Download - The Basics of Cost Analysis
-
8/7/2019 The Basics of Cost Analysis
1/93
The Basics of CostThe Basics of Cost
AnalysisAnalysis
Presented by Edmund K. Kowalski
Financial Services Office (FSO)
Updated January 15, 2008
-
8/7/2019 The Basics of Cost Analysis
2/93
2
-
8/7/2019 The Basics of Cost Analysis
3/93
3
Contents of this ModuleContents of this Module
Section 1 - Cost Analysis
Section 2 Defining Costs
Section 3 Source Selections
Section 4 - Cost Data Requirements
Section 5 Field Pricing Support
Section 6- Cost Allowability
-
8/7/2019 The Basics of Cost Analysis
4/93
Section 1 - Cost Analysis
Definition
-
8/7/2019 The Basics of Cost Analysis
5/93
5
Definition of Cost Analysis
The review and evaluation of the separatereview and evaluation of the separate
cost elements and profitcost elements and profitin an offerors or
contractors proposal (including cost or
pricing data or information other than cost
or pricing data), and the application of
judgement to determine how well the
proposed costs represent what the cost ofthe contract should be, assuming reasonable
economy and efficiency (FAR
15.404(c)(1)).
-
8/7/2019 The Basics of Cost Analysis
6/93
6
Price and Cost Analysis
Compared Price Analysis is the process of examining and evaluating
a proposed price without evaluating its separate costelements and proposed profit.
Determines whether the price is fair and reasonable.
Cost Analysis Evaluates the separate cost elements, profit, and facilities capitalEvaluates the separate cost elements, profit, and facilities capital
cost of money (if proposed).cost of money (if proposed).
Used to evaluate/determine any or all of the following: cost and/or price reasonableness
cost realism
most probable cost and/or price
It is the more costly method in terms of time and manpower.
-
8/7/2019 The Basics of Cost Analysis
7/93
7
Cost Analysis: When to apply it.
It is performed if certified cost or pricing data are requiredif certified cost or pricing data are required.
It may be used to evaluate information other than cost or
pricing data, e.g., non-certified cost data.
Normally, it is not needed if adequate price competition exists.In this case, it still may be used if the price is determined to beunreasonableunreasonable or you are considering a cost realismcost realismevaluationevaluation [see FAR 15.305(a)(1)].
Cost analysis is one of the approaches that should be usedwhen a cost realism evaluation is required.
When you perform a cost analysis, you should also include a
price analysis to verify price reasonablenessprice analysis to verify price reasonableness.
-
8/7/2019 The Basics of Cost Analysis
8/93
Section 2Defining Costs
Performing a Cost AnalysisExamples: Proposed Price by
Major Cost Element
-
8/7/2019 The Basics of Cost Analysis
9/93
-
8/7/2019 The Basics of Cost Analysis
10/93
10
Total Contract Cost
(FAR 31.201-1)
is the sum of the direct & indirect
costs allocable to the contract,incurred or to be incurred, less any
allocable credits, plus any
applicable cost of money (CostAccounting Standard 414).
-
8/7/2019 The Basics of Cost Analysis
11/93
11
Direct Costs (FAR 31.202)
DefinitionDefinition: Direct costs are identifiable to a finalcost objective (a particular contract).
Examples: direct material and direct labor.
All costs identified specifically with a contract are
direct costs for that contract and shall not be
charged to another contract directly, or indirectly.
No cost shall be charged to a contract as a direct
cost, if other costs incurred for the same purposein like circumstances have been charged as an
indirect cost.
-
8/7/2019 The Basics of Cost Analysis
12/93
12
Indirect Costs (FAR 31.203)
DefinitionDefinition: Indirect costs are not directly
identifiable with a final cost objective (e.g. aparticular contract), but identified with two or
more final cost objectives.
The distribution of indirect costs to various
contracts should roughly be based on the benefits
received on each contract.
No cost shall be charged to a contract as an
indirect cost if other costs incurred for the samepurpose in like circumstances have been charged
as a direct cost to that contract or any other
contract.
-
8/7/2019 The Basics of Cost Analysis
13/93
13
Alternative Direct Cost
Treatment (FAR 31.202)
For practicality, any direct cost of minor
dollar amount may be treated as an indirectcost if this treatment:
Is consistently applied across all contracts,
and
Produces substantially the same results astreating the cost as a direct cost
-
8/7/2019 The Basics of Cost Analysis
14/93
14
Proposal Major Cost Elements Direct Labor Cost
Labor Categories
Labor Rates
Labor Hours
Direct Material Cost The Actual Materials
Raw material
Purchased parts and/or
assemblies Subcontracts
Miscellaneous material
Discounts, Scrap, InventoryShrinkage, & Freight-in
Indirect Costs Material Handling
Fringe Benefits
Overhead (or burden)
G&A Expenses
OtherDirect Costs Nonrecurring costs
Subcontracts
Travel
Profit or Fee
Cost of Money
EscalationEscalation
-
8/7/2019 The Basics of Cost Analysis
15/93
15
Cost Analysis: First Step Pre-solicitation involvement by the price/cost analyst
(FSO) and engineer (ESO) is recommended
Price/cost input
Section B set-up, Price/Cost Evaluation Template, Section Lprice/cost data requirements, and Section M price/cost evaluation
factors
Engineering and price/cost input
SOW/PWS
Read the solicitation, section B, and SOW/PWS What is being purchased?
Not as easy as looking at the Section B CLINs and/or SLINs
What are the solicitation requirements for the contractor and thegovernment?
-
8/7/2019 The Basics of Cost Analysis
16/93
16
Cost Analysis: Second Step
Read the contractors proposal price/cost narrative It will discuss the contractors proposal structure,
assumptions, rationale, etc.
The length and quality will vary An important source of proposal information
Study/know the proposal set-up
Check the math: Is the arithmetic correct? The Section B unit prices multiplied by
the quantities result in the total amounts?
Do the amounts foot? Do they add-up and/or calculatecorrectly?
Do the numbers track? Can the figures be traced among thesupport schedules?
-
8/7/2019 The Basics of Cost Analysis
17/93
17
Cost Analysis: Third Step What is the basis of the proposed cost?
How did you come up with this number?
What is your rationale? What are your assumptions?
What are the calculations you used?
The contractors responses provide theanswer to the question:
Why is this price and/or cost reasonable?
-
8/7/2019 The Basics of Cost Analysis
18/93
18
Cost Estimating Methods Used
by the Contractor
Common methods:
Round Table: Experts get together and make
judgments on projected costs
Comparison: Adjustments are made to a past or current
item to derive the cost
Parametric: Projections are based on formulas, or cost
estimating relationships
Detailed: A thorough review is made, with detailed
information comprising the estimate
An offeror may use any generally accepted estimatingmethods that are equitable and consistently applied insimilar situations.
-
8/7/2019 The Basics of Cost Analysis
19/93
19
Basic Cost Element BreakdownProposed Price By Cost Element
Item/Service:RFP:
CLIN:
SLIN:
Date/Time: 4/21/2006 13:43
File Name:
Base Period
Cost Element: Hours Rate Base Amount
Material:
Direct Material 100
Scrap/Discount/Miscellaneous 1% 100 1Material Handling 2% 101 2
Total Material 103
Direct Labor:
Labor Category 1 5 5.00 25
Labor Category 2 6 2.00 12
Total 11 3.36 37
Fringe Benefits 3% 37 1
Overhead 4% 38 2
Other Direct Costs (ODC's)
Subcontracts 100
Travel 50
Total ODC's 150
Subtotal 193
G&A Expenses 5% 193 10
Total Costs 202
Profit 1% 202 2
Unit Price 204
Quantity 2
Total Price 409
-
8/7/2019 The Basics of Cost Analysis
20/93
20
Basic Cost Element BreakdownCost Element: Hours Rate Base Amount
Material:
Direct Material 100
Scrap/Discount/Miscellaneous 1% 100 1
Material Handling 2% 101 2
Total Material 103
Direct Labor:
Labor Category 1 5 5.00 25Labor Category 2 6 2.00 12
Total 11 3.36 37
Fringe Benefits 3% 37 1
Overhead 4% 38 2
Other Direct Costs (ODC's):
Subcontracts 100
Travel 150
Transportation 50Total ODC's 300
Subtotal 193
G&A Expenses 5% 193 10
Total Costs 202
Profit 1% 202 2
Unit Price 204
Quantity 2
Total Price 409
-
8/7/2019 The Basics of Cost Analysis
21/93
21
Example: Loaded Labor Rate
Cost Element BreakdownLoaded Labor Rate Calculation TemplateItem/Service:
RFP:
CLIN:
SLIN:
Date/Time: 2/28/2006 11:08
File Name:
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)
(3)*(4) (5)*(6) (5)+(6) (7)*(8) (7)+(8) (8)*(9) (8)+(9) (11)*(12) (11)+(12) (13)*(14) (13)+(14) (15)*(16)
Rates: 1.00% 2.00% 3.00% 4.00% 1% Est Est
Base Composite Adj Labor Total
CLIN/SLIN Labor Category WGT Lbr Rate L Rate Esc LR FB ST O/H ST G&A TC Profit LLR Hours PriceAutomotive Mechanic 40% 1.00 0.40
Metal Body Repairman 20% 2.00 0.30
Elec Tech/Mechanic 30% 3.00 0.20
Fuel/Elec Sys Mechanic 10% 4.00 0.10
0001AA Compos ite 100% 1.00 0.01 1 .01 0.02 1.03 0. 03 1.06 0.04 1.10 0.01 1.11 100 111.46
-
8/7/2019 The Basics of Cost Analysis
22/93
22
SAMPLECOST BREAKDOWN2001 2002 2003 Tot l
t r i lDir t t ri l
liri kop pplir p
905
23
905
23
1086
33
Tot l tl 100 100 120 320
Labor
Labor RatLabor our
254
304
354
Total Labor 100 120 140 360
Labor /
D
10
5
10
5
10
5
30
15S/T 215 235 275 725
G&A
Profit/20
15
5
20
15
5
20
15
5
60
45
15
Total Pri 255 275 315 845
-
8/7/2019 The Basics of Cost Analysis
23/93
-
8/7/2019 The Basics of Cost Analysis
24/93
24
FAR 15.404-4(c) Contracting
Officer Responsibilities: Profit Contracting officer responsibilities.
(1) When the price negotiation is not based
on cost analysis, contracting officers arenot required to analyze profit.
(2) When the price negotiation is based on
cost analysis, contracting officers in
agencies that have a structured approach
shall use it to analyze profit.
-
8/7/2019 The Basics of Cost Analysis
25/93
25
DFARS 215.404-4(b)(1) Profit
Departments and agencies must use astructured approach for developing a pre-
negotiation profit or fee objective on anynegotiated contract action when cost orpricing data is obtained, except for cost-plus-award-fee contracts or contracts withFederally Funded Research and
Development Centers. DFARS 215.404-70 DD FORM 1547
DFARS 215.404-71 Weighted Guidelines Method
-
8/7/2019 The Basics of Cost Analysis
26/93
26
FAR 15.404-4(c)(4):
Fee - Statutory Limitations For R&D work performed under a CPFF contract, the fee
shall not exceed 15% of the contracts estimated cost,excluding fee.
For architect-engineer services for public works or utilities,the contract price or the estimated cost and fee forproduction and delivery of designs, plans, drawings, andspecifications shall not exceed 6% of the estimated cost ofconstruction of the public work or utility, excluding fees.
For other CPFF contracts, the fee shall not exceed 10% ofthe contracts estimated cost, excluding fee.
-
8/7/2019 The Basics of Cost Analysis
27/93
27
Profit-Miscellaneous
FAR 15.404-4(c)(5). The contracting officer shall not
require any prospective contractor to submit breakouts or
supporting rationale for its profit or fee objective but may
consider it, if it is submitted voluntarily.
FAR 15.404-4(c)(6). If a change or modification calls
for essentially the same type and mix of work as the basic
contract and is of relatively small dollar value compared to
the total contract value, the contracting officer may use thebasic contracts profit or fee rate as the pre-negotiation
objective for that change or modification.
-
8/7/2019 The Basics of Cost Analysis
28/93
28
Profit and Fee Reporting PGI 215.404-76(1):
send completed DD Forms 1547 on actions that exceed thecost or pricing data threshold, where the contractingofficer used the weighted guidelines method, an alternatestructured approach, or the modified weighted guidelinesmethod, to designated office within 30 days after contractaward.
PGI 215.404-76(2): use Army Weighted Guidelines Software for reporting DD Form
1547 data.
PGI 215.404-76(4): Contracting offices outside the United States and its outlying areas
are exempt from reporting.
-
8/7/2019 The Basics of Cost Analysis
29/93
Section 3 Source Selection:
- Price Reasonableness
- Cost Realism- Completeness
Cost Realism Analysis
-
8/7/2019 The Basics of Cost Analysis
30/93
30
(Best Value) Source Selection:
Sect M Cost/Price EvaluationCriteria Three price/cost evaluation factors
Price reasonableness No FAR definition
Price Reasonableness is determined by the results of a
price analysis.
Cost Realism
Defined in the FAR
Completeness
No FAR definition
Also Unbalanced Pricing
-
8/7/2019 The Basics of Cost Analysis
31/93
31
Source Selection Sect M:
Cost/Price Evaluation Criteria Price Reasonableness: No FAR definition see next slide
Cost Realism: Measure of the appropriateness of a cost to its
corresponding work element. The Government will determine if the
proposed costs/price(s) are realistic for the work to be performed,reflect a clear understanding of the solicitations requirements, and are
consistent with the various elements of the Offerors technical proposal
(FAR 15.404-1(d)).
Completeness (non-FAR definition): An accurate reflection, within
the cost/price proposal, of all aspects of the technical proposal;compliance with the cost/price preparation instructions in the RFP
Section L Instructions, Conditions, and Notices to Offerors; and
compliance with any other applicable directions.
-
8/7/2019 The Basics of Cost Analysis
32/93
32
How to Define Price
Reasonableness? A cost (substitute price for cost) is reasonable if, in its
nature and amount, it does not exceed what a prudentperson would pay in the conduct of competitive business
[FAR31.201-3(a)]. Price reasonableness will be determined based on:
the results of a price/cost analysis
the results of the application of the price analysis techniquesdetailed in the FAR
a comparison to the IGCE a comparison of the competing offers
A combination of any of the above Price reasonableness will be determined based on the results of a
price/cost analysis, including a comparison to the IGCE and
comparisons of the competing offers.
-
8/7/2019 The Basics of Cost Analysis
33/93
33
Reasonableness Per ESIs
Advanced Source Selection Are the offerors cost estimating methods
reasonable and accurately prepared?
What is the level of quality and credibilityof the offerors basis of estimates?
For example, are costs based on actual data orengineering judgment?
Are the offerors cost metrics and methodslogical and appropriate for the product?
-
8/7/2019 The Basics of Cost Analysis
34/93
34
Completeness Per ESIs
Advanced Source Selection Has the offeror captured all proposed effort in the
cost estimates?
Did the offeror provide all information required bythe RFP?
Did the offeror claim some performance intechnical or management not included in the cost?
Are the technical assumptions used in the costproposal traceable to the technical volume andvice versa?
-
8/7/2019 The Basics of Cost Analysis
35/93
35
Cost Realism Analysis: General
FAR 15.404-1(d)
Review the specific elements of each
offerors cost estimate to determine: If its realistic for the work to be done
If the offeror clearly understands the
requirements If its consistent with the unique aspects
of their technical proposal
-
8/7/2019 The Basics of Cost Analysis
36/93
36
Cost Realism Analysis FAR 15.404-1(d)(2)(Cost Reimbursement Contracts)
The following apply to both competitive andsole sourceenvironments:
Government shallshallperform cost realism analyses for cost-reimbursement contracts.
Individually determine the probable costprobable costof performance of each
offeror. Probable Cost is the governments best estimate of the cost of any
contract that is likely to result from the offerors proposal.
Probable costProbable costdetermined by adjusting each offerorscosts, and fee when appropriate, to reflect any
understatements or overstatements based on the resultsof the cost realism analysis. For a CPFF contract, the fee would not be adjusted.
Probable costProbable costis used in deciding best valuebest value.
(Competitive environment only).
-
8/7/2019 The Basics of Cost Analysis
37/93
37
Cost Realism Analysis FAR 15.404-1(d)(3)
(Competitive Fixed Price Contracts) May be performed on Fixed Price Incentive contracts.
Situations where cost realism analysis may be done on
competitive fixed price contracts:
When new requirements may not be fully understood bycompeting offerors, or
There are quality concerns, or
Past experience indicates that contractors proposed costs have
resulted in quality or service shortfalls
You cannot adjust offered prices as a result of the cost
realism analysis.
Results of the analysis maymay be used in performance risk
assessments andresponsibility dete
rminations.
-
8/7/2019 The Basics of Cost Analysis
38/93
-
8/7/2019 The Basics of Cost Analysis
39/93
Section 4 - Cost Data
Requirements
Certified Cost orPricing Data
Information OtherThan Cost or
Pricing Data
-
8/7/2019 The Basics of Cost Analysis
40/93
40
Obtaining Information to Establish
Price Reasonableness [FAR 15.402(a)]
(and Cost Realism)
Order of preference for type of data requiredand/or requested:
1 No additional information2 Information other than cost or pricing data
3 (Certified) cost or pricing data
Do not obtain more info than necessary
Rely first on information available within theGovernment.
Second, on information obtained from sources otherthan the offeror.
If necessary, on information obtained from the offeror.
-
8/7/2019 The Basics of Cost Analysis
41/93
41
Introduction to Cost Data
Two types:
1 (Certified) Cost or pricing data
2 Information Other than Cost or Pricing Data
Both can be the exact same information
What is the difference between the two?
For the first, the contractorcertifiescertifies that the
data is current, accurate, and complete.
For the second, the contractordoes not certifydoes not certify
that the data is current, accurate, and complete.
-
8/7/2019 The Basics of Cost Analysis
42/93
42
(Certified) Cost orPricing Data
Defined[FAR 2.101]
All facts that, as of the date of price agreement or,
if applicable, an earlier date agreed upon between
the parties that is as close as practicable to the dateof agreement on price, prudent buyers and sellers
would reasonably expect to affect price
negotiations significantly.
Are factual, not judgmental, and are verifiable.
Includes data forming bases of judgements.
More than historic accounting data.
All facts contributing to soundness of estimates.
-
8/7/2019 The Basics of Cost Analysis
43/93
43
Certification of Cost orPricing Data
[FAR 15.406-2]
When cost or pricing data are required, the
contracting officer shall require the contractor to
execute a Certificate ofCurrentCost orPricingData.
To the best of my knowledge and belief, the cost orthe cost or
pricing data submittedpricing data submitted, either actually or by specific
identification in writing, to the Contracting Officer orthe Contracting Officers representative in support of
(the proposal) are accurate, complete, and currentare accurate, complete, and currentas
of (date negotiations completed or price agreement
reached).
-
8/7/2019 The Basics of Cost Analysis
44/93
-
8/7/2019 The Basics of Cost Analysis
45/93
45
Defective Cost or Pricing Data
(FAR 15.407-
1) If, after award, cost orpricing data are found to becost orpricing data are found to beinaccurate, incomplete, ornoninaccurate, incomplete, ornon--currentcurrent, as of the date of
final agreement on price or an earlier date agreed upon by
the parties given on the contractors/subcontractors
Certificate of Current Cost or Pricing Data, the Government is entitled to a price adjustment, including profit
or fee, of any significant amount by which the price was increased
because of the defective data (Clauses 52.215-10 & 52.215-11).
Audit Tracking
Contract Audit Follow Up (CAFU)
Resolving the issue may involve repayment of disputed
amount plus penalty and interest.
-
8/7/2019 The Basics of Cost Analysis
46/93
-
8/7/2019 The Basics of Cost Analysis
47/93
47
Subcontract Cost or Pricing Data
FAR 15.404-3 (1 of 2) The contractor shall submit (or cause to be
submitted by the subcontractor (s)) cost or pricing
data to the Government for subcontracts that arethe lowerlowerof :
(1) $11.5 million ormore$11.5 million ormore; or (2) Both more thanBoth more than
the pertinent cost orpricing data thresholdthe pertinent cost orpricing data threshold
($650K) and more than 10% of the prime($650K) and more than 10% of the primecontractors proposed pricecontractors proposed price, unless the
Government believes such submission is
unnecessary.
-
8/7/2019 The Basics of Cost Analysis
48/93
48
Subcontract Cost or Pricing Data
FAR 15.404-3 (2 of 2) The PCO may require the contractor or subcontractor to
submit to the Government subcontractor cost or pricing
data below the thresholds that the PCO considers necessary
for adequately pricing the prime contract.
The subcontractor cost or pricing data shall be current,
accurate, and complete as of the date of price agreement,
or, if applicable, an earlier date agreed upon by the parties
and specified on the contractors Certificate of CurrentCost or Pricing Data. The contractor shall update
subcontractors data, as appropriate, during negotiations.
-
8/7/2019 The Basics of Cost Analysis
49/93
49
Certified Cost or Pricing Data for
Actions Under $650,000 FAR 15.403-4(2): The head of the
contracting activity, without the power of
delegation, may authorize the PCO to obtaincost or pricing data for pricing actions
below the pertinent threshold.
Shall justify the requirement with writtendocumentation and supporting facts, that cost or
pricing data are necessary to determine price is
fair and reasonable.
-
8/7/2019 The Basics of Cost Analysis
50/93
50
Exemptions from (Certified) Cost or
Pricing Data RequirementsPer FAR 15.403-1(b), five exemptions:
1 Adequate price competition
2 Prices set by law or regulation3 Commercial items
4 Waivers (HCA approval, documentation with support)
DFARS: Canadian Commercial Corp (CCC) & Nonprofit
organizations with cost reimbursement/no fee contracts
5 Modifying commercial item contract or subcontract
FAR 15.403-2 adds the exercise of options if the price was
established at contract award or initial negotiation.
-
8/7/2019 The Basics of Cost Analysis
51/93
51
Information Other than Cost or
Pricing Data Defined[FAR 15.402]
Any type of information that is notrequired to be
certifiedIAW FAR 15.406-2 and is necessary to
determine price reasonableness or cost realism. Such information may include pricing, sales, or
cost information, and includes cost or pricing data
for which certification is determined inapplicable
after submission.
Again, certification is the difference between the
two categories of cost/price data!
-
8/7/2019 The Basics of Cost Analysis
52/93
52
Information Other than Cost or Pricing Data,
with Adequate Price Competition -
FAR 15.403-3(b) Generally, no additional info is needed,
unless the price is unreasonable.
I
f due to unusual cir
cumstancesadditional info is needed to determinereasonableness, to the maximum extentpracticable obtain it from sources other
than the offeror. You may request information to determine
the cost realism of competing offers or toevaluate competing approaches.
-
8/7/2019 The Basics of Cost Analysis
53/93
53
Situations Where Non-Certified Cost
Information May be Needed
In general, you dont expect certified data will be
required, but you need cost information toyou need cost information to
determine price reasonableness orcostrealismdetermine price reasonableness orcostrealism..
For example, you: Expect adequate price competition on a source selection
but dont expect to be able to rely on comparisons
between offers to determine price reasonableness (e.g.
offerors may use different technical approaches). Have determined the action is below the cost or pricing
data threshold ($650,000), but you need cost
information to determine price reasonableness.
-
8/7/2019 The Basics of Cost Analysis
54/93
54
Instructions forSubmission ofInformation
Other than Certified Cost orPricing Data -
FAR 15.403-5 In the solicitation, you should specify any
information other than certified cost or pricing
data that is required (Section L).
It may be submitted in the offerors own format,
unless the contracting officer decides use of a
specific format is essential andthe format is
described in the solicitation. If you didnt specify the info in the solicitation,
you can still request and obtain the needed
information after initial proposals are submitted.
-
8/7/2019 The Basics of Cost Analysis
55/93
55
Info other than Cost or Pricing Data:
Limitations on Commercial Items
- FAR 15.403-3(c)
Requests for offerors sales data is
limited to data for the same or similaritems during a relevant time period.
To the maximum extent practicable,
limit any request for info to includeonly info that is in the form regularly
maintained by the offeror.
Thi th S li it ti M t S if C t
-
8/7/2019 The Basics of Cost Analysis
56/93
56
Things the Solicitation Must Specify on Cost or
Pricing Data, orInfo Other than Cost orPricing
Data (FAR 15.403-5) - P. 1 of 2
Whether certified cost or pricing data are required
That offerors may submit a request for exception,
instead of submitting certified data
Any information other than certified cost or
pricingdata that is required
The required format for the cost or pricing data or
information other than cost or pricing data Necessary pre-award or post-award access to
offerors records, if not provided by one of the
standard clauses
-
8/7/2019 The Basics of Cost Analysis
57/93
-
8/7/2019 The Basics of Cost Analysis
58/93
Section 5
Field Pricing Support
i ld i i i
-
8/7/2019 The Basics of Cost Analysis
59/93
59
Field Pricing Services
FAR 15.404-2(a)(2)
Technical, audit, and special reports associated with the cost elements
of a proposal, including subcontracts.
Information on related pricing practices and history.
Information to help contracting officers determine commerciality and
price reasonableness:
verify sales history to source documents
identify special terms and conditions
identify customarily granted or offered discounts for the item
verify the item to an existing catalog or price list
verify historic data for item to qualify as commercial
identify general market conditions affecting determinations of
commerciality and price reasonableness
Information relative to the business, technical, production, or other
capabilities and practices of an offeror.
-
8/7/2019 The Basics of Cost Analysis
60/93
60
Field Pricing Support
FAR 15.404-2(a)(b)(c) Defense Contract Audit Agency (DCAA)
Trained in accounting, finance, and auditing
Access to contractor accounting records Auditors (onAuditors (on--site/offsite/off--site)site) & Financial Advisors (FA)
Provide proposal analysis of material, labor, indirect rates,
G&A, COM, etc.
Defense Contract Management Agency (DCMA) Pricing and/or Technical Personnel: production
specialist, engineer, etc.
Provide technical analysis and/or pricing support
-
8/7/2019 The Basics of Cost Analysis
61/93
61
Defense Contract Audit Agency
(DCAA) DCAA provides the following:
Proposal audits by request
Agreed Upon Procedures Assignment
Forward Pricing Rate Agreements (FPRAs) Direct labor and indirect rates w/DCMA ACO as lead
Incurred cost audits: on going
Qualifications/requirements: Formal proposal request
Formal contractor proposal in a structured/auditableformat
Minimum 30 to 45 day request processing time
-
8/7/2019 The Basics of Cost Analysis
62/93
62
OtherDCAA/DCMA Reviews
Accounting system reviews Pre-award/post award
FAR/DFARS 9.106/209.106
Estimating system reviews DFARS 215.407-5 Estimating systems
DCAA performs but DCMA/ACO function
Compensation System Reviews (CSR) Contractor Purchasing System Review (CPSR)
Reference FAR 44.3 and DFARS 244.3
DCMA/ACO function with DCAA assistance
-
8/7/2019 The Basics of Cost Analysis
63/93
63
Technical Analysis
[FAR 15.404-1(e)] Evaluation performed by personnel having specialized
knowledge, skills, experience, or capability in engineering,science, or management on proposed material types and
quantities, labor, processes, special tooling, facilities,reasonableness of scrap and spoilage, and other factors inthe proposal in order to determine the need for andreasonableness of the proposed resources.
At a minimum:At a minimum:
examine the types and quantities of material (kinds andexamine the types and quantities of material (kinds andquantities evaluation)quantities evaluation)
and the need for the types and quantities of laborhours and theand the need for the types and quantities of laborhours and thelabormix (skill and category)labormix (skill and category)
-
8/7/2019 The Basics of Cost Analysis
64/93
-
8/7/2019 The Basics of Cost Analysis
65/93
65
Points to ConsiderWhen
Requesting Field Pricing Support Per FAR 15.404-2(a)(1):
The contracting officer should request field pricing assistance
when the information available at the buying activity is inadequate
to determine a fair and reasonable price; tailor requests to reflectthe minimum essential supplementary information needed to
conduct a technical or cost or pricing analysis.
Considercostrisk!Considercostrisk!
Contract type: there is more risk on a FFP than CPFF or CPAFcontracts.
Proposal total dollar value
The DCAA PLA or FA can help determine the type ofThe DCAA PLA or FA can help determine the type of
field pricing support/audit services needed.field pricing support/audit services needed.
-
8/7/2019 The Basics of Cost Analysis
66/93
66
FSO is the POC forDCAA
Request DCAA audits through the FSO
Submit audit request to DCAA
Receive/file DCAA audit reports Tracking/report status ofDCAA audits
AFARS 5142.1-90-2
Contract Audit Follow Up (CAFU) Program
DoDD7640.2 AFARS 5142.1-90-2
SOP Number 25
-
8/7/2019 The Basics of Cost Analysis
67/93
67
Contract Audit Follow Up
(CAFU) Program (1 of 2) Track/provide status of reportable audits
Reportable Audits
Estimating/accounting system and internal controlreviews
Incurred costs including final indirect cost rates
Claims
Defective pricing reviews Termination settlements
CAS issues/cost impact statement reviews
-
8/7/2019 The Basics of Cost Analysis
68/93
68
Contract Audit Follow Up
(CAFU) Program (2 of 2) Recent revision: DCMA database now used
Rules/procedures?
Reviewed/updated: March 31st
September30th
Overage Audit Review Board
Discuss unresolved DCAA audits over6 months oldwith the Commander
Bottom Line: reportable audits must be resolved ina timely manner
-
8/7/2019 The Basics of Cost Analysis
69/93
Section 6- Cost Allowability
-
8/7/2019 The Basics of Cost Analysis
70/93
70
Factors Affecting Cost
Allowability (FAR31.201-2)
Reasonableness Allocability
Accounting Principles & Standards
Contract Terms
-
8/7/2019 The Basics of Cost Analysis
71/93
71
ReasonablenessReasonableness - (FAR31.201-3)
Definition: A cost is reasonable if, in itsnature and amount, it does not exceed whata prudent person would pay in the conduct
of competitive business. Considerations
Is the cost necessary?
Is the cost consistent with sound businesspractice and law?
Are the contractors purchases done on anarms-length basis?
-
8/7/2019 The Basics of Cost Analysis
72/93
-
8/7/2019 The Basics of Cost Analysis
73/93
73
The Most Common Ways Costs are
Incurred
ExpendCashExpendCash - Actual outlay of dollars (by cash,
check, etc.) in exchange for goods or services.
(e.g. Pay a vendor for raw materials)
Accrue ExpenseAccrue Expense - For accounting purposes,
because a future obligation is being incurred or an
asset is being used. (e.g. Incurring an obligation
to current workers, for their future pensions)
Use InventoryUse Inventory - For example, contractor buys
inventory in advance and charges it to contracts as
inventory is used.
-
8/7/2019 The Basics of Cost Analysis
74/93
74
Sources of Accounting
Principles & Standards
Generally Accepted AccountingPrinciples (GAAP)
Cost Accounting Standards (CAS)
FAR Part 31 Contract Cost Principlesand Procedures
-
8/7/2019 The Basics of Cost Analysis
75/93
75
Accounting: Financial & Cost
In semi-plain English:
AccountingAccountingis the process of identification, measurement,
and communication of financial information about
economic entities to interested parties. Two types: Financial accountingFinancial accountingfocuses on measuring the results of an
organizations operations for a period of time, reflected in the
financial statements.
Cost (ormanagement) accountingCost (ormanagement) accountingfocuses on cost allocation to a
product, service, or contract; management uses the information toplan, evaluate, and control within its organization and to assure
appropriate use of, and accountability for, its resources.
-
8/7/2019 The Basics of Cost Analysis
76/93
76
Generally Accepted Accounting
Principles (GAAP) Generally Accepted AccountingPrinciples orGAAPGenerally Accepted AccountingPrinciples orGAAP
refers to the common set of accounting concepts,standards, and procedures which represent a general guide.
GAAP principles are those that have substantialauthoritative support or are based on accounting practicesaccepted over time by prevalent use.
Financial Accounting Standards Board (FASB), American Instituteof CPAs (AICPA), Accounting Principles Board (APB), etc.
The end products of the accounting cycle, the financialThe end products of the accounting cycle, the financialstatements (balance sheet, income statement, etc.) arestatements (balance sheet, income statement, etc.) areprepared in accordance with GAAP.prepared in accordance with GAAP.
-
8/7/2019 The Basics of Cost Analysis
77/93
77
Cost Accounting Standards (CAS)
(1 of 2) Purpose of CAS:
Promulgate standards to achieve uniformityachieve uniformity
and consistency in cost accounting practicesand consistency in cost accounting practicesto be followed by contractors and
subcontractors for defense contracts. It is an
attempt to provide common ground between the
contractors and the federal government on costaccounting issues during proposal preparation,
negotiations, etc.
C A i S d d (CAS)
-
8/7/2019 The Basics of Cost Analysis
78/93
78
Cost Accounting Standards (CAS)
(2 of 2)
Currently, there are 19 standards.
Cost Accounting Standards Board (CASB) administersCAS: five members, includes representatives fromgovernment, industry, and academia.
CAS/CASB was originally established in August 1970under the legislative branch.
Ceased operations September30, 1980 due to lack offunds.
R
eR
e--established in November
1988 under
theestablished in November
1988 under
the executiveexecutivebranchbranch within Office of Federal Procurement Policy(OFPP) which is under Office of Management and Budget(OMB).
-
8/7/2019 The Basics of Cost Analysis
79/93
79
Exemptions From CAS (1 of 2)
Eleven exemptions, with the most common (7)below:
Sealed bidSealed bidcontracts.
Negotiated contracts/subcontracts less than $650,000less than $650,000.
Contracts & subcontracts with small businessessmall businesses.
FFP & FFP with EPA contracts/subcontracts for theacquisition ofcommercial itemscommercial items.
FFP contracts & subcontracts awarded on the basis ofawarded on the basis ofadequate price competition without the submission ofadequate price competition without the submission ofcost/price data.cost/price data.
-
8/7/2019 The Basics of Cost Analysis
80/93
80
Exemptions From CAS (2 of 2)
Contracts/subcontracts in which the price is setset
by law orregulation.by law orregulation.
Contract/subcontract executed and performedContract/subcontract executed and performedoutside the U.S., its territories, and itsoutside the U.S., its territories, and its
possessions.possessions.
-
8/7/2019 The Basics of Cost Analysis
81/93
81
CAS Coverage
Two types of CAS can be applicable, depending on thedollar value of previous awards and current acquisitions.
Full coverageFull coverage: comply with all CAS in effect on the contractaward date and with any new standards.
Modified coverageModified coverage: requires contractor to comply with fourstandards
CAS 401, Consistency in estimating, accumulating, & reporting costs.
CAS 402, Consistency in allocating costs incurred for the same
purpose. CAS 405, Accounting for unallowable costs.
CAS 406, Cost accounting period.
-
8/7/2019 The Basics of Cost Analysis
82/93
82
CAS - Disclosure Statement
Firms that have contracts/subcontracts subject to
full CAS coverage should have submitted a CASB
Disclosure Statement, providing information onhow they charge specific types of costs.
Contractordiscloses/documents company accounting
practices to the government.
The ACO and cognizant DCAA auditor areresponsible for reviewing the contractors
Disclosure Statement for adequacy, and for
compliance with FAR Part 31 and CAS.
-
8/7/2019 The Basics of Cost Analysis
83/93
83
GAAP vs. CAS
GAAP and CAS are not the same.
GAAP generally refers to financial, not cost,accounting guidance.
CAS is an attempt to extend GAAP-like guidanceto government cost accounting.
CAS Objectives:
Common cost treatment, same terminology, and theavoidance of cost manipulation (gaming).
Facilitate proposal preparation and negotiations.
-
8/7/2019 The Basics of Cost Analysis
84/93
84
CAS: FAR References
FARPart 30
CAS Administration
Policies and Procedures for applyingCAS to negotiated contracts &subcontracts
FAR Appendix B
Contains the actual CAS
FAR 31 2 C t P i i l f
-
8/7/2019 The Basics of Cost Analysis
85/93
85
FAR31.2 Cost Principles for
Commercial Organizations
Applies to all contractors.
Defines direct and indirect costs.
Addresses specific kinds of costs as towhetherallowable, unallowable, orallowable with restrictions.
Examples of unallowable costs: interestexpense, bad debts, entertainment costs,donations, attorney fees for claims.
-
8/7/2019 The Basics of Cost Analysis
86/93
86
FARPart 31: Examples of
Unallowable Costs
31.205-3 -- Bad Debts
31.205-8 -- Contributions orDonations
31.205-14 -- Entertainment Costs
31.205-20 -- Interest and Other Financial
Costs
31.205-51 -- Costs of Alcoholic Beverages
FAR P t 31 C t P i i l f
-
8/7/2019 The Basics of Cost Analysis
87/93
87
FAR Part 31 Cost Principles for
Other O
rganizations
Refer to FAR31 for separate, uniquecoverage of the cost principles for
contracts with:Educational institutions (FAR31.3)
State & local governments, & federally
recognized Indian tribal governments(FAR31.6)
Nonprofit organizations (FAR31.7)
-
8/7/2019 The Basics of Cost Analysis
88/93
88
Contract Terms & Cost Principles
Specific costs may be addressed in RFP orcontract. (e.g. Although transportation costs
are generally allowable, the contract mayrestrict them to a certain mode.)
On cost allowability, contract terms canonly be more restrictive than other factors.(e.g. Contract terms cannot make interestexpense allowable on the contract.)
-
8/7/2019 The Basics of Cost Analysis
89/93
89
Conclusion
-
8/7/2019 The Basics of Cost Analysis
90/93
90
Management/Cost Accounting
System Contractors have to manage their organizations,
products/services, and contracts
There needs to be a system in place to determinewhether the service, product, or contract
Is on schedule for completion
Is at its budgeted cost
And if not Why not?
What is being done to correct the situation?
All major companies have such a system!
-
8/7/2019 The Basics of Cost Analysis
91/93
-
8/7/2019 The Basics of Cost Analysis
92/93
92
Adequate Accounting System
Primary goal of an acceptable accounting system:
Ensure that costs are appropriately, equitably, and consistently allocated toall final cost objectives (i.e., individual contracts, jobs, or products).
Pre-award accounting system survey performed by DCAA.
System should answer affirmative to specific questions:
IAWGAAP? (IAW CAS?)
Identify & segregate direct from indirect costs, allocating these costsequitably to specific contracts on a consistent basis?
Timekeeping & labor distribution systems appropriately identify directand indirect labor charges to intermediate & final cost objectives?
Accumulates costs integrated with, and reconcilable to, the generalledger?
Determine cost of work performed at interim points (at least monthly)because of routine posting to books of account?
If required by the contract, identify costs by CLIN/SLIN or by unit?
Specifically: Are there accounting controls in place?
C t A l i S
-
8/7/2019 The Basics of Cost Analysis
93/93
Cost Analysis Summary:
Question Checklist Understand the contractors proposal. Review the proposal
The proposal/contractorshould provide answers toThe proposal/contractorshould provide answers to
these questions!these questions! What are the bases/rationale for the proposed costs?
What assumptions were made and reflected in the estimate(s)?
Support documentation provided for the proposed costs?
Are the costs realistic?
Are the costs and/or price reasonable? Are all the contractors expected costs included in his proposal?
Have all the contract requirements been priced into the proposal?