The Basics of Cost The 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

Section 1 - Cost Analysis

Definition

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Definition of Cost Analysis

The review and evaluation of the separate cost review and evaluation of the separate cost elements and profitelements and profit in an offeror’s or contractor’s 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 of the 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 cost elements and proposed profit.– Determines whether the price is fair and reasonable.

• Cost Analysis– Evaluates the separate cost elements, profit, and facilities capital Evaluates 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 be unreasonableunreasonable or you are considering a cost realism cost realism evaluationevaluation [see FAR 15.305(a)(1)].

• Cost analysis is one of the approaches that should be used when 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.

Section 2Defining Costs

Performing a Cost AnalysisExamples: Proposed Price by

Major Cost Element

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engineeringm anufac tur ingfie ld se rviceIL S

direct labor

trave lvendortool ing

odc

raw m ate r ia lpurchased partss tandard com m erc ia li tem ssubcontrac ts

direct m aterial

direct cost

engineeringm anufac tur ingfie ld se rviceIL Sm ate r ia lhandling

burden (O /H) G&A

engineeringm anufac tur ingfie ld se rviceIL Sm ate r ia lhandlingG & A

FCCM (COM)

indirect cost

cost profit

Contract Price

Contract Price = Cost + Profit

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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 (Cost Accounting Standard 414).

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Direct Costs (FAR 31.202)

• DefinitionDefinition: Direct costs are identifiable to a final cost 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 purpose in 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. a particular 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 same purpose 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 indirect cost if this treatment:

– Is consistently applied across all contracts,

and

– Produces substantially the same results as treating 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, Inventory

Shrinkage, & Freight-in

• Indirect Costs– Material Handling– Fringe Benefits– Overhead (or burden)– G&A Expenses

• Other Direct 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 L price/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 the government?

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Cost Analysis: Second Step

• Read the contractor’s proposal price/cost narrative– It will discuss the contractor’s 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 calculate correctly?– Do the numbers “track”? Can the figures be traced among the support

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 contractor’s responses provide the answer 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 estimating methods that are equitable and consistently applied in similar situations.

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Basic Cost Element BreakdownProposed Price By Cost ElementItem/Service:RFP:CLIN:SLIN:Date/Time: 4/21/2006 13:43File Name:

Base PeriodCost Element: Hours Rate Base AmountMaterial: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 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 AmountMaterial: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 € 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 150 Transportation 50

Total 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 RateCost Element Breakdown

Loaded Labor Rate Calculation TemplateItem/Service:RFP:CLIN:SLIN:Date/Time: 2/28/2006 11:08File 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 EstBase 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 Composite 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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SAMPLE COST BREAKDOWN2001 2002 2003 Total

MaterialDirect MaterialHandlingShrinkageShop SuppliesScrap

905

23

905

23

1086

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Total Mat’l 100 100 120 320

LaborLabor RateLabor Hours

254

304

354

Total Labor 100 120 140 360

Labor O/HODC

105

105

105

3015

S/T 215 235 275 725G&AProfit/FeeCOM

2015

5

2015

5

2015

5

604515

Total Price 255 275 315 845

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Cost Analysis: Profit/Fee

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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 are not 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 a structured approach for developing a pre-negotiation profit or fee objective on any negotiated contract action when cost or pricing data is obtained, except for cost-plus-award-fee contracts or contracts with Federally 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 contract’s estimated cost, excluding fee.

• For architect-engineer services for public works or utilities, the contract price or the estimated cost and fee for production and delivery of designs, plans, drawings, and specifications shall not exceed 6% of the estimated cost of construction of the public work or utility, excluding fees.

• For other CPFF contracts, the fee shall not exceed 10% of the contract’s 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 the basic contract’s 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 the cost or pricing data threshold, where the contracting officer used the weighted guidelines method, an alternate structured approach, or the modified weighted guidelines method, to designated office within 30 days after contract award.

• 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.

Section 3 – Source Selection:

- Price Reasonableness- Cost Realism- Completeness

Cost Realism Analysis

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(Best Value) Source Selection: Sect M Cost/Price Evaluation

Criteria• 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 solicitation’s requirements, and are consistent with the various elements of the Offeror’s 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 prudent person would pay in the conduct of competitive business [FAR 31.201-3(a)].

• Price reasonableness will be determined based on:– the results of a price/cost analysis– the results of the application of the price analysis techniques detailed 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 ESI’s Advanced Source Selection

• Are the offeror’s cost estimating methods reasonable and accurately prepared?

• What is the level of quality and credibility of the offeror’s basis of estimates?– For example, are costs based on actual data or

engineering judgment?

• Are the offeror’s cost metrics and methods logical and appropriate for the product?

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Completeness Per ESI’s Advanced Source Selection

• Has the offeror captured all proposed effort in the cost estimates?

• Did the offeror provide all information required by the RFP?

• Did the offeror claim some performance in technical or management not included in the cost?

• Are the technical assumptions used in the cost proposal traceable to the technical volume and vice versa?

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Cost Realism Analysis: GeneralFAR 15.404-1(d)

• Review the specific elements of each offeror’s cost estimate to determine:– If it’s realistic for the work to be done

– If the offeror clearly understands the requirements

– If it’s 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 and sole source environments:– Government shallshall perform cost realism analyses for cost-

reimbursement contracts. – Individually determine the probable costprobable cost of performance of each

offeror. • Probable Cost is the government’s best estimate of the cost of any

contract that is likely to result from the offeror’s proposal.

– Probable costProbable cost determined by adjusting each offeror’s costs, and fee when appropriate, to reflect any understatements or overstatements based on the results of the cost realism analysis.

• For a CPFF contract, the fee would not be adjusted.

• Probable costProbable cost is 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 by competing

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 and responsibility determinations.

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Cost Realism Analysisand Cost Analysis

• There is a difference between the two, but– Confusion between the terms– Often used interchangeably

• Cost Realism Analysis applies to source selections– Used to verify that the contractor’s technical approach has

been priced in the proposal– Used mainly on cost reimbursement type contracts– Used to determine the Probable Cost of Performance (Most

Probable Cost)

• Cost Analysis methods/procedures are used to determine Cost Realism.

Section 4 - Cost Data Requirements

Certified Cost or Pricing Data

Information Other Than 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 required

and/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 the

Government.– Second, on information obtained from sources other

than 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 data2 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 contractor certifiescertifies that the

data is current, accurate, and complete. – For the second, the contractor does not certifydoes not certify

that the data is current, accurate, and complete.

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(Certified) Cost or Pricing 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 date of 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 or Pricing Data [FAR 15.406-2]

• When cost or pricing data are required, the contracting officer shall require the contractor to execute a Certificate of Current Cost or Pricing Data.

– “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 or the Contracting Officer’s representative in support of (the proposal) are accurate, complete, and currentare accurate, complete, and current as of (date negotiations completed or price agreement reached).”

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Certification Implications for the Contractor

• Emphasis on non-certified data was an Acquisition Streamlining change:– To reduce lead-times and costs to the Government & Contractors – Facilitate evaluations and reduce post award administration

• Certification is expensive for the contractor in terms of time, manpower, and cost to assemble, prepare, check, and present the certified data package.

• Administrative and legal problems for contractors with certification:– Truth In Negotiations Act (TINA)

– DCAA post award audits

– Potential defective pricing

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Defective Cost or Pricing Data (FAR 15.407-1)

• If, after award, cost or pricing data are found to be cost or pricing data are found to be inaccurate, incomplete, or non-currentinaccurate, incomplete, or non-current, as of the date of final agreement on price or an earlier date agreed upon by the parties given on the contractor’s/subcontractor’s 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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Thresholds/Awards Where Certified Cost or Pricing Data Are Required

• Per 15.403-4(a)(1): – Award of any negotiated contract over $650K

– Award of a subcontract over $650K at any tier, if contractor and each higher-tier subcontractor also have to submit certified data

– Modification worth over $650K, of any sealed bid or

negotiated contract (consider absoluteabsolute value of both cost increases and decreases)

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Subcontract Cost or Pricing DataFAR 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 are the lowerlower of : (1) $11.5 million or more$11.5 million or more; or (2) Both more than Both more than the pertinent cost or pricing data threshold the pertinent cost or pricing data threshold ($650K) and more than 10% of the prime ($650K) and more than 10% of the prime contractor’s proposed pricecontractor’s proposed price, unless the Government believes such submission is unnecessary.

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Subcontract Cost or Pricing DataFAR 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 contractor’s Certificate of Current Cost or Pricing Data. The contractor shall update subcontractor’s 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 obtain cost or pricing data for pricing actions below the pertinent threshold.– Shall justify the requirement with written

documentation 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 Requirements

Per FAR 15.403-1(b), five exemptions:

1 Adequate price competition

2 Prices set by law or regulation

3 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 not required to be certified IAW 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.

• If due to unusual circumstances additional info is needed to determine reasonableness, to the maximum extent practicable obtain it from sources other than the offeror.

• You may request information to determine the cost realism of competing offers or to evaluate competing approaches.

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Situations Where “Non-Certified Cost Information” May be Needed

• In general, you don’t expect certified data will be required, but you need cost information to you need cost information to determine price reasonableness or cost realismdetermine price reasonableness or cost realism..

• For example, you:– Expect adequate price competition on a source selection

but don’t 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 for Submission of Information Other than Certified Cost or Pricing 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 offeror’s own format, unless the contracting officer decides use of a specific format is essential and the format is described in the solicitation.

• If you didn’t 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 similar items during a relevant time period.

• To the maximum extent practicable, limit any request for info to include only info that is in the form regularly maintained by the offeror.

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Things the Solicitation Must Specify on Cost or Pricing Data, or Info Other than Cost or Pricing

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

pricing data 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

offeror’s records, if not provided by one of the standard clauses

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Things the Solicitation Must Specify on Cost or Pricing Data, or Info Other than Cost or Pricing

Data (FAR 15.403-5) - P. 2 of 2

• Standard Clauses are 52.215-20, and 52.215-21 (mods)– Called out in FAR 15.408(l) & (m)– You may use these if reasonably certain cost or

pricing data (or “Info Other than….”) needed– These cover the requirements and allow

offerors to request one of the exceptions from submitting the data

– If you want specific data without exception, don’t use the standard clause

Section 5 – Field Pricing Support

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Field Pricing ServicesFAR 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 SupportFAR 15.404-2(a)(b)(c)

• Defense Contract Audit Agency (DCAA)– Trained in accounting, finance, and auditing

– Access to contractor accounting records

– Auditors (on-site/off-site)Auditors (on-site/off-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/auditable

format– Minimum 30 to 45 day request processing time

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Other DCAA/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 in the proposal in order to determine the need for and reasonableness of the proposed resources.

• At a minimum: At a minimum: – examine the types and quantities of material (“kinds and examine the types and quantities of material (“kinds and

quantities” evaluation)quantities” evaluation)– and the need for the types and quantities of labor hours and the and the need for the types and quantities of labor hours and the

labor mix (skill and category)labor mix (skill and category)

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Field Pricing Support & theCost or Pricing Data Threshold

• DFARS 215.404-2(a):– PCO should consider field pricing support for

• Fixed price proposals exceeding $650K

• Cost type proposals exceeding $650K from offerors with significant estimating system deficiencies

• Cost type proposals exceeding $10 million from offerors without significant estimating system deficiencies

– PCO should not request field pricing support for proposals less than $650K; exceptions:

• lack of knowledge of particular contractor

• sensitive conditions/problem areas

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Points to Consider When 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 reflect the minimum essential supplementary information needed to conduct a technical or cost or pricing analysis.

• Consider cost risk!Consider cost risk! – Contract type: there is more risk on a FFP than CPFF or CPAF

contracts.– Proposal total dollar value

• The DCAA PLA or FA can help determine the type of field The DCAA PLA or FA can help determine the type of field pricing support/audit services needed.pricing support/audit services needed.

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FSO is the POC for DCAA

• Request DCAA audits through the FSO– Submit audit request to DCAA– Receive/file DCAA audit reports– Tracking/report status of DCAA audits

• AFARS 5142.1-90-2

– Contract Audit Follow Up (CAFU) Program • DoDD 7640.2• 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 control reviews

– 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

– September 30th

• Overage Audit Review Board – Discuss unresolved DCAA audits over 6 months old

with the Commander

• Bottom Line: reportable audits must be resolved in a timely manner

Section 6 - Cost Allowability

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Factors Affecting Cost Allowability (FAR 31.201-2)

• Reasonableness

• Allocability

• Accounting Principles & Standards

• Contract Terms

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ReasonablenessReasonableness - (FAR 31.201-3)

• Definition: A cost is reasonable if, in its nature and amount, it does not exceed what a prudent person would pay in the conduct of competitive business.

• Considerations– Is the cost necessary?– Is the cost consistent with sound business practice

and law?– Are the contractor’s purchases done on an

“arm’s-length basis”?

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AllocabilityAllocability - (FAR 31.201-4)

• Definition: A cost is allocable to one or more cost objectives (e.g., contracts) if it is charged based on the relative benefits received or some other equitable relationship.

• A cost is Allocable to a Government contract if:

– It is incurredincurred specifically for the contract, or– It benefits the contract and other work (e.g. it’s

an overhead cost), and can be fairly distributed based on benefits received, or

– It is necessary to overall operation of the business (e.g. certain G&A expenses).

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The Most Common Ways Costs are Incurred

• Expend CashExpend Cash - 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 Accounting Principles (GAAP)

• Cost Accounting Standards (CAS)

• FAR Part 31 Contract Cost Principles

and Procedures

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Accounting: Financial & Cost

In semi-plain English:• Accounting Accounting is the process of identification, measurement,

and communication of financial information about economic entities to interested parties. Two types: – Financial accountingFinancial accounting focuses on measuring the results of an

organization’s operations for a period of time, reflected in the financial statements.

– Cost (or management) accountingCost (or management) accounting focuses on cost allocation to a product, service, or contract; management uses the information to plan, 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 Accounting Principles or GAAPGenerally Accepted Accounting Principles or GAAP refers to the common set of accounting concepts, standards, and procedures which represent a general guide.

• GAAP principles are those that have substantial authoritative support or are based on accounting practices accepted over time by prevalent use.– Financial Accounting Standards Board (FASB), American

Institute of CPAs (AICPA), Accounting Principles Board (APB), etc.

• The end products of the accounting cycle, the financial The end products of the accounting cycle, the financial statements (balance sheet, income statement, etc.) are statements (balance sheet, income statement, etc.) are prepared in accordance with GAAP.prepared in accordance with GAAP.

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Cost Accounting Standards (CAS)(1 of 2)

• Purpose of CAS:– Promulgate standards to achieve uniformity achieve uniformity

and consistency in cost accounting practicesand consistency in cost accounting practices to 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 cost accounting issues during proposal preparation, negotiations, etc.

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Cost Accounting Standards (CAS)(2 of 2)

• Currently, there are 19 standards.• Cost Accounting Standards Board (CASB) administers

CAS: five members, includes representatives from government, industry, and academia.

• CAS/CASB was originally established in August 1970 under the legislative branch.

• Ceased operations September 30, 1980 due to lack of funds.

• Re-established in November 1988 under the Re-established in November 1988 under the executive executive branchbranch 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 bid contracts. – Negotiated contracts/subcontracts less than $650,000less than $650,000.– Contracts & subcontracts with small businessessmall businesses.– FFP & FFP with EPA contracts/subcontracts for the

acquisition of commercial itemscommercial items.– FFP contracts & subcontracts awarded on the basis of awarded on the basis of

adequate price competition without the submission of adequate price competition without the submission of cost/price data.cost/price data.

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Exemptions From CAS (2 of 2)

– Contracts/subcontracts in which the price is set set by law or regulation.by law or regulation.

– Contract/subcontract executed and performed Contract/subcontract executed and performed outside the U.S., its territories, and its outside the U.S., its territories, and its possessions.possessions.

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CAS Coverage• Two types of CAS can be applicable, depending on the

dollar value of previous awards and current acquisitions.

– Full coverageFull coverage: comply with all CAS in effect on the contract award date and with any new standards.

– Modified coverageModified coverage: requires contractor to comply with four standards

• 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 on how they charge specific types of costs.– Contractor discloses/documents company accounting

practices to the government.

• The ACO and cognizant DCAA auditor are responsible for reviewing the contractor’s 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 guidance

to government cost accounting. • CAS Objectives:

– Common cost treatment, same terminology, and the avoidance of cost manipulation (gaming).

– Facilitate proposal preparation and negotiations.

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CAS: FAR References

• FAR Part 30– CAS Administration– Policies and Procedures for applying

CAS to negotiated contracts & subcontracts

• FAR Appendix B– Contains the actual CAS

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FAR 31.2 Cost Principles for Commercial Organizations

• Applies to all contractors.

• Defines direct and indirect costs.

• Addresses specific kinds of costs as to whether allowable, unallowable, or allowable with restrictions.

• Examples of unallowable costs: interest expense, bad debts, entertainment costs, donations, attorney fees for claims.

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FAR Part 31: Examples of Unallowable Costs

• 31.205-3 -- Bad Debts

• 31.205-8 -- Contributions or Donations

• 31.205-14 -- Entertainment Costs

• 31.205-20 -- Interest and Other Financial Costs

• 31.205-51 -- Costs of Alcoholic Beverages

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FAR Part 31 Cost Principles for “Other” Organizations

• Refer to FAR 31 for separate, unique coverage of the cost principles for contracts with:

– Educational institutions (FAR 31.3)– State & local governments, & federally

recognized Indian tribal governments (FAR 31.6)

– Nonprofit organizations (FAR 31.7)

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Contract Terms & Cost Principles

• Specific costs may be addressed in RFP or contract. (e.g. Although transportation costs are generally allowable, the contract may restrict them to a certain mode.)

• On cost allowability, contract terms can only be more restrictive than other factors. (e.g. Contract terms cannot make interest expense 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 determine whether 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 Estimating System

• ACO estimating system approval means that the system has the controls to consistently produce adequate and reliable estimates.– established policies, procedures, and practices to persons

responsible for preparing and supporting estimates

• A disapproved system is a red flag indicating that the firm's estimating system does not consistently provide adequate proposals. – Normally, proposals from a firm with a disapproved system should

be subjected to closer scrutiny, particularly closer scrutiny by audit professionals.

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Adequate Accounting System• Primary goal of an acceptable accounting system:

– Ensure that costs are appropriately, equitably, and consistently allocated to all 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:

– IAW GAAP? (IAW CAS?)– Identify & segregate direct from indirect costs, allocating these costs equitably

to specific contracts on a consistent basis?– Timekeeping & labor distribution systems appropriately identify direct and

indirect labor charges to intermediate & final cost objectives?– Accumulates costs integrated with, and reconcilable to, the general ledger?– 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?

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Cost Analysis Summary: Question Checklist

• Understand the contractor’s proposal.– Review the proposal

– The proposal/contractor should provide answers to The proposal/contractor should 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 contractor’s expected costs included in his proposal?

• Have all the contract requirements been priced into the proposal?