. Accessorial costs

Accessorial costs are expenses incidental to issues, sales and transfers of material that may or may not be in the standard price or contract cost (FMR Vol. 15, Ch. 7, para. 4.0). They include packing, crating and handling, transportation, port loading and unloading, and staging. Packing, crating and handling covers labor, materials and services at Defense facilities to remove articles from storage, prepare them for shipment and process release documents (FMR Vol. 15, Ch. 7, para. 4.1.1). It is based on original acquisition value and is not charged on articles shipped direct from the manufacturer. Nor is it added to working capital fund items delivered after October 1, 1990, because their standard price already includes it (FMR Vol. 15, Ch. 7, para. 4.1.2).

Port loading and unloading costs cover Defense-supplied or Defense-financed labor, materials and services at ports of embarkation or debarkation (FMR Vol. 15, Ch. 7, para. 4.3). For service and maintenance cases, packing, crating and handling is applied to the acquisition cost of the items sold or serviced, not to the cost of the service (FMR Vol. 15, Ch. 7, para. 4.1.3). Actual costs should be used when known, with the prescribed rates as the fallback (FMR Vol. 15, Ch. 7, para. 4.1.2).

5. Transportation on the offer

Where purchasers use the Defense Transportation System, some services are estimated above the line (FMR Vol. 15, Ch. 7, para. 4.2.4.1). The examples are premium transport such as special assignment airlift missions, securing a vessel for a one-time shipment, staging for consolidation, radio-frequency tracking devices and guards hired to escort a shipment. Routine costs are estimated below the line by applying a delivery term code percentage, based on the mode of transport and the rate area of delivery (FMR Vol. 15, Ch. 7, para. 4.2.4.2). Since fiscal year 2021, new capacity building cases under Title 10 authority carry no below-the-line charges.

Where standard percentages would differ significantly from actual charges, as for sensitive or hazardous end items, components use the estimated actual totals in the manual’s transportation look-up tables (FMR Vol. 15, Ch. 7, para. 4.2.4.3). Transportation is computed on original acquisition value, not reduced value, except once accountability for excess items has passed to property disposal (FMR Vol. 15, Ch. 7, para. 4.2.4.4). Staging is recovered at actual cost as an above-the-line charge (FMR Vol. 15, Ch. 7, para. 4.4.1), or at 3 percent in non-working-capital-fund facilities in the continental United States where below-the-line recovery is authorized (FMR Vol. 15, Ch. 7, para. 4.4.2).

Key terms

Estimated price	The offer’s reasonable approximation of what will ultimately be billed.
Accessorial costs	Packing, crating and handling, transportation, port handling and staging.
Above-the-line charge	A specific service estimated separately on the offer, such as escorted or premium transport.
Delivery term code	The code whose percentage estimates routine transport costs below the line.
Termination liability	Damages and costs from canceling a procurement, which the purchaser must cover.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

How Sentfore supports this

Transportation charges on an offer often cover escorted and sensitive moves. Sentfore works at the delivery end of defense programs in difficult environments, providing secure movement, protective security, facilities and life support. Requirements can be sent through the contact page.