STUDENT GUIDE CON 170 Fundamentals of Cost & Price Analysis Unit 5, Lesson 1 Cost Analysis Process, Players, and Business Systems January 2017 CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 1
STUDENT PREPARATION Required Student Preparation Read FAR subpart 15.4, DFARS subpart 215.4 Scan CPRG Vol 3, Chapters 1-4 Planned Academic Time Required: 90 minutes Student performance will be informally evaluated during class discussions, and formally evaluated on Exam 2 CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 2
Lesson Presentation We begin this lesson with a brief discussion to review the definition of cost analysis. As defined at FAR 15.404-1(c)(1), Cost analysis is the review and evaluation of any of the separate cost elements and profit or fee in an offeror s or contractor s proposal, as needed to determine a fair and reasonable price or to determine cost realism, 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. As also introduced in Unit 4 Lesson 1, price analysis generally involves evaluation of the total price; while cost analysis generally involves evaluation of all or some of the individual cost elements that comprise the total price. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 3
The FAR also says that Cost analysis shall be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data are required (FAR 15.404-1(a)(3)), and may be used to evaluate data other than certified cost or pricing data to determine cost reasonableness or cost realism when a fair and reasonable price cannot be determined through price analysis alone. (FAR 15.404-1(a)(4)). It is important to realize that cost analysis can be used to analyze proposals for ANY type of contract. Beware of a common misunderstanding that cost analysis can only be done on cost reimbursement contracts. Per TINA, cost analysis is required whenever certified cost or pricing data are required regardless of contract type. Remember, contract type is not a TINA exception. Cost analysis can be used any time the contracting officer believes it is necessary to determine a price to be fair and reasonable. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 4
However, it is equally important to realize that if the Contracting Officer needs to conduct cost analysis without obtaining certified cost or pricing data (i.e. a TINA exception applies) there are some limitations and considerations for obtaining data other than certified cost or pricing data when it is needed to establish a fair and reasonable price. Per FAR 15.402(a)(2)-(3), the Contracting Officer shall obtain data from Government or other secondary sources first (relying first on Government data, then secondary sources), and then as a last resort obtain data necessary to establish a fair and reasonable price from the offeror, but not any more data than is necessary. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 5
The slide below presents a summary of the cost analysis techniques and procedures stated in FAR 15.404-1(c)(2). Two more listed techniques, review for completeness and analysis of make-or-buy reviews, aren t addressed in this lesson. When reviewing contractors costs in proposals, audits, or requests for payment, contracting officers must also understand the definition of what constitutes an allowable cost. From Unit 1 Lesson 4, remember the five characteristics which make a cost allowable, as stated in FAR 31.201-2. - Reasonableness (31.201-3) -- Nature or need for the cost & generally recognized as necessary by a prudent person -- No presumption that a cost actually incurred is a reasonable cost - Allocability (31.201-4) -- Incurred specifically, distributed proportionally, or necessary to overall business -- Direct (FAR 31.202) or indirect (FAR 31.203) not both. - Accounting Principles -- Generally Accepted Accounting Principles (GAAP) all contractors/contracts -- Cost Accounting Standards (CAS) if applicable - Terms of the Contract -- Mutually agreed-to if contractor accepts contracting officer s solicitation clauses - Limitations set forth in subpart 31.205: Allowable, unallowable, allowable with restrictions CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 6
It will be unlikely that you can perform cost analysis on your own. Cost analysis requires an evaluation of individual cost elements and an understanding of cost allowability. In addition, cost analysis requires an understanding of direct and indirect costs, an ability to evaluate indirect rates, and an awareness of how contractors estimate future costs. All of these aspects must be integrated with an understanding of what we are buying. In short, cost analysis, perhaps to an even greater extent than price analysis, is a team sport. Based on this review, we will now explore the process of cost analysis, and the roles and responsibilities of the key players in accomplishing cost analysis. The Process and Key Players in Cost Analysis As mentioned above, contracting officers must seek support from other Government acquisition team members. When your supervisor hands you the assignment to contract for a requirement where cost analysis will be required, what will you do? The next slide and narrative describe the cost analysis process in 8 steps, as outlined in FAR 15.404-1(c)). CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 7
CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 8
The Process of Cost Analysis Step 1 Know what you are buying: Like price analysis, cost analysis begins by understanding the requirement. This requires market research, engagement with the customer, and engagement with contractors. As early as possible, figure out and make a determination about whether or not the requirement is commercial, and whether certified cost and pricing data will be required. If it is required, cost analysis shall be accomplished. If certified cost and pricing data is not required, cost analysis may still be accomplished in areas where there are gaps in historical data. Finally, early in the acquisition, the contracting officer must embrace a leadership role in identifying risk areas, determining commerciality, writing the solicitation, and establishing what data will be needed from the contractor in order to perform cost analysis, and determine the price to be fair and reasonable. Step 2 Get a good proposal: The contracting officer s goal is to receive a proposal that is complete on the first submittal. This is only possible if Step 1 concluded with a well-written requirement and solicitation. In addition, when certified cost or pricing data are required, the solicitation must require contractors to submit their proposals in accordance with the proposal adequacy checklist (DFARS 252.215-7009, Proposal Adequacy Checklist, prescribed in DFARS 215.408(5). This checklist may still be used as a guide when certified data are not required. DCAA (one of the agencies we will explore later in this lesson) will use this guide before auditing a proposal, and may reject a proposal that does not comply. This will require additional time delays for the contractor to resubmit. You should expect contractors to submit adequate proposals on the first submittal, and generally not accept an inadequate proposal from the contractor. Step 3 Map and Model the proposal: The process of mapping the proposal means reading it, studying it, and understanding how the technical elements align with the cost elements. This typically requires several rounds of meetings between the Government s contracting and technical team members. Then, the contracting officer leads efforts to model the proposal, whereby the contracting officer (or buyer) creates a spreadsheet workbook to mirror the contractor s proposed cost element calculations. This model becomes a foundational tool during negotiations to quickly calculate cost adjustments. Step 4 Cost analysis with technical analysis: This is the point in the process where you are actively leading Government team members in order to conduct a technical analysis and a cost analysis of the proposal. Yes, technical analysis is a separate Proposal Analysis Technique per FAR 15.404-1(e); however, cost analysis is almost ALWAYS conducted in conjunction with a technical analysis. Thus, in this step, the contracting officer must embrace a leadership role to ensure the following are accomplished: Technical analysis by technical specialists, including within DCMA. Analysis of direct and indirect costs by the contracting officer, DCMA, and DCAA Analysis of the amounts and mixes of material and labor Analysis of field pricing support (DCMA) or audit (DCAA) (per FAR 15.404-1(c)) CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 9
- DCMA. Field pricing support may also include technical evaluation. Should complement, not replace the technical evaluation by your local Government team members. - DCAA. Will conduct a formal audit only when above certain dollar thresholds, as described in the next section of this lesson. Below thresholds may not be a priority. When asking for an audit, the more focused or tailored the request, the better odds the audit will be timely, focused. - If contractor s proposal and data is so deficient a review or audit cannot be accomplished, contracting officer engages with contractor immediately (FAR 15.404-1(d)) - Analysis of gaps/weaknesses in proposed costs; fact-finding - Request additional information when lacking adequate data (including cost or pricing data) to determine a fair and reasonable price. - Evaluation of the contractor s commercial item determination - Evaluation of subcontracts (FAR 15.404-3) - Establishing profit/fee objective (FAR 15.404-4) Throughout this process, the contracting officer must embrace a leadership role in assigning tasks, setting deadlines, and ensuring the team s evaluations are sound. These analyses serve as the contracting officer s basis for determining fair and reasonable. Step 5 Document the analysis and establish a fair and reasonable range: At this point, you will conclude evaluations, document conclusions, and establish your negotiation objectives. The contracting officer leads the team to integrate the technical analyses with cost analysis to establish minimum and maximum negotiation objectives within a fair and reasonable range. While the contracting officer is responsible pursuant to FAR 1.6 to determine prices to be fair and reasonable, cost analysis requires analysis and contributions by all members of the acquisition team. Step 6 Obtain approval to enter negotiations: Obtain management review and approval to enter negotiations. Remember, this is not just a contracting officer s job. You might need to bring technical experts in to defend their positions. Contracting officers or the technical evaluation team leader or project/program manager should have a role in presenting this information in order to obtain approval to proceed. Step 7 - Negotiate: Focus on the most significant areas. Conduct a sensitivity analysis to ensure team focuses on the most important elements a small change in overhead rate bases can drive big changes in the overhead rate. How will you know which are most important? Watch how much the price objective changes with/without each key element. This is also not only a job for the contracting professionals. Successful negotiations often involve several members of the acquisition team. Step 8 - Award: If certified cost or pricing data is required, as of the date the price is agreed to, the contractor conducts a final review to ensure all their cost and pricing data is accurate, current and complete (This will be covered in Lesson 7). Finally, write and obtain approval for your post negotiation price memorandum and obtain signatures on the award document. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 10
Finally, as you journey through the process described, keep in mind some of the following tips: - The purpose of cost and price analysis is to enable the contracting officer and an offeror to agree on a fair and reasonable price. A fair and reasonable price does not require agreement on every element of cost, nor that the agreed price be within the contracting officer s initial negotiation position. - Consider advisory recommendations, reports of contributing specialists, status of contractor s purchasing system, and provide rationale when not adopting specialists recommendations. - Negotiation objectives should be based on the results of the contracting officer s analysis of the offeror s proposal, taking into consideration all pertinent information including field pricing assistance, audit reports and technical analysis, fact-finding results, independent Government cost estimates and price histories. However, the contracting officer is still responsible to exercise judgment to reach a fair and reasonable price, and document rationale on the most significant elements. The Key Players in Cost Analysis Contracting Officer. As we learned earlier, the purpose of cost analysis is to analyze costs so that the contracting officer can determine a fair and reasonable price. Because this determination is the responsibility of the contracting officer (FAR 15.402), the contracting officer must initiate action and lead the Government team through the cost analysis process. Thus, the contracting officer typically seeks the support of technical specialists, the Defense Contract Management Agency (DCMA), and the Defense Contract Audit Agency (DCAA), to accomplish cost analysis, and determine the objectives for a fair and reasonable price. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 11
Technical Specialists. Per FAR 1.602-2(c), and 15.404-1(e)). Because a technical analysis is generally a critical aspect of determining a price to be fair and reasonable, the contracting officer should request personnel having specialized knowledge, skills, experience, or capability in engineering, science, or management perform a technical analysis of the proposed types and quantities of materials, labor, processes, special tooling, equipment or real property, the reasonableness of scrap and spoilage, and other associated factors set forth in the proposal(s) in order to determine the need for and reasonableness of the proposed resources, assuming reasonable economy and efficiency. At a minimum, per FAR 15.404-1(e)(2), the technical analysis should examine the types and quantities of material proposed and the need for the types and quantities of labor hours and the labor mix. Any other data that may be pertinent to an assessment of the offeror s ability to accomplish the technical requirements or to the cost or price analysis of the service or product being proposed should also be included in the analysis. The contracting officer s role in orchestrating technical analysis and cost analysis requires leadership. Many other team members outside of contracting may perceive market research, technical evaluation, and cost analysis to be exclusively a a contracting function. The above FAR references recognize the contracting officer s leadership role, and the need for the contracting officer to request support from team members with the appropriate background and training to accomplish all aspects of cost analysis. The contracting officer must embrace a leadership role to focus the team members to accomplish their analyses, for the determination of fair and reasonable price is still vested with the contracting officer. DCAA. In addition to recruiting technical specialists within the buying agency, the contracting officer may also be required to request support from team members outside their agency. In conducting cost analysis, consider the range of cost analysis support functions DCAA is capable of delivering. The DCAA is known as the audit agency for the DoD. Its authority was established by the Government Accountability Office, pursuant to Generally Accepted Government Audit Standards (GAGAS), commonly known as the Yellow Book, available at http://www.gao.gov/yellowbook/overview. The DCAA auditor supports contracting officers and other Government acquisition team members by analyzing a contractor s financial and accounting records, reviewing the financial and accounting aspects of the contractor s cost control systems, and analyzing proposed and historical, actual costs. This support can be critical to contracting officers during cost analysis, as the Government teams are attempting to verify historical costs, and validate proposed costs. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 12
A common support function for DCAA is to provide Government acquisition teams with a preaward audit of a contract proposal. The objectives of these audits are outlined in DCAA s Pre- Award Checklist, in DFARS 252.215-7009. According to FAR 42.101, DCAA is normally the CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 13
responsible Government audit agency. However, there may be instances where DCAA must decline requests for service. In such cases, Government teams may be required to tailor their request, or engage with DCMA or other support activity. The DCAA contract audit dollar thresholds are stated in DFARS PGI 215.404-2(c). At the time of this text s issue, a contracting officer should submit audit requests to DCAA for contract actions over $10 million for a fixed price contract, and over $100 million for a cost reimbursement type contract. Otherwise, the contracting officer should seek field pricing support from DCMA. When DCAA provides an audit of a contractor s proposal, they provide an audit report with a range of opinions to help the contracting officer determine if the proposal is a reasonable basis for negotiation. Per the Defense Contract Audit Agency Audit Manual (known as the DCAM, the range of auditor s opinions include the following (DCAM, Ch 9, Section 9-211): - Unqualified auditor believes data submitted by contractor is an acceptable basis for negotiation - Qualified auditor believes data includes questioned, unsupported costs, which may impact basis for negotiation - Adverse data includes significant inadequacies or non-compliances, or contractor has denied access to auditor - Disclaimer no opinion expressed due to an insufficient audit Although an auditor s opinions are advisory, contracting officers should evaluate each comment and document how each comment was dispositioned. Generally, contracting officers discuss the opinions with the auditor to ensure the Government evaluation team understands the auditor s perspectives, and to assess the impact on the proposal evaluation. When significant disagreements arise, contracting officers must abide by the procedures in the DFARS PGI 215.406-1(a) and (b) to pursue resolution. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 14
DCMA. The last key player in supporting cost analysis discussed in this lesson is DCMA. Check out Attachments 1 & 2 to this lesson for a look at 2 DCMA informational brochures the first one provides some insight into DCMA capabilities in terms of cost and pricing analysis and support and the second one provides information and details regarding the DCMA Commercial Item Centers of expertise. In addition, DCMA offers a wide variety of additional contract administration and support services, as outlined in FAR 42.302. A summary of these services can support the contracting officer through the cost analysis process. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 15
In accomplishing cost analysis, a contracting officer should contact the cognizant DCMA office to obtain specific information regarding a contractor s direct and indirect rates, and to ensure compliance with Forward Pricing Rate Agreements (FPRA) if available (per FAR 42.302, and 15.407-3). In addition, contracting officers engage with DCMA to verify the contractor s compliance with Cost Accounting Standards (when applicable), and to verify the contractor is performing appropriately on a host of other contract administration functions listed in FAR 42.302. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 16
A specific area in which contracting officers rely on DCMA is in determining the acceptability of each contractor s Contractor Business Systems. The Contractor Business Systems are defined by law (P.L. 111-383, Section 893), and prescribed for DoD contracts in DFARS subpart 242.70, and 252.242-7005. DCMA is responsible for routinely monitoring these systems, determining if the systems are approved or disapproved, and engaging with a contractor to ensure deficiencies are corrected. An overview of each business system is provided below: CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 17
Accounting System. Per FAR 42.302(a)(12), the cognizant Contract Administration Office (CAO) within DCMA is responsible to determine the adequacy of a contractor s accounting system. An accounting system includes the contractor s system to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data. The DFARS 252.242-7006 defines accounting system, and describes the parameters of an acceptable accounting system. This clause, and therefore an acceptable accounting system is required when contracting with a cost reimbursement, incentive type, time & materials or labor hour contract; or a contract with progress payments. Earned Value Management System (EVMS). Per FAR subpart 34.2, and DFARS 234.203(2), an EVMS is required to track cost, schedule and performance status for systems and other major contract actions. The DFARS 252.242-7002 defines earned value management system, and describes the parameters of an acceptable earned value management system. This clause, and therefore an acceptable EVM system is required when contracting for a requirement that meets the circumstances described at DFARS 234.203(2). Estimating System. Per DFARS 252.242-7002(d), the cognizant Administrative Contracting Officer within DCMA is responsible to determine the adequacy of a contractor s estimating system. DFARS 252.242-7002 defines estimating system, and describes the parameters of an acceptable estimating system. An estimating system is the contractor s policies, procedures and practices for budgeting and planning controls, and generating estimates of costs included in proposals. As prescribed in DFARS 215.408(2), an estimating system is required when contractors must submit certified cost and pricing data. Material Management and Accounting System (MMAS). Per DFARS 242-7203(a)(2), the cognizant Administrative Contracting Officer within DCMA is responsible to determine the CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 18
adequacy of a contractor s MMAS. A material management and accounting system (MMAS) is the contractor's system for planning, controlling, and accounting for the acquisition, use, issuing, and disposition of material. The DFARS 252.242-7004 defines MMAS and describes the parameters of an acceptable system. The DFARS 242.7204 prescribes when MMAS is required, which is generally for noncommercial contracts above the simplified acquisition threshold that are either cost reimbursement or fixed price with progress payments based on actual costs. Property Management System. Per DFARS 245.105, the cognizant ACO within DCMA, in consultation with the property administrator is responsible to determine the adequacy of a contractor s property management system. The clause at DFARS 252.245-7003 defines property management system as the contractor s system or systems for managing and controlling Government property, prescribes when to include the clause in a contract, and states the parameters of an acceptable property management system. Purchasing System. Per DFARS 244.301, the cognizant Administrative Contracting Officer within DCMA is responsible to determine the adequacy of a contractor s purchasing system, including contractor s rationale for commercial item determination, and processes for avoiding use of counterfeit parts. The DFARS 252.244-7001 defines and describes parameters of an acceptable purchasing system. A purchasing system is the contractor s system for purchasing, subcontracting, selecting vendors, analyzing quoted prices, placing and administering of orders, and expediting delivery of materials. The purpose of this lesson is not to become an expert in each of these systems, but to recognize the following: - DCMA is the authority for monitoring, reviewing, and determining these systems to be acceptable. - Consequences on the contractor for having a disapproved system(s) could include withheld payments, no new contract awards, and lower performance ratings. - With respect to cost analysis, the procuring contracting officer should remember to contact DCMA before awarding contract actions to verify these systems are in an approved status. - In situations where a procuring contracting officer is unable to obtain appropriate or verifiable data from the contractor, he can request DCMA review a related business system to ensure the contractor is adequately managing data with respect to accounting, estimating, project management, and property. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 19
Exercise: Understanding Contractor Business Systems Learning Objective Describe the requirements for compliance of contractor's business systems. Introduction This exercise will require the student to explore the descriptions and requirements of the contractor business systems as described in their respective clauses and introduced in this lesson. Assessment This activity is not scored or graded. Student Instructions: Explore the respective DFARS business system clauses to complete this matching exercise. You will have approximately 20 minutes to associate the contractor business system with one element from its system criteria list. Ensure you cite your references. A. Accounting System (DFARS 252.242-7006) B. Earned Value Management System (EVMS) (DFARS 252.234-7002) C. Estimating System (DFARS 252.215-7002) D. Material Management and Accounting System (MMAS) (DFARS 252.242-7004) E. Property Management System (DFARS 252.245-7003) F. Purchasing System (DFARS 252.244-7001) Establish and maintain adequate levels of record accuracy, and include reconciliation of recorded inventory quantities to physical inventory by part number on a periodic basis. A 95 percent accuracy level is desirable. A timekeeping system that identifies employees labor by intermediate or final cost objectives. Provide procedures that ensure subcontract prices are reasonable based on a documented review and analysis provided with the prime proposal, when practicable. Management procedures that provide for generation of timely, reliable, and verifiable information for the Contract Performance Report (CPR) and the Integrated Master Schedule (IMS) required by the CPR and IMS data items of this contract. Evaluate price, quality, delivery, technical capabilities, and financial capabilities of competing vendors to ensure fair and reasonable prices The Contractor s system shall be in accordance with paragraph (f) of the contract clause at Federal Acquisition Regulation 52.245-1. CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 20
LESSON SUMMARY TLO: 5.1 Summarize the cost analysis process, including the purpose, key players, and necessity for compliant contractor business systems ELO(s): 5.101 Describe the process of cost analysis 5.102 Summarize the roles of key players in the cost analysis process, including the contracting officer, technical specialist, DCMA, and DCAA 5.103 Summarize the responsibilities of key players in the cost analysis process, including the contracting officer, technical specialist, DCMA, and DCAA 5.104 Describe the different contractor's business systems 5.105 Describe the requirements for compliance of contractor's business systems CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 21
DCMA Cost & Pricing Brochure Attachment 1 (Page 1 of 2) CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 22
DCMA Cost & Pricing Brochure Attachment 1 (Page 2 of 2) CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 23
DCMA Commercial Item Centers of Expertise Brochure Attachment 2 (Page 1 of 2) CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 24
DCMA Commercial Item Centers of Expertise Brochure Attachment 2 (Page 2 of 2) CON170, Unit 5 Lesson 1 Cost Analysis Process and Players - Page 25