Cost Analysis Agenda

1
(No Transcript)
2
Cost Analysis Agenda

• Cost Analysis Overview
• Requirement for Cost Analysis
• Cost Pricing Data
• Cost Analysis Techniques
• Cost Proposal Example

3
Cost Analysis Overview

• Price or Cost Analysis shall be evaluated in
  every source selection
• Cost Analysis is the review and evaluation of
  separate cost elements and profit FAR
  15.404-1(c)
• Cost Analysis shall be used when cost or pricing
  data is required. Cost Analysis may also be used
  to evaluate information other than cost or
  pricing data to determine cost realism

4
Cost Analysis Overview (cont.)

• Cost Realism Analysis is the process of
  independently reviewing specific cost estimates
  to determine whether
• The estimated costs are realistic
• The requirements are clearly understood
• The estimated costs are consistent with the
  technical proposal
• Cost Realism Analysis must be performed on all
  cost type contracts

5
Requirement for Cost Analysis

• Cost Analysis shall be used to evaluate cost or
  pricing data to determine cost reasonableness
• Cost Analysis may also be used to evaluate
  information other than cost or pricing data
• Cost Realism Analysis is required on all
  cost-reimbursement contracts to determine
  probable cost

6
Truth in NegotiationsKey Concepts

• Cost or Pricing data is required by the
  Truth-in-Negotiations Act (TINA)
• The purpose of TINA is to place the government
  and the contractor in an equal negotiating
  posture
• The Act only requires disclosure

7
Cost Or Pricing Data

• Cost or pricing data is
• Factual, not judgmental information
• Information that a prudent person would expect to
  have a significant effect on price
• Verifiable information
• Any facts available through the date of price
  agreement

8
Requirements of TINA

• Disclose all cost or pricing data reasonably
  available as of the date of price agreement by
  submittal or specific identification
• Merely making data available is not adequate

9
Cost or Pricing Data Not Required When

• Contracting Officer (CO) determines that prices
  are based on adequate competition
• CO determines that prices are set by law or
  regulation
• When a commercial item is being acquired
• Waiver by head of contracting activity
• Modification to a commercial contract

10
Cost Pricing Data Required If

• Contract Award / Subcontract / Modification gt
  550,000
• NOTE Unless an exception applies, modifications
  of government contracts where the sum of the
  absolute values exceed 550,000 are subject to
  TINA because competition does not exist to ensure
  a fair and reasonable price.

11
Subcontractor Pricing Considerations

• Prime Contractor is responsible for conducting
  cost
• Prime contractor must obtain and analyze
  subcontractor cost or pricing data if the
  subcontract exceeds 550,000 unless it is exempt.
• The prime contractor is responsible for ensuring
  that subcontractor cost or pricing data is
  updated as of the date of price agreement.

12
Key Dates Defective Pricing Risk
SOLICITATION
SUBMISSION
PRICE AGREEMENT
CONTRACT SIGNING
NEGOTIATION
PERFORMANCE
MEDIUM RISK
HIGH RISK
NO RISK

• CRITICAL DATE

13
Certification Requirements

• Contractor must certify that its cost or pricing
  data is accurate, complete and current as of the
  date of agreement on price
• Certificate executed as soon as practicable after
  agreement on price, i.e. handshake date
• Effective date on which data must be accurate,
  complete, and current is the handshake date
• Absence of a certificate is not a defense to
  defective pricing allegations

14
Ramifications of Defective Pricing

• Failure to comply with Truth In Negotiations
  requirements can lead to
• Price reduction including cost, fee, interest on
  any overpayments and penalties (FAR 15.407-1)
• Fraud investigation
• Prosecution
• Suspension or debarment

15
Cost Analysis Techniques

• Assess reasonableness of proposed costs including
  allowances for contingencies
• Projection of cost trends on the basis of current
  and historical cost
• Reasonableness of estimates using parametric
  models or cost relationships
• Application of negotiated or audited rates
• Evaluating the effect of the offerors current
  practices on future costs
• Comparison of costs proposed by the offeror for
  individual cost elements to actual costs,
  previous cost estimates, other cost estimates
  received, and independent technical estimates

16
Cost Analysis Techniques

• Ensure the offerors costs are in accordance with
  FAR Part 31
• Determine whether any other cost or pricing data
  is needed to make the proposal complete
• Analyze the results of any make-or-buy program
  reviews

17
Information to Support Cost Analysis

• Related contract files which may identify past
  problems and/or differences in contracting
  situations
• Relevant audits and technical reports on similar
  items
• Reviews of offerors systems
• Purchasing
• Accounting
• Estimating
• Industry cost estimating guides and standards

18
Analyzing Proposal Costs

• Total contract cost
• The sum of the direct and indirect costs
  allocable to the contract
• Direct cost
• Any cost that can be identified to one final cost
  objective (for example, direct labor)
• Indirect cost
• Any cost that benefits two or more cost objectives

19
Analyzing Proposal Costs Direct Labor

• Does the proposed labor match the statement of
  work
• Is the mix of labor correct
• Was learning curve theory properly applied to
  labor estimates
• Were appropriate labor rates applied
• Is the justification for the estimated labor
  hours adequate
• Were consistent formats used
• If subject to the Service Contract Act and Davis
  Bacon Act were proper Wage Determinations used

20
Analyzing Proposal Costs Direct Material

• Did the purchasing department obtain quotes
• Were material requirements derived from the
  statement of work
• Was a price analysis performed on all vendors
  selected for the proposal
• Were appropriate learning curves applied to
  materials
• Is the basis for the vendor selections adequately
  documented in the proposal

21
Analyzing Proposal Costs Other Direct

• Are other direct costs clearly defined
• Are there consistency problems with costs
  incurred for the same purpose
• Are the other direct costs included in the
  proposal properly substantiated
• Examples of ODCs
• Travel
• Service centers
• Relocation

22
Analyzing Proposal Costs Indirect Costs

• Does the allocation base reflect a causal or
  beneficial relationships between the activities
  in the pool and final cost objectives
• Overhead
• General and administrative expenses
• Other intermediate pools or service centers
• Does the base contain all the elements that
  should be in the base
• Is the base understatedresult is an
  inappropriate high rate
• Are pool expenses reasonable in amount and type?

23
Key Elements To Consider

• In calibrating the amount of effort required for
  cost analysis consider
• Reasonableness of prior proposals
• Proper utilization of history
• Active participation by subject matter experts
• Understanding of the work
• Existence of working business process

24
Indicators of Deficiencies

• Indicators that additional effort may be
  required
• Historical data not available or used
• Failure to analyze material costs
• Failure to perform subcontractor cost reviews
• No analytical support for significant proposed
  costs
• Excessive reliance on judgment
• Recurring defective pricing for certain costs
  elements
• Failure to integrate relevant parts from MIS
• No policies and procedures for cost estimating

25
Questions?