Principles of Contract Pricing

Transcription

1

2 Principles of Contract Pricing Breakout Session # F09 Janie L Maddox, Lecturer, U.S. Naval Postgraduate School Erin Phalen, Sr. Supply Chain Analyst BAE Systems Date July 29, 2014 Time 4:00pm 5:15pm

3 Contract Pricing Topics Contract Pricing Concepts Government Primary Techniques in Proposal Analysis - Price Analysis - Cost Analysis - Cost Realism Misc. Contract Pricing Info - Quantitative Techniques - Subcontract and Commercial Item Pricing 2 2

4 Direct and Indirect Costs Direct Costs- Any cost that can be identified specifically with a final cost objective Indirect Costs-Any cost that cannot directly be identified with with a single, final cost objective 3

5 Contract Pricing and The Contracting Process - Buyers Perspective Pre-Award and Solicitation Evaluation and Award Requirements Determination Market Research Acq Planning Competitive Or Sole Source RFP Evaluation/ Negotiation Selection Award BUSINESS PLANNING... MARKETING PROPOSAL PREPARATION NEGOTIATION CONTRACT ADMINISTRATION Kick off Contract/System Compliance Performance Monitoring Contract Modifications Completion / Payment / Closeout... SUBCONTRACTING... DELIVERY & COMPLIANCE... CHANGES, INVOICING... SCHEDULING MONITORING ACCEPTANCE CLAIMS & DISPUTES CLOSEOUT & COLLECTION Note: Shaded area represents contractors activities during each Phase 4

6 Pricing Restraints in Defense Contracting Use of Public Funds Promotion of Competition Generally no product or supplier loyalty - Must extend opportunities to compete to all responsible sources 5

7 Pricing Advantages in Defense Contracting Government is the only buyer High Volume purchases The debts are paid Prompt payment of bills Certified Cost or Pricing Data Most Favored Customer treatment 6

8 Why Analyze Price? Why Not Take The Contractor s Price As Is? - Forecasts, Assumptions, Projections - Competition Factors And Market Dynamics - Performance Risk And Uncertainties - Mandated By Law What Is The Objective Of Price Analysis? 7

9 KEY POINT Market conditions, not the supplier s cost, usually determine selling price. 8

10 Pricing Strategies Two Perspectives Contractor Objectives Seek: Profit Market share Long-term survival Product quality Technology leader High productivity Strategies in versus Defense Contracting Objectives Seek Fair & reasonable price Strategies in Analyzing Prices Market-based Prices What the traffic will bear Adapting to Established Prices Customary or Convenient Prices Estimating Price Cost-based Cost plus profit pricing Market-based Competitive Offers Established Catalog Price Established Market Price Cost-based Review cost data if provided Market Controls Bidder Controls 9 Price Analysis Cost Analysis

11 Fair and Reasonable Prior To Award Of Any Contract, Modification, Exercising Options (etc.) We Must Determine Price To Be Fair And Reasonable Reasonable: - What A Prudent Business Person Would Expect To Pay In The Conduct Of Competitive Business. - Taking Into Account: o o o o Fair: Market Conditions/Supply and Demand Competition And Competitive Factors Availability Of Substitutes State-of-the-art And Product s Cycle - Fair to both the seller and buyer 10

12 Truth & Negotiation- Certified Cost or Pricing Data Requirement The threshold is $700,000 under the following when no exceptions apply: - The award of any negotiated contract - The award of a subcontract if prime or higher tier was required - Modification of a any sealed bid or negotiated contract where the aggregate change exceeds $700,000 11

13 Exceptions to TINA/Cost & Pricing Data Requirements Adequate Price Competion Prices set by law or regulation Acquisition of a commercial item Where a waiver has been granted Modifications for commercial items 12

14 Govt. Relies on Adequate Price Competition Two or more responsible offerors One offer-reasonable competition expectation--- --NOT IN DOD Current or Recent Prices 13

15 Govt. s Primary Techniques to Proposal Analysis Price analysis shall be used when cost or pricing data are not required Cost analysis shall be used when cost or pricing data are required Cost realism analyses shall be performed on cost-reimbursement contracts to determine the probable cost of performance for each offeror. 14

16 Definition of Price Analysis Price Analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit. Price Analysis [FAR (b)] 15

17 Price of GPS Garmin GPSMAP 76CSx $ Magellan Magellan Triton 1500 $ Lowrance ifinder H2O $ Price Analysis Example 16

18 Price Analysis- A Comparison with other Prices Price Analysis is essentially Value Comparison Price analysis always involves some form of comparison with other prices. Price Analysis comparisons are dependent up available data. You are responsible for gathering the pricing data available and selecting the appropriate comparisons that you will use in determining if a price is fair and reasonable. From the DATA, one can DEVELOP AN ESTIMATE FOR what we call a SHOULD-PAY PRICE 17

19 Price Analysis Comparison Techniques Comparison of proposed prices with: proposed prices received in response to a solicitation; previously proposed prices and contract prices for the same or similar items; estimates made through the application of CERs o (such as dollars per sq. ft.); published price lists or established market prices; independent cost estimates; prices obtained through market research for the same or similar items. When limited/no pricing data available: Analysis of pricing information provided by the offeror. The first two comparisons listed are preferred per FAR FAR (b)(2)&(3) 18

20 Definition of Cost Analysis Cost Analysis is the review and evaluation of the separate cost elements and profit in a proposal Material Cost Analysis [FAR (c)] - Bill of Material - Purchased Parts - Subcontracts Labor - Labor Mix - Labor Hours and Rates Overhead Rates Profit/Fee 19

21 What is Cost Analysis? Applying judgment in reviewing and evaluating the proposed cost elements and profit/fee (including certified cost or pricing data or Data other than certified cost or pricing data) Used to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency

22 Cost Analysis Techniques and Procedures Verify cost or pricing data Evaluate cost elements, including: - Necessity, reasonableness - Allocable, Terms of proposed Contract - Projections of the bidders s cost trends - A technical appraisal Application of rates Evaluate the effect of the offeror s current practices on future costs. - Effects of inefficient or uneconomical past practices are not projected - Trend analysis of basic labor and materials 21 21

23 Cost Analysis example Direct Material and Subcontracts Subcontractor cost or pricing data? [FAR (a)(1)(ii)] Substantial subcontracting? (70%)[DFARS Case 2006-D057] Prime s subcontractor analysis? [FAR (c)1(ii)] Correct kinds, types, quantities in Bill of Material (BOM)? Current, complete, and accurate quotes/purchase orders? Receive OH, G&A (if TCI base), and Profit under scrutiny for excessive pass-through cost. 22

24 Definition of Cost Realism Cost Realism means that the costs in an offeror's proposal are realistic for the work to be performed; Costs reflect a clear understanding of the requirements; and are consistent with the various elements of the offeror's technical proposal. Cost Realism Analysis [FAR (d)] 23

25 What is Cost Realism? Is the process of independently reviewing and evaluating specific elements of each offeror's proposed cost estimate to determine whether the cost elements--- - are realistic for the work to be performed - reflect a clear understanding of the requirements - are consistent with the unique methods of performance and materials described in the offeror's technical proposal. 24

26 Cost Realism example Contractor A B C Proposed $2,450,000 $2,750,450 $2,735,670 Govt. MPC $2,950,670 $2,750,000 $2,850,650 Competitive Cost Reimbursement 25

27 Quantitative Analysis Techniques Price Index Numbers Cost-Volume-Profit Analysis Statistical Analysis Regression Analysis Improvement Curve Analysis Information on these techniques can be found in the Contract Pricing Reference Guides -- Vol. 2, Quantitative Techniques for Contract Pricing

28 Subcontract Pricing The CO must determine price reasonableness for subcontracting costs - Even when subcontract prices have been negotiated before negotiation of the prime contract The prime contractor or subcontractor shall: - Conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices - Include the results of these analyses in the price proposal 27

29 Commercial Item Pricing CO must establish price reasonableness in accordance with - FAR Subsections or or FAR Subpart 15.4 as applicable 28

30 Contract Pricing Summary Contract Pricing Concepts Government Primary Techniques in Proposal Analysis - Price Analysis - Cost Analysis - Cost Realism Misc. Contract Pricing Info - Quantitative Techniques - Subcontract and Commercial Item Pricing 29

31 Questions, Comments & Banter? Janie L Maddox Lecturer U.S. Naval Postgraduate School jlmaddox@nps.edu Erin Phalen Sr. Supply Chain Analyst BAE Systems erin.phalen@baesystems.com 30

32 Cost Allowability A cost can be properly charged to a cost objective (contract) when it is-- - Reasonable - Allocable - IAW Appropriate Accounting Practices - IAW Terms of the Contract - and not disallowed by FAR Part 31 Cost Principles 31

33 Composition of Indirect Costs In general, indirect cost accounts fall into two broad categories: Overhead-These are indirect costs related to support of specific operations. Examples include: - Material Overhead - Manufacturing Overhead - Engineering Overhead\ - Field Service Overhead General and Administrative (G&A) Expenses-These are costs related to the general management and administration of the business unit as a whole. Examples of G&A Expense include: - Salary of the executive staff of the corporate or home office - Salary of staff services such as legal, accounting, & public relations, - Selling and marketing expenses 32