STUDENT GUIDE. CON 170 Fundamentals of Cost & Price Analysis. Unit 4, Lesson 1 Differences between Cost & Price Analysis

Transcription

1 STUDENT GUIDE CON 170 Fundamentals of Cost & Price Analysis Unit 4, Lesson 1 Differences between Cost & Price Analysis April 2018

2 STUDENT PREPARATION Required Student Preparation Read FAR subpart 15.4, DFARS subpart Familiarity with CPRG Planned Academic Time Required: 2 hours Student performance will be informally evaluated during class discussions, and formally evaluated on Exam 2 CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 2

3 Lesson Presentation In this lesson, you will learn what steps are taken to properly analyze a contractor s proposal. You will learn to differentiate the steps and methods used to conduct price analysis and those used to conduct cost analysis. You will also learn when each method of analysis is appropriate. You will be introduced to the Cost Price Reference Guides and you will gain a better understanding of what is meant by the phrase fair and reasonable. Finally, you will learn the FAR definition of the phrase cost realism and the application of the phrase price realism and their respective roles in determining that a price is fair and reasonable. A critical responsibility of a contracting officer is to determine proposed prices to be fair and reasonable in all contract actions from competitive to sole-source, from commercial and noncommercial, including contract modifications, terminations, settlements of claims and requests for equitable adjustment. This lesson presents fundamental pricing techniques and tools that can be used to determine a price to be fair and reasonable in any contracting situation. THE CONTRACT PRICING REFERENCE GUIDES One of the best tools for learning about price and cost analysis is the Contract Pricing Reference Guides, or the CPRG. These guides were developed by the Air Force Institute of Technology and the Federal Acquisition Institute to provide Government buying teams relevant guidance on pricing and negotiation issues. The CPRG consists of five volumes: 1. Price Analysis 2. Quantitative Techniques for Contract Pricing 3. Cost Analysis 4. Advanced Issues in Contract Pricing 5. Negotiation Techniques. The CPRG provides guidance related to processes required by the FAR. The CPRG is not directive or regulatory, but serves as a useful reference for how to conduct both price and cost analysis. The guides will be referred to frequently in this course and can be found at CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 3

4 Given the large amount of information in the five-volumes of the CPRG, the areas we will explore in this course are listed on the following slide. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 4

5 The CPRG, Volume 1, Chapter 0 (yes, zero ), paragraphs I.2 and I.3 provide valuable insight in to the Pricing Policy as stated in FAR This policy drives contracting officers to purchase all goods and services from responsible sources at fair and reasonable prices, to price actions separately and independently, and to exclude contingencies in proposed offers. The goal of this pricing policy is to acquire goods and services at fair and reasonable prices. First, let s examine what is meant by the terms price, and fair and reasonable. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 5

6 Discussion Questions: 1. Define price, based on FAR What is a fair and reasonable price? (Hint: Search FAR, as well as other sources, including a dictionary, and the CPRG, Volume 1, Chapter 0 (zero), paragraph I.2.) The FAR tells us competition normally yields prices we can determine to be fair and reasonable (FAR (a)(1), (b), and (b)(2)(i)). However, contracting officers are still required to actively determine prices to be fair and reasonable in EVERY contract action. Why? Economic conditions (including inflation and interest rates) and market conditions (supply, demand, technology, alternatives, competition) change over time. What we buy and how we buy it may not be same over time. The Government publishes what we paid for our contracts--contractors understand the Government typically sets budgets based on prices paid in the past. The FAR requires us to do so! CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 6

7 For these reasons, whether in a competitive or non-competitive environment, contracting officers execute a deliberate process to determine proposed prices to be fair and reasonable. While the FAR does not define what constitutes a fair and reasonable price, it does establish specific steps we need to take in order to determine prices proposed as fair and reasonable. This process is called proposal analysis. As indicated in the following slide, there are several proposal analysis techniques. The techniques described in FAR may be used singly, or in combination with the others, to ensure that the final price is fair and reasonable. Each of these techniques is accomplished by multi-functional teams, including specialists with expertise in product performance, product support, engineering, financial management, and contracting. However, through the acquisition process, the contracting officer holds a leadership role in completing acquisition documents, evaluations, and acquisition timelines. This places the contracting officer in a role of leading team members outside the contracting chain of command, which can present a leadership challenge. Thus, contracting officers must routinely engage with team members, initiate productive communication, and lead from the front with planning and execution toward a successful acquisition. The primary focus of this lesson focuses on price analysis, cost analysis, and cost realism analysis so we ll begin by learning the definitions of these techniques and when to use each. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 7

8 Price Analysis. First of all, price analysis is defined and explained in the following slides. With an understanding of the price analysis definition, note that FAR (b)(2) lists several price analysis techniques. Each technique is useful in determining prices to be fair and reasonable; yet, as indicated in the slide below, FAR (b)(3) also states the two preferred techniques are the first two listed at (b)(2). CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 8

9 As you know, acquisition teams are encouraged to pursue competition to the maximum extent practicable in each acquisition, because, with respect to pricing, competition normally helps to establish price reasonableness. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 9

10 Cost Analysis. Next, let s examine the fundamental concepts of cost analysis. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 10

11 With a fundamental understanding of price and cost analysis, we must also understand they are used in different contracting situations, but sometimes they will even be used together. The following slides, as well as Attachment 1 (refresher information from Unit 1 Lesson 2), provide key information for determining when each type of analysis is required. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 11

12 Cost Realism Analysis. Finally, in addition to price and cost analysis, contracting officers are often required to conduct Cost Realism Analysis. This technique is described below. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 12

13 Unlike price and cost analysis, the decision to conduct cost realism analysis is not based upon TINA s requirements for obtaining cost or pricing data. Instead, the decision to use cost realism analysis is based upon the contract type being considered. The following table is a useful reference for the deciding when to use price analysis, cost analysis, and cost realism analysis. IF The Contracting Officer Determines: Certified cost/pricing data are not required by FAR , and fair and reasonable price can be established based upon data from Government sources, and sources other than the offeror (no additional data is required from the offeror). Certified cost/pricing data are required per FAR THEN The Analysis Technique is: Price analysis shall be used (FAR (a)(2)). For information, FAR states that in these cases, price analysis is normally sufficient (FAR (a)(1)). Cost analysis shall be used, and in addition price analysis should be used (FAR (a)(3)). Certified cost/pricing data are not required per FAR , but data other than certified cost and pricing data are necessary to establish a fair and reasonable price (FAR (a)(2) and (a)(1). Certified cost/pricing data are required in a case when the CO requested and obtained approval from the HCA (per FAR (a)(2)). Price analysis shall be used (FAR (a)(2). Either price or cost analysis may be used to analyze the additional data (FAR (a)(4)). Cost analysis shall be used, and price analysis should be used when certified cost/pricing data is required (FAR (a)(3)). All in all, the process for determining which technique to use begins during market research, where we study historical pricing data and other market information to estimate and evaluate future prices. It is through Market Research, and an assessment of historical data that contracting officers determine if any exceptions to TINA are present, and assess what the contract type will be, all of which will play a role in the determination of which type of analysis is appropriate and/or required. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 13

14 ADDITIONAL PROPOSAL ANALYSIS TECHNIQUES In addition to price, cost, and cost realism analysis, the Government s evaluation of proposals commonly also includes technical analysis, unit price analysis, and an assessment of unbalanced pricing. While the contracting officer is responsible for determining the proposed prices to be fair and reasonable, the contracting officer typically requests other Government team members to execute the following types of analysis. Technical Analysis. Technical analysis is an important part of proposal analysis whether we are conducting price or cost analysis. Individuals with the proper expertise conduct technical analysis in order to determine if the proposed approach will sufficiently deliver the contracted products or services. For example, when evaluating a construction project, who should review the bill of materials and proposed list of equipment required? Although a contracting officer may have construction experience, the Government team members responsible for the design and project management would likely have a more robust understanding of the materials and processes required to complete the project. For an IT Support Services Contract, which Government team members should review the types and labor hours proposed? The best choice would be a member of the project team with a robust understanding the work required, as well as the level of skills, education, and experience needed by contracted personnel to successfully complete the work. Typically, the authors of the work statement are well-suited to conduct the technical analysis of such elements. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 14

15 Unit Price Analysis. DoD Contracting Officers will face scenarios where it may be difficult to determine the relationship between the proposed unit price of an item or service, and the actual cost, or intrinsic value, to deliver. For example, a subcontractor is manufacturing an item under a prime contract, the Government must pay the subcontractor s costs to produce the item, plus the indirect costs and profit added by the prime. When a contracting officer evaluates the price of the item, there must be a clear price breakdown which reveals the costs incurred by the subcontracts, with the indirect costs and profit identified separately. In addition, the contracting officer must determine how much value is added by the prime. This pricing technique is known as unit price analysis and enable the contracting officer to discern the intrinsic value of the item being procured. The FAR provides the following regarding unit price analysis: The unit price analysis technique ensures Government buyers understand how much of the total price of an item is based upon the intrinsic value of the item or service, and how much of the price is related to other factors such as prime contractor indirect overhead and profit, unique shipping requirements, drastic fluctuation in material prices, and other market variables. A couple examples follow to help explain the importance and applicability of unit price analysis. Example 1. (The following example highlights how unit price analysis keeps Government buyers aware of how unique factors in one acquisition can influence future unit prices. Read DFARS (2)(i) through (iv), and DFARS , and discuss the answers to the questions that follow with your team.) CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 15

16 About 9 months ago, your teammate executed a purchase for a noncommercial, sole-source spare part for $1,500 each, at a quantity of 100. In the past six months, due to an operational demand surge for depot maintenance, he executed 2 purchases for the same part. These last 2 purchases were executed at a unit cost of 1,500 per part for 100 parts, but included an additional $30,000 for expedited shipping and handling by air instead of rail. He executed the contract via a single CLIN worth $180,000, with descriptive data as 100 parts plus shipping and handling, for a total CLIN price of $180,000. Regretfully, he did not document the surged operational demand or the expedited shipping costs. a. Today, you are researching a routine purchase for 100 of these parts. What problems will you potentially face? b. Describe what additional steps should have been taken in the last 2 purchases. Remember, the prices we pay now become the basis for the prices we will pay in the future. Therefore, unless the FAR states an exception, our contract pricing documentation and CLIN structure must reflect an analysis of unit prices. Example 2. (This example highlights a common issue known as excessive pass-through charges, and reveals how understanding of unit price analysis better equips contracting officers to handle these charges. Before reading the scenario, review FAR (Limitation on Passthrough Charges Identification of Subcontract Effort) and -23 (Limitation on Pass-through Charges), then answer the questions below with your team.) Early in a jet engine s life cycle, a prime contractor awarded a subcontract for jet engine fan blades. The subcontractor s cost to manufacture a set of fan blades was $800,000. In addition, at this phase of the engine s life-cycle, the prime contractor was heavily involved in the development, manufacturing, and testing efforts. The prime contractor applied its material overhead rate, G&A, and profit to the subcontract. After fact-finding and negotiation, the Government paid $2,400,000 on a firm-fixed price contract, with a single Contract Line Item (CLIN) for the set of blades. A year later, the blade design was stable, with no changes planned in the foreseeable future. The prime contractor was no longer directly engaged in managing the fan blade production or delivery. In fact, the subcontractor offered to ship the blades directly to the Government depot maintenance facility. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 16

17 In a pre-proposal conference regarding the upcoming purchase of fan blade spares, the prime contractor intends to submit an FFP CLIN price of $1,000,000. a. What price did we determine to be fair and reasonable a year ago? b. What is the intrinsic value of the set of fan blades? c. Would you include the provision at FAR and clause at FAR in this acquisition? In addition to the example above, analysis of unit prices can also help the Government detect unit price distortion due to distribution of transportation and delivery costs, other non-recurring costs, and additional distortion due to Sub-CLIN breakouts which account for different funding sources CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 17

18 Unbalanced Pricing. Another common proposal analysis tool is an assessment of unbalanced pricing, as described in the following slide. Per FAR (g) and the CPRG Volume 1, Chapter 8, paragraph 8.1.2, contracting officers may reject a bid if the lack of balance poses an unacceptable risk to the Government. Such bids are generally described as materially unbalanced. A bid is materially unbalanced IF it is mathematically unbalanced AND one of the following is true: There is reasonable doubt that the lowest evaluated bid will actually result in the lowest cost to the Government. The offer is so grossly unbalanced that its acceptance would be tantamount to allowing an advanced payment. A bid is mathematically unbalanced IF it is based on prices that are significantly less than cost for some line items AND significantly more than cost for other line items. In review, we have learned that price analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit. Cost analysis is the review and evaluation of any separate cost elements and profit or fee. These techniques can be used separately, or together with the other proposal analysis techniques to enable the contracting officer to determine the price to be reasonable. To determine when to use each technique, we refer to both FAR and (a). The requirement to accomplish price analysis or cost analysis is based on the contracting officer s decision to require certified cost and pricing data, or data other than certified cost and pricing data. Such requirements are explained in FAR and (a), and related DFARS and DFARS PGI sections. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 18

19 In addition, we learned that cost realism analysis is a technique used to evaluate costreimbursement contracts, or other flexibly priced contracts, in order to determine the most probable cost, and minimize the likelihood that a contractor will significantly underbid. Unlike cost and price analysis, use of this technique is not tied to TINA s requirements for cost and pricing data. A helpful reference for reviewing these concepts is included at Attachment 2. The table includes definitions and summary information regarding when to use price analysis, cost analysis, and cost realism analysis. To conclude the instruction in this lesson, consider this brief contrast between proposal analysis with a similar term, proposal evaluation. While both are in FAR Part 15, and both deal with the overall goal to award to an offeror with a fair and reasonable price, these terms are not synonymous. Proposal evaluation is a term specifically related to the source selection process, when an offer is evaluated against the solicitation s evaluation criteria, and the Government s objective is to determine if the offeror could perform successfully. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 19

20 CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 20

21 Exercise #1: Appropriate Analysis Technique(s) Learning Objective Given contracting scenarios, identify the appropriate method of analysis, either price analysis, cost analysis, or cost realism analysis. Introduction This lesson explored the different types of analysis to be used when analyzing offeror(s) proposals. Complete the following questions based on the classroom lecture, suggested resources, and slides. Assessment This activity is not scored or graded. Student Instructions: Given contracting scenarios, identify the appropriate method(s) of analysis. As a team, answer each question below, and list the FAR, PGI, or CPRG references that support your answer. 1. You are analyzing a firm-fixed price commercial services contract that was solicited competitively. Seven proposals were received. You perform what type of proposal analysis? 2. You are analyzing a cost reimbursement contract for R&D services. It is being solicited competitively and 3 offerors responded to the RFP. You perform what type of proposal analysis? 3. You are analyzing a sole-source modification to a firm-fixed-price contract that was competitively awarded, for a non-commercial service. The contractor is a small, disadvantaged business. The net value of the modification is a reduction of $750,000 worth of work, and adds $500,000. What type of proposal analysis would you perform? CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 21

22 4. You are analyzing a $500,000 proposal from an 8(a) contractor for a non-commercial service that is awarded on a sole-source basis pursuant to the requirements at FAR 19. What type of proposal analysis would you perform? What if the value was over $750,000? 5. You are analyzing a competitive firm fixed price contract for $950,000, for a noncommercial item. Prices were not set by law or regulation, and there was no basis for a TINA waiver. Though your Market Research indicated at least three contractors would submit proposals, only 1 offer was received. Per DOD guidance you re-advertised and still only one offer was received. What type of proposal analysis do you perform? CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 22

23 Exercise #2: Appropriate Analysis Technique(s) - 2 Learning Objective Given contracting scenarios, identify the appropriate method of analysis, either price analysis, cost analysis, or cost realism analysis. Introduction This lesson explored the different types of analysis to be used when analyzing offeror(s) proposals. Complete the following questions based on the classroom lecture, suggested resources, and slides. Assessment This activity is not scored or graded. Student Instructions: Given contracting scenarios, identify the appropriate method(s) of analysis. As a team, answer each question below, and list the FAR, PGI, or CPRG references that support your answer. Consider a Multiple Award Task Order contract (MATOC) for Information Technology (IT) services. Out of the 9 companies that competed for this contract, 3 companies received the actual contract award. The original award contains negotiated labor rates for the associated labor hour categories that relate to the work we need them to do under this contract. You just sent out a task order RFP for IT support in Anchorage, Alaska. Part of the criteria for responding to a task order RFP requires the contractor to submit their Basis of Estimate (BOE) to help the Technical Evaluation Team understand if their proposal reflects a clear understanding of the work required as well as whether their approach to the requirement is feasible. The evaluation criteria is LPTA. The anticipated contract type for the order is FFP. Assume the dollar amount is $500,000, and the service is commercial. Neither Company 1 nor Company 3 submits a proposal. You received letters from both companies explaining their reasoning for not responding to the TORFP. You review the technical report prepared that analyzed Company 2 s proposal and discover that there are significant other direct costs (including travel) associated with this work that are included in the company s fixed price proposal. These costs are unique to this task order and no data exists within the government to validate the need and reasonableness of these costs. 1. Would you perform price analysis, cost analysis, and/or cost realism analysis if faced with this situation? Remember, price analysis examines proposed prices without analyzing each of the individual elements of cost will that be adequate in this case? CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 23

24 2. Where in the CPRG might we look for guidance on analyzing certain types of costs, specifically the travel costs proposed as Other Direct Costs, and what questions might you ask regarding those costs? 3. Which specific price or cost analysis techniques would you perform to determine the price fair and reasonable? 4. How would the analysis process change if Company 3 had also submitted a proposal? What steps would you take in that case? CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 24

25 Exercise #3: Knowledge Review (Homework) Learning Objective Describe the concept of fair and reasonable as it pertains to proposal analysis. Introduction This lesson explored the different types of analysis to be used when analyzing offeror(s) proposals in order to make a determination of fair and reasonable. Complete the following questions based on the classroom lecture, suggested resources, and slides. Assessment This activity is not scored or graded. Student Instructions: Answer each question below, and, if appropriate, list the FAR, DFARS or CPRG references that support your answer. 1. Per FAR (a)(1), who is responsible for evaluating the reasonableness of proposed prices? How do FAR , , relate to (a)(1)? 2. Per FAR (a), what process does FAR state we must follow to determine fair and reasonable? 3. Can the contracting officer accomplish all of the proposal analysis techniques on his/her own? 4. Who generally performs technical analysis? CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 25

26 5. What challenges do you believe a contracting officer will face in accomplishing proposal analysis? 6. Can you think of a scenario where the contracting officer would require data other than certified cost and pricing data, but then would not conduct a cost analysis on the additional data? 7. According to FAR (b) and (c), the contracting officer is required to price each contract separately and independently and not do what? CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 26

27 8. In the following two tables, match the term/phrase with the correct definition, and include the reference for your answer. You may use an answer more than once. Answer Ref Term/Phrase Definition Price Analysis a. The determination that competition was present based on the EXPECTATON of competition by all offerors Cost Analysis Cost Realism Analysis Fair and Reasonable Adequate Price Competition per FAR Adequate Price Competition per DOD CPRG b. Reference guides prepared by AFIT and FAI that provide guidance to pricing to pricing and negotiation personnel. c. In addition to the FAR definition, the determination that competition was present based on specific solicitation timelines, additional efforts to receive more than one proposal, and in the event of only one response, conducting negotiations based upon price analysis or cost analysis. d. The process of evaluating a price/cost proposal by analyzing the appropriateness of each elements of cost and requested supporting data including certified cost/pricing data e. The process that the evaluates costs in an offeror s proposal to determine that they are realistic for the work to be performed; reflect a clear understanding of the requirements; and are consistent with the various elements of the offeror s technical proposal f. The price paid by prudent buyers that possess and understanding of the associated marketplace. g. The process of comparing proposed prices without detailed evaluation of their individual elements of costs or the appropriateness and need of each element of cost CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 27

28 Answer Ref Term/Phrase Definition Price h. The intrinsic value of an item or service and shall be in Realism proportion to an item s base cost (e.g., manufacturing or acquisition costs). Any method of distributing costs to line items that distorts the unit prices shall not be used. For example, distributing costs equally among line items is not acceptable except when there is little or no variation in base cost. Unit Prices Should Shall May Must Unbalanced Pricing Technical Analysis i. Accomplished by personnel with specialized knowledge to analyze the need and reasonableness of proposed elements, including: -Types & quantities of material -Types, quantities, mix of labor hours -Pertinent technical aspects -Processes, special tooling, equipment -Real property, scrap and/or spoilage j. The imperative k. May increase performance risk and could result in payment of unreasonably high prices. Exists when, despite an acceptable total evaluated price, the price of one or more contract line items is significantly over or understated as indicated by the application of cost or price analysis techniques. The greatest risks associated with this occur when -- (i) Startup work, mobilization, first articles, or first article testing are separate line items; (ii) Base quantities and option quantities are separate line items; or (iii) The evaluated price is the aggregate of estimated quantities to be ordered under separate line items of an indefinite-delivery contract. l. Indicates an expected course of action or policy that is to be followed unless inappropriate for a particular circumstance m. Denotes the permissive. However, the words no person may... mean that no person is required, authorized, or permitted to do the act described. n. A term that is often used when contracting professionals speak of making the determination that a price or cost is fair and reasonable. This terminology is not addressed or defined in the FAR or the DFARS, and should not be considered the same as cost realism. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 28

29 LESSON SUMMARY TLO: 4.1 Accurately differentiate between price, cost analysis, and cost realism analysis. ELOs: Describe the proposal analysis process Describe the concept of fair and reasonable as it pertains to proposal analysis Define price analysis, cost analysis, price realism and cost realism Recognize the contents and purpose of the Contract Pricing Reference Guides Given contracting scenarios, identify appropriate method of analysis, either price analysis, cost analysis, or cost realism analysis CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 29

30 Unit 4 Lesson 1 - Attachment 1 p1 of 2 CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 30

31 Unit 4 Lesson 1 - Attachment 1 Pg 2 of 2 CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 31

32 Unit 4 Lesson 1 - Attachment 2 Summary Reference Table for Price Analysis, Cost Analysis, and Cost Realism Analysis Proposal Analysis Technique Price Analysis Cost Analysis Cost Realism Analysis FAR Ref Definition When to use FAR (b) FAR (c) FAR (d) Price Analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit. Cost Analysis is the review and evaluation of the separate cost elements and profit in an offeror s or contractor s proposal (including certified cost or pricing data or other than certified cost or pricing data), and the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency. Cost Realism Analysis is the process of independently reviewing and evaluating specific elements of each offeror s proposed cost estimate to determine whether the estimated proposed cost elements are: - Realistic for the work to be performed; - Reflect a clear understanding of the requirements; and, - Are consistent with the various elements of the offeror s technical proposal. Probable Cost: The probable cost should reflect the Government s best estimate of the cost of any contract that is most likely to result from the offeror s proposal. On cost reimbursement contracts the probable cost is determined by adjusting each offeror s proposed cost to reflect any additions or reductions in cost elements to realistic levels based on the results of the cost realism analysis. On fixed-price contracts the results of cost realism analysis may be used in performance risk assessments and responsibility determinations. However, the proposals shall be evaluated using the criteria in the solicitation, and the offered prices shall not be adjusted because of the analysis. Price Analysis is used when certified cost or pricing data are not required. FAR (a)(2) Cost Analysis shall be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data are required. FAR ((a)(3)The Government may use various cost analysis techniques and procedures to ensure a fair and reasonable price. Cost Analysis is never performed on sealed bids. Cost Realism Analysis shall be performed on cost reimbursement contracts to determine the probable cost of performance for each offeror. Cost Realism Analysis may be used on competitive fixed-price incentive contracts or, in exceptional cases, on other competitive fixedprice type contracts when new requirements may not be fully understood by competing offerors, there are quality concerns, or past experience indicates that contractors proposed costs have resulted in quality or service shortfalls. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 32

33 Unit 4 Lesson 1 - Attachment 2 Pg 2 of 2 Summary Reference Table for Price Analysis, Cost Analysis, and Cost Realism Analysis (cont d) Proposal Analysis Technique FAR Ref Definition When to use Price Realism (sometimes used in the same context cost realism, but is not the same for a DoD contracting officer) N/A Price Realism a term that is often used when contracting professionals speak of making the determination that a price or cost is fair and reasonable. This terminology is not addressed or defined in the FAR or the DFARS, but is defined in the Environmental Protection Agency FAR supplement as follows: price realism relates to an offeror s demonstrating that the proposed cost or price provides an adequate reflection of the offeror s understanding of the requirements of this solicitation, i.e. that the cost or price is not unrealistically low or unreasonably high. While there is no regulatory or procedural instruction concerning this concept, it is always prudent to ensure that the price we are about to obligate the government to pay is a realistic price given our market research, the work required, the economic, conditions, the adequacy of the contractor s proposal and other related factors. For DoD contracting officers, do not assume this is the same as Cost Realism or Cost Realism Analysis. CON 170, Unit 4, Lesson 1 - Differences Between Cost and Price Analysis - P age 33