the basics of cost analysis

8/7/2019 The Basics of Cost Analysis

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The Basics of CostThe Basics of Cost

AnalysisAnalysis

Presented by Edmund K. Kowalski

Financial Services Office (FSO)

Updated January 15, 2008


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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


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Section 1 - Cost Analysis

Definition


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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)).


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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.


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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.


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Section 2Defining Costs

Performing a Cost AnalysisExamples: Proposed Price by

Major Cost Element


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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).


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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.


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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.


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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


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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


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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?


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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?


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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?


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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.


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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


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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


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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


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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


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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.


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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


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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.


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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.


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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.


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Section 3 Source Selection:

- Price Reasonableness

- Cost Realism- Completeness

Cost Realism Analysis


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(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


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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.


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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.


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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?


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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?


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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


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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).


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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.


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Section 4 - Cost Data

Requirements

Certified Cost orPricing Data

Information OtherThan Cost or

Pricing Data


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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.


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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.


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(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.


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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).


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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.


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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.


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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.


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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.


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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.


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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!


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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.


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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.


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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.


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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


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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


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Section 5

Field Pricing Support

i ld i i i


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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.


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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


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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


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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


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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)


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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.


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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


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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


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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


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Section 6- Cost Allowability


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Factors Affecting Cost

Allowability (FAR31.201-2)

Reasonableness Allocability

Accounting Principles & Standards

Contract Terms


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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?


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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.


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Sources of Accounting

Principles & Standards

Generally Accepted AccountingPrinciples (GAAP)

Cost Accounting Standards (CAS)

FAR Part 31 Contract Cost Principlesand Procedures


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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.


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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.


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(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)


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(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).


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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.


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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.


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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.


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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.


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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.


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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


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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.


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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


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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)


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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.)


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Conclusion


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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!


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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


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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?

the basics of cost analysis

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