Wednesday, March 5, 2008

Sole Source Pricing

What if you have a sole source product or service? How do you determine whether the prices you’re being charged are reasonable, especially if you’ve been using the sole source provider for some time?

This can actually be a fairly difficult situation to verify, but here are a couple of possible ideas. None of these strategies solves the entire problem, but taken together they can help provide a reality check on the prices you’re being charged.

  • Compare the prices you’re being charged with what the sole source provider is charging other customers. You can ask the sole source provider for a list of such customers for you to contact, or if you know of customers that are also using this provider, you could contact them directly. Sometimes other government agencies may have contracts that have been competitively bid in which the provider you’re using competed, and these prices can be used to compare with what you’re paying.
  • Compare the prices you’re being charged with the prices that other providers with similar products or services charge.
  • Review the prices you’re being charged now with the prices you were charged by your sole source provider last year, the year before, or two years ago. Are the percentage price increases reasonable and consistent with changes in the Consumer Price Index? If any of the price increases over time appear unreasonable, have a discussion with the sole source provider about the reasons for the percentage increases.
  • If other portions of your agency used the same sole source provider, find out from them what prices they paid for the same products or services that you’re procuring.
  • Ask the sole source provider for permission to review and audit their prices and the basis of those prices. Depending on the complexity and nature of the pricing structure, you may want to engage the services of a consultant or your accounting or other staff to help in such a review.

If you have other ideas on how to approach this problem, let me know.

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