The Basics of Cost Analysis

Presented by Edmund K. Kowalski

Financial Services ffice !FS " #$dated %anuary &'( )**+

Contents of this Module

- Section 1 - Cost Analysis - Section 2 Defining Costs - Section 3 Source Selections - Section 4 - Cost Data Requirements - Section 5 Field Pricing Support - Section 6 - Cost Allowability
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Section 1 . Cost Analysis

/efinition

Definition of Cost Analysis

The re iew an! e aluation of t"e se#arate cost elements an! #rofit in an offeror0s or contractor0s $ro$osal !includin1 cost or $ricin1 data or information other than cost or $ricin1 data"( and the a$$lication of 2ud1ement to determine how well the $ro$osed costs re$resent what the cost of the contract should be( assumin1 reasonable economy and efficiency !FA3 &'.4*4!c" !&"". '

Price and Cost Analysis Com$ared

- Price Analysis is the $rocess of e6aminin1 and e aluating a #ro#ose! #rice wit"out e aluating its se#arate cost elements and $ro$osed $rofit.
7 /etermines whether the $rice is fair and reasonable.

- Cost Analysis
7 $ aluates t"e se#arate cost elements% #rofit% an! facilities ca#ital cost of money &if #ro#ose!'( 7 #sed to evaluate8determine any or all of the followin19
- cost and8or $rice reasonableness - cost realism - most $robable cost and8or $rice

7 :t is the more costly method in terms of time and man$ower.

5

Cost Analysis: When to apply it.

- :t is $erformed if certified cost or pricing data are required. - :t may be used to evaluate information other than cost or $ricin1 data( e.1.( non.certified cost data. - <ormally( it is not needed if ade=uate $rice com$etition e6ists. :n this case( it still may be used if the $rice is determined to be unreasona le or you are considerin1 a cost realis! e"aluation >see FA3 &'.,*'!a"!&"?. - Cost analysis is one of the a$$roaches that should be used when a cost realism evaluation is re=uired. - @hen you $erform a cost analysis( you should also include a price analysis to "erify price reasona leness.
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Section 2 /efinin1 Costs Performin1 a Cost Analysis E6am$les9 Pro$osed Price by Aa2or Cost Element

Contract Price # Cost $ Profit

" o n tr a c t $ r ic e
cost
d ir e c t c o s t d ir e c t la b o r
e n g in e e rin g m a n u fa c tu rin g fie ld s e rv ic e IL S

p r o f it
in d ir e c t c o s t

odc
tra v e l vendor to o lin g

d ir e c t m a te r ia l
ra w m a te ria l p u rc h a s e d p a rts s ta n d a rd c o m m e rc ia l ite m s s u b c o n tra c ts

b u r d e n (O /H )
e n g in e e rin g m a n u fa c tu rin g fie ld s e rv ic e IL S m a te ria l h a n d lin g

G&

! " " # (" O # )

e n g in e e rin g m a n u fa c tu rin g fie ld s e rv ic e IL S m a te ria l h a n d lin g G& B

%otal Contract Cost &FA' ().*+),)- Cis

the sum of the direct D indirect costs allocable to the contract( incurred or to be incurred( less any allocable credits( $lus any a$$licable cost of money !Cost Accountin1 Standard 4&4".
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Direct Costs &FA' ().*+*- /efinition9 /efinition /irect costs are identifiable to a final cost ob2ective !a $articular contract".
E6am$les9 direct material and direct labor.

- All costs identified s$ecifically with a contract are direct costs for that contract and shall not be char1ed to another contract directly( or indirectly. - <o cost shall be char1ed to a contract as a direct cost( if other costs incurred for the same $ur$ose in like circumstances have been char1ed as an indirect cost.
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.ndirect Costs &FA' ().*+(- /efinition9 /efinition :ndirect costs are not directly identifiable with a final cost ob2ective !e.1. a $articular contract"( but identified with two or more final cost ob2ectives. - The distribution of indirect costs to various contracts should rou1hly be based on the benefits received on each contract. - <o cost shall be char1ed to a contract as an indirect cost if other costs incurred for the same purpose in like circumstances have been char1ed as a direct cost to that contract or any other contract.
&)

Alternati"e Direct Cost %reat!ent &FA' ().*+*- For $racticality( any direct cost of minor dollar amount may be treated as an indirect cost if this treatment9
7 :s consistently applied across all contracts(
and

7 Produces su stantially the sa!e results as treating the cost as a direct cost
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Pro$osal Aa2or Cost Elements

- /irect Eabor Cost
7 Eabor Cate1ories 7 Eabor 3ates 7 Eabor Fours

- :ndirect Costs
7 Aaterial Fandlin1 7 Frin1e Benefits 7 verhead !or burden" 7 GDA E6$enses

- /irect Aaterial Cost

7 The Actual Aaterials
- 3aw material - Purchased $arts and8or assemblies

ther /irect Costs

7 <onrecurrin1 costs 7 Subcontracts 7 Travel

7 Subcontracts 7 Aiscellaneous material 7 /iscounts( Scra$( :nventory Shrinka1e( D Frei1ht.in

- Profit or Fee - Cost of Aoney - $scalation

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Cost Analysis9 First Ste$

- Pre.solicitation involvement by the $rice8cost analyst !FS " and en1ineer !ES " is recommended
7 Price8cost in$ut
- Section B set.u$( Price8Cost Evaluation Tem$late( Section E $rice8cost data re=uirements( and Section A $rice8cost evaluation factors

7 En1ineerin1 and $rice8cost in$ut

- S @8P@S

- 3ead the solicitation( section B( and S @8P@S

7 @hat is bein1 $urchasedH
- <ot as easy as lookin1 at the Section B CE:<s and8or SE:<s

7 @hat are the solicitation re=uirements for the contractor and the 1overnmentH
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Cost Analysis9 Second Ste$

- 3ead the contractor0s $ro$osal $rice8cost narrative
7 :t will discuss the contractor0s $ro$osal structure( assum$tions( rationale( etc.
- The len1th and =uality will vary - An im$ortant source of $ro$osal information

- Study8know the $ro$osal set.u$ - Check the math9

7 :s the arithmetic correctH The Section B unit $rices multi$lied by the =uantities result in the total amountsH 7 /o the amounts IfootJH /o they add.u$ and8or calculate correctlyH 7 /o the numbers ItrackJH Can the fi1ures be traced amon1 the su$$ort schedulesH
&5

Cost Analysis9 Third Ste$

- @hat is the basis of the $ro$osed costH
7 7 7 7 Fow did you come u$ with this numberH @hat is your rationaleH @hat are your assum$tionsH @hat are the calculations you usedH

- The contractor0s res$onses $rovide the answer to the =uestion9

7 @hy is this $rice and8or cost reasonableH
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Cost /sti!ating Methods 0sed y the Contractor

An offeror may use any 1enerally acce$ted estimatin1 methods that are equita le and consistently applied in si!ilar situations. - Co!!on !ethods9 7 Roun! )able: E6$erts 1et to1ether and make 2ud1ments on $ro2ected costs 7 Com#arison: Ad2ustments are made to a $ast or current item to derive the cost 7 *arametric: Pro2ections are based on formulas( or cost estimatin1 relationshi$s 7 Detaile!: A thorou1h review is made( with detailed information com$risin1 the estimate
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Basic Cost Element Breakdown

$roposed $rice %& "ost 'lement Item/Service: RFP: CLIN: SLIN: Date/Time: 4/21/2006 13:43 File Name: %ase $eriod Cost Eleme t: !o"rs %aterial: Direct %aterial Scra&/Disco" t/%iscella eo"s %aterial !a (li ) Total %aterial Direct La*or: La*or Cate)or+ 1 , La*or Cate)or+ 2 6 Total 11 Fri )e #e e/its 0ver1ea( 0t1er Direct Costs 30DC4s5 S"*co tracts Travel Total 0DC4s S"*total 78$ E9&e ses Total Costs Pro/it : it Price ;"a tit+ Total Price Rate #ase $mo" t 100 1 2 103 2, 12 3. 1 2 100 ,0 1,0 163 10 202 2 204 2 406

1' 2'

100 101

,-00 2-00 3-36 3' 4'

3. 32

,' 1'

163 202

&B

Basic Cost Element Breakdown

Cost Eleme t: %aterial: Direct %aterial Scra&/Disco" t/%iscella eo"s %aterial !a (li ) Total %aterial Direct La*or: La*or Cate)or+ 1 La*or Cate)or+ 2 Total Fri )e #e e/its 0ver1ea( 0t1er Direct Costs 30DC4s5: S"*co tracts Travel Tra s&ortatio Total 0DC4s S"*total 78$ E9&e ses Total Costs Pro/it : it Price ;"a tit+ Total Price !o"rs Rate #ase $mo" t 100 1 2 103 2, 12 3. 1 2 100 1,0 ,0 300 163 10 202 2 204 2 406 1' 2' 100 101

, 6 11

,-00 < 2-00 < 3-36 < 3' 4'

3. 32

,' 1'

163 202

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E6am$le9 Eoaded Eabor 3ate Cost Element Breakdown

Loaded Labor (ate "alculation )emplate Item/Service: RFP: CLIN: SLIN: Date/Time: 2/22/2006 11:02 File Name: 315 325 335 345 3,5 335=345 (ates* CLIN/SLIN La*or Cate)or+ $"tomotive %ec1a ic %etal #o(+ Re&airma Elec Tec1/%ec1a ic F"el/Elec S+s %ec1a #ase @7T L*r Rate 40' 1-00 < 20' 2-00 < 30' 3-00 < ic 10' 4-00 < 100' 365 3.5 325 365 3105 3115 3125 3135 3145 31,5 3165 31.5 31,5=3165 Est Est La*or Total !o"rs Price

3,5=365 3,5>365 3.5=325 3.5>325 325=365 325>365 3115=3125 3115>3125 3135=3145 3135>3145 +,--. /,--. $(? LR F# ST 0,--. 0/! ST 1,--. 78$ TC +. Pro/it LLR

Com&osite L Rate Esc 0-40 < 0-30 < 0-20 < 0-10 <

0001$$ Com&osite

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 <

)&

SAMPLE C1S% 2'/A3D1W4

/--+ /--/ 45 / 0 /--0 +-6 7 0 0 )otal

#aterial

2irect #aterial Handling Shrin3age Shop Supplies Scrap

45 / 0

)otal #at8l Labor

Labor (ate Labor Hours

+--

+--

+/-

0/-

/5 1

01

05 1

)otal Labor Labor O/H O2" S/) G& $rofit/!ee "O# )otal $rice

+-+5 /+5 /+5 5 /55

+/+5 /05 /+5 5 /95

+1+5 /95 /+5 5 0+5

070+5 9/5 715 +5

)) 615

Cost Analysis9 Profit8Fee

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FA3 &'.4*4.4!c" Contractin1 fficer 3es$onsibilities9 Profit

A Co tracti ) o//icer res&o si*ilities.
B 315 @1e t1e &rice e)otiatio is ot *ase( o cost a al+sisC co tracti ) o//icers are ot reD"ire( to a al+Ee &ro/itB 325 @1e t1e &rice e)otiatio is *ase( o cost a al+sisC co tracti ) o//icers i a)e cies t1at 1ave a str"ct"re( a&&roac1 s1all "se it to a al+Ee &ro/it)4

/FA3S )&'.4*4.4!b"!&" Profit

A De&artme ts a ( a)e cies m"st "se a str"ct"re( a&&roac1 /or (evelo&i ) a &reF e)otiatio &ro/it or /ee o*?ective o a + e)otiate( co tract actio G1e cost or &rici ) (ata is o*tai e(C e9ce&t /or costF&l"sF aGar(F/ee co tracts or co tracts Git1 Fe(erall+ F" (e( Researc1 a ( Develo&me t Ce tersB DF$RS 21,-404F.0 DD F0R% 1,4. B DF$RS 21,-404F.1 @ei)1te( 7"i(eli es %et1o(
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F$R 1,-404F43c5345:

Fee . Statutory Eimitations

- For 3D/ work $erformed under a CPFF contract( the fee shall not e6ceed &'K of the contract0s estimated cost( e6cludin1 fee. - For architect.en1ineer services for $ublic works or utilities( the contract $rice or the estimated cost and fee for $roduction and delivery of desi1ns( $lans( drawin1s( and s$ecifications shall not e6ceed 5K of the estimated cost of construction of the $ublic work or utility( e6cludin1 fees. - For other CPFF contracts( the fee shall not e6ceed &*K of the contract0s estimated cost( e6cludin1 fee.

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Pro/itF%iscella eo"s
A F$R 1,-404F43c53,5- The contractin1 officer shall not re=uire any $ros$ective contractor to submit breakouts or su$$ortin1 rationale for its $rofit or fee ob2ective but may consider it( if it is submitted voluntarily. A F$R 1,-404F43c5365- :f a chan1e or modification calls for essentially the same ty$e and mi6 of work as the basic contract and is of relatively small dollar value com$ared to the total contract value( the contractin1 officer may use the basic contract0s $rofit or fee rate as the $re.ne1otiation ob2ective for that chan1e or modification.
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Profit and Fee 3e$ortin1

- PG: )&'.4*4.;5!&"9
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

- PG: )&'.4*4.;5!)"9
7 use Army @ei1hted Guidelines Software for re$ortin1 // Form &'4; data.

- PG: )&'.4*4.;5!4"9
7 Contractin1 offices outside the #nited States and its outlyin1 areas are e6em$t from re$ortin1.
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Section 3 7 Source Selection9 . Price 3easonableness . Cost 3ealism . Com$leteness Cost 3ealism Analysis

!Best Lalue" Source Selection9 Sect A Cost8Price Evaluation Criteria

- Three $rice8cost evaluation factors
7 Price reasonableness
- <o FA3 definition - Price 'easona leness is deter!ined y the results of a price analysis.

7 Cost 3ealism
- /efined in the FA3

7 Com$leteness
- <o FA3 definition

- Also #nbalanced Pricin1

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Source Selection Sect A9 Cost8Price Evaluation Criteria

Price 3easonableness9 <o FA3 definition 7 see ne6t slide Cost 3ealism9 Aeasure of the a$$ro$riateness of a cost to its corres$ondin1 work element. The Government will determine if the $ro$osed costs8$rice!s" are realistic for the work to be $erformed( reflect a clear understandin1 of the solicitation0s re=uirements( and are consistent with the various elements of the fferor0s technical $ro$osal !FA3 &'.4*4.&!d"". Com$leteness &non,FA' definition-9 An accurate reflection( within the cost8$rice $ro$osal( of all as$ects of the technical $ro$osalM com$liance with the cost8$rice $re$aration instructions in the 3FP Section E 7 :nstructions( Conditions( and <otices to fferorsM and com$liance with any other a$$licable directions.
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Fow to /efine Price 3easonablenessH

- A cost !substitute I$riceJ for cost" is reasonable if( in its nature and amount( it does not e6ceed what a $rudent $erson would $ay in the conduct of com$etitive business >FA3 ,&.)*&.,!a"?. - Price reasonableness will be determined based on9
7 the results of a $rice8cost analysis 7 the results of the a$$lication of the $rice analysis techni=ues detailed in the FA3 7 a com$arison to the :GCE 7 a com$arison of the com$etin1 offers

- A combination of any of the above

7 Price reasonableness will be determined based on the results of a $rice8cost analysis( includin1 a com$arison to the :GCE and ,) com$arisons of the com$etin1 offers.

3easonableness Per ES:0s Advanced Source Selection

- Are the offeror0s cost estimatin1 methods reasonable and accurately $re$aredH - @hat is the level of =uality and credibility of the offeror0s basis of estimatesH
7 For e6am$le( are costs based on actual data or en1ineerin1 2ud1mentH

- Are the offeror0s cost metrics and methods lo1ical and a$$ro$riate for the $roductH
,,

Com$leteness Per ES:0s Advanced Source Selection

- Fas the offeror ca$tured all $ro$osed effort in the cost estimatesH - /id the offeror $rovide all information re=uired by the 3FPH - /id the offeror claim some $erformance in technical or mana1ement not included in the costH - Are the technical assum$tions used in the cost $ro$osal traceable to the technical volume and vice versaH
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Cost 'ealis! Analysis: 5eneral FA' )5.6+6,)&d- 'e"ie7 the specific ele!ents of each offeror8s cost esti!ate to deter!ine:
7 :f it0s realistic for the work to be done 7 :f the offeror clearly understands the require!ents 7 :f it0s consistent with the uni=ue as$ects of their technical $ro$osal
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Cost 'ealis! Analysis FA3 &'.4*4.&!d"!)"

&Cost 'ei! urse!ent Contracts- The followin1 a$$ly to both com$etitive an! sole source environments9
7 Government s"all $erform cost realism analyses for cost. reimbursement contracts. 7 :ndividually determine the #robable cost of $erformance of each offeror.
- Probable Cost is the 1overnment0s best estimate of the cost of any contract that is likely to result from the offeror0s $ro$osal.

7 *robable cost determined by ad2ustin1 each offeror0s costs( and fee when a$$ro$riate( to reflect any understatements or overstatements based on the results of the cost realism analysis.
- For a CPFF contract( the fee would not be ad2usted.

- *robable cost is used in decidin1 best alue. !Com$etitive environment only".

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Cost 'ealis! Analysis FA3 &'.4*4.&!d"!,"

!Co!petiti"e Fi9ed Price Contracts"
- Aay be $erformed on Fi6ed Price :ncentive contracts. - Situations where cost realism analysis may be done on com$etitive fi6ed $rice contracts9
7 @hen new re=uirements may not be fully understood by com$etin1 offerors( or 7 There are =uality concerns( or 7 Past e6$erience indicates that contractors0 $ro$osed costs have resulted in =uality or service shortfalls

- Nou cannot ad2ust offered $rices as a result of the cost realism analysis. - 3esults of the analysis may be used in perfor!ance ris: assess!ents and responsi ility deter!inations.
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Cost 3ealism Analysis and Cost Analysis

- There is a difference between the two( but
7 Confusion between the terms 7 ften used interchan1eably

- Cost 3ealism Analysis a$$lies to source selections

7 #sed to verify that the contractor0s technical a$$roach has been $riced in the $ro$osal 7 #sed mainly on cost reimbursement ty$e contracts 7 #sed to determine the Probable Cost of Performance !Aost Probable Cost"

- Cost Analysis methods8$rocedures are used to determine Cost 3ealism.

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Section 4 . Cost /ata 3e=uirements

Certified Cost or Pricing Data .nfor!ation 1ther %han Cost or Pricing Data

1 taining .nfor!ation to /sta lish Price 'easona leness ;FA' )5.6+*&a-< &and Cost 'ealis!rder of $reference for ty$e of data re=uired and8or re=uested9
& <o additional information ) :nformation other than cost or $ricin1 data , !Certified" cost or $ricin1 data

- /o not obtain more info than necessary

7 3ely first on information available within the Government. 7 Second( on information obtained from sources other than the offeror. 7 :f necessary( on information obtained from the offeror.

4*

:ntroduction to Cost /ata

- Two ty$es9
& !Certified" Cost or $ricin1 data ) :nformation ther than Cost or Pricin1 /ata

- Both can be the e6act same information - @hat is the difference between the twoH
7 For the first( the contractor certifies that the data is current( accurate( and com$lete. 7 For the second( the contractor !oes not certify that the data is current( accurate( and com$lete.
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&Certified- Cost or Pricing Data Define! ;FA' *.)+)<

- All facts that( as of the date of $rice a1reement or( if a$$licable( an earlier date a1reed u$on between the $arties that is as close as $racticable to the date of a1reement on $rice( $rudent buyers and sellers would reasonably e6$ect to affect $rice ne1otiations si1nificantly.
7 7 7 7 Are factual( not 2ud1mental( and are verifiable. :ncludes data formin1 bases of 2ud1ements. Aore than historic accountin1 data. All facts contributin1 to soundness of estimates.

4)

Certification of Cost or Pricing Data ;FA' )5.6+=,*<

- @hen cost or $ricin1 data are re=uired( the contractin1 officer shall re=uire the contractor to e6ecute a Certificate of Current Cost or *ricing Data.
7 ITo the best of my knowled1e and belief( t"e cost or #ricing !ata submitte!( either actually or by s$ecific identification in writin1( to the Contractin1 fficer or the Contractin1 fficer0s re$resentative in su$$ort of !the proposal" are accurate% com#lete% an! current as of !date negotiations completed or price agreement reached".J 4,

Certification .!plications for the Contractor

- Em$hasis on non.certified data was an Ac=uisition Streamlinin1 chan1e9
7 To reduce lead.times and costs to the Government D Contractors 7 Facilitate evaluations and reduce $ost award administration

- Certification is e6$ensive for the contractor in terms of time( man$ower( and cost to assemble( $re$are( check( and $resent the certified data $acka1e. - Administrative and le1al $roblems for contractors with certification9
7 Truth :n <e1otiations Act !T:<A" 7 /CAA $ost award audits 7 Potential defective $ricin1

44

/efective Cost or Pricin1 /ata !FA3 &'.4*;.&"

- :f( after award( cost or #ricing !ata are foun! to be inaccurate% incom#lete% or non-current( as of the date of final a1reement on $rice or an earlier date a1reed u$on by the $arties 1iven on the contractor0s8subcontractor0s Certificate of Current Cost or Pricin1 /ata(
7 the Government is entitled to a $rice ad2ustment( includin1 $rofit or fee( of any si1nificant amount by which the $rice was increased because of the defective data !Clauses ').)&'.&* D ').)&'.&&".

- Audit Trackin1
7 Contract Audit Follow #$ !CAF#"

- 3esolvin1 the issue may involve re$ayment of dis$uted amount $lus $enalty and interest.
4'

%hresholds>A7ards Where Certified Cost or Pricing Data Are 'equired

- Per &'.4*,.4!a"!&"9
7 Award of any ne1otiated contract over O5'*K 7 Award of a subcontract over O5'*K at any tier( if contractor and each hi1her.tier subcontractor also have to submit certified data 7 Aodification worth over O5'*K( of any sealed bid or ne1otiated contract !consider a solute value of both cost increases and decreases"
45

Subcontract Cost or Pricin1 /ata FA3 &'.4*4., !& of )"

- The contractor shall submit !or cause to be submitted by the subcontractor !s"" cost or $ricin1 data to the Government for subcontracts that are the lower of 9 !&" +11(, million or moreM or !)" -ot" more t"an t"e #ertinent cost or #ricing !ata t"res"ol! &+6,./' an! more t"an 1.0 of t"e #rime contractor1s #ro#ose! #rice( unless the Government believes such submission is unnecessary.
4;

Subcontract Cost or Pricin1 /ata FA3 &'.4*4., !) of )"

- The PC may re=uire the contractor or subcontractor to submit to the Government subcontractor cost or $ricin1 data below the thresholds that the PC considers necessary for ade=uately $ricin1 the $rime contract. - The subcontractor cost or $ricin1 data shall be current( accurate( and com$lete as of the date of $rice a1reement( or( if a$$licable( an earlier date a1reed u$on by the $arties and s$ecified on the contractor0s Certificate of Current Cost or Pricin1 /ata. The contractor shall u$date subcontractor0s data( as a$$ro$riate( durin1 ne1otiations.
4+

Certified Cost or Pricin1 /ata for Actions #nder O5'*(***

- FA3 &'.4*,.4!)"9 The head of the contractin1 activity( without the $ower of dele1ation( may authoriPe the PC to obtain cost or $ricin1 data for $ricin1 actions below the $ertinent threshold.
7 Shall 2ustify the re=uirement with written documentation and su$$ortin1 facts( that cost or $ricin1 data are necessary to determine $rice is fair and reasonable.
4B

/9e!ptions fro! &Certifie!- Cost or Pricing Data 'equire!ents

& ) , 4 Per FA3 &'.4*,.&!b"( five e6em$tions9 Ade=uate $rice com$etition Prices set by law or re1ulation Commercial items @aivers !FCA a$$roval( documentation with su$$ort"
7 /FA3S9 Canadian Commercial Cor$ !CCC" D <on$rofit or1aniPations with cost reimbursement8no fee contracts

' Aodifyin1 commercial item contract or subcontract - FA' )5.6+(,* adds the e6ercise of o$tions if the $rice was established at contract award or initial ne1otiation.
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.nfor!ation 1ther than Cost or Pricing Data Define! ;FA' )5.6+*<

- Any ty$e of information that is not require! to be certifie! :A@ FA3 &'.4*5.) and is necessary to determine $rice reasonableness or cost realism. - Such information may include $ricin1( sales( or cost information( and includes cost or $ricin1 data for which certification is determined ina$$licable after submission. - Again% certification is t"e !ifference between t"e two categories of cost2#rice !ata3
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:nformation ther than Cost or Pricin1 /ata( with Adequate Price Co!petition . FA' )5.6+(,(& - Generally( no additional info is needed( unless the $rice is unreasona le. - .f due to unusual circu!stances additional info is needed to deter!ine reasona leness? to the !a9i!u! e9tent practica le o tain it fro! sources other than the offeror. - Nou !ay re=uest information to determine the cost realism of com$etin1 offers or to evaluate com$etin1 a$$roaches. ')

Situations Where @4on,Certified Cost .nfor!ationA May e 4eeded

- :n 1eneral( you don0t e6$ect certified data will be re=uired( but you nee! cost information to !etermine #rice reasonableness or cost realism( - For e6am$le( you9
7 E6$ect ade=uate $rice com$etition on a source selection but don0t e6$ect to be able to rely on com$arisons between offers to determine $rice reasonableness !e.1. offerors may use different technical a$$roaches". 7 Fave determined the action is below the cost or $ricin1 data threshold !O5'*(***"( but you need cost information to determine $rice reasonableness.
',

.nstructions for Su !ission of .nfor!ation 1ther than Certified Cost or Pricing Data , FA' )5.6+(,5
- :n the solicitation( you should s$ecify any information other than certified cost or $ricin1 data that is re=uired !Section E". - :t may be submitted in the offeror0s own format( unless the contractin1 officer decides use of a s$ecific format is essential and the format is described in the solicitation. - :f you didn0t s$ecify the info in the solicitation( you can still re=uest and obtain the needed information after initial $ro$osals are submitted. '4

:nfo other than Cost or Pricin1 /ata9 Bi!itations on Co!!ercial .te!s . FA' )5.6+(,(&c- 3e=uests for offerors0 sales data is limited to data for the same or similar items durin1 a relevant time $eriod. - To the ma6imum e6tent $racticable( limit any re=uest for info to include only info that is in the form re1ularly maintained by the offeror.

''

%hings the Solicitation Must Specify on Cost or Pricing Data? or 4nfo 5t"er t"an Cost or *ricing Data &FA' )5.6+(,5- , P. ) of * - @hether certified cost or $ricin1 data are re=uired - That offerors may submit a re=uest for e6ce$tion( instead of submittin1 certified data - Any information other than certified cost or pricing data that is re=uired - The re=uired format for the cost or $ricin1 data or information other than cost or $ricin1 data - <ecessary $re.award or $ost.award access to offeror0s records( if not $rovided by one of the standard clauses

'5

%hings the Solicitation Must Specify on Cost or Pricing Data? or 4nfo 5t"er t"an Cost or *ricing Data &FA' )5.6+(,5- , P. * of *

- Standard Clauses are ').)&'.)*( and ').)&'.)& !mods"

7 Called out in FA3 &'.4*+!l" D !m" 7 Nou !ay use these if reasonably certain cost or $ricin1 data !or Info Other than !" needed 7 These cover the re=uirements and allow offerors to re=uest one of the e6ce$tions from submittin1 the data 7 :f you want s$ecific data without e6ce$tion( don0t use the standard clause ';

Section , 7 Field Pricin1 Su$$ort

Field Pricin1 Services FA3 &'.4*4.)!a"!)"

Technical( audit( and s$ecial re$orts associated with the cost elements of a $ro$osal( includin1 subcontracts. :nformation on related $ricin1 $ractices and history. :nformation to hel$ contractin1 officers determine commerciality and $rice reasonableness9
7 7 7 7 7 7 verify sales history to source documents identify s$ecial terms and conditions identify customarily 1ranted or offered discounts for the item verify the item to an e6istin1 catalo1 or $rice list verify historic data for item to =ualify as commercial identify 1eneral market conditions affectin1 determinations of commerciality and $rice reasonableness
'B

:nformation relative to the business( technical( $roduction( or other ca$abilities and $ractices of an offeror.

Field Pricin1 Su$$ort FA3 &'.4*4.)!a"!b"!c"

- /efense Contract Audit A1ency !/CAA"
7 Trained in accountin1( finance( and auditin1 7 Access to contractor accountin1 records 7 Au!itors &on-site2off-site' D Financial Advisors !FA"
- Provide $ro$osal analysis of material( labor( indirect rates( GDA( C A( etc.

- /efense Contract Aana1ement A1ency !/CAA"

7 Pricin1 and8or Technical Personnel9 $roduction s$ecialist( en1ineer( etc.
- Provide technical analysis and8or $ricin1 su$$ort
5*

/efense Contract Audit A1ency !/CAA"

- /CAA $rovides the followin19
7 Pro$osal audits by re=uest 7 IA1reed #$on ProceduresJ Assi1nment 7 Forward Pricin1 3ate A1reements !FP3As"
- /irect labor and indirect rates w8/CAA AC as lead

7 :ncurred cost audits9 on 1oin1

- Qualifications8re=uirements9
7 Formal $ro$osal re=uest 7 Formal contractor $ro$osal in a structured8auditable format 7 Ainimum ,* to 4' day re=uest $rocessin1 time

5&

ther /CAA8/CAA 3eviews

- Accountin1 system reviews
7 Pre.award8$ost award 7 FA38/FA3S B.&*58)*B.&*5

- Estimatin1 system reviews

7 /FA3S )&'.4*;.' Estimatin1 systems 7 /CAA $erforms but /CAA8AC function

- Com$ensation System 3eviews !CS3" - Contractor Purchasin1 System 3eview !CPS3"

7 3eference FA3 44., and /FA3S )44., 7 /CAA8AC function with /CAA assistance
5)

Technical Analysis >FA3 &'.4*4.&!e"?

- Evaluation $erformed by $ersonnel havin1 s$ecialiPed knowled1e( skills( e6$erience( or ca$ability in en1ineerin1( science( or mana1ement on $ro$osed material ty$es and =uantities( labor( $rocesses( s$ecial toolin1( facilities( reasonableness of scra$ and s$oila1e( and other factors in the $ro$osal in order to determine the need for and reasonableness of the $ro$osed resources. - At a minimum6
7 e7amine t"e ty#es an! quantities of material &89in!s an! quantities: e aluation' 7 an! t"e nee! for t"e ty#es an! quantities of labor "ours an! t"e labor mi7 &s9ill an! category'
5,

Field Pricin1 Su$$ort D the Cost or Pricin1 /ata Threshold

- /FA3S )&'.4*4.)!a"9
7 PC should consider field $ricin1 su$$ort for
- Fi6ed $rice $ro$osals e6ceedin1 O5'*K - Cost ty$e $ro$osals e6ceedin1 O5'*K from offerors wit" significant estimatin1 system deficiencies - Cost ty$e $ro$osals e6ceedin1 O&* million from offerors wit"out significant estimatin1 system deficiencies

7 PC should not re=uest field $ricin1 su$$ort for $ro$osals less than O5'*KM e6ce$tions9
- lack of knowled1e of $articular contractor - sensitive conditions8$roblem areas
54

Points to Consider @hen 3e=uestin1 Field Pricin1 Su$$ort

- Per FA' )5.6+6,*&a-&)-:
7 The contractin1 officer should re=uest field $ricin1 assistance when the information available at the buyin1 activity is inade=uate to determine a fair and reasonable $riceM tailor re=uests to reflect the minimum essential su$$lementary information needed to conduct a technical or cost or $ricin1 analysis.

- Consi!er cost ris93

7 Contract type9 there is more risk on a FFP than CPFF or CPAF contracts. 7 Proposal total dollar "alue

- %he DCAA PBA or FA can help deter!ine the type of field pricing support>audit ser"ices needed. 5'

FS is the P C for /CAA

- 3e=uest /CAA audits throu1h the FS
7 Submit audit re=uest to /CAA 7 3eceive8file /CAA audit re$orts 7 Trackin18re$ort status of /CAA audits
- AFA3S '&4).&.B*.)

7 Contract Audit Follow #$ !CAF#" Pro1ram

- /o// ;54*.) - AFA3S '&4).&.B*.) - S P <umber )'
55

Contract Audit Follow #$ !CAF#" Pro1ram !& of )"

- Track8$rovide status of Ire$ortable auditsJ - 3e$ortable Audits
7 Estimatin18accountin1 system and internal control reviews 7 .ncurred costs including final indirect cost rates 7 Claims 7 /efective $ricin1 reviews 7 Termination settlements 7 CAS issues8cost im$act statement reviews
5;

Contract Audit Follow #$ !CAF#" Pro1ram !) of )"

- 3ecent revision9 /CAA database now used - 3ules8$roceduresH - 3eviewed8u$dated9
7 Aarch ,&st 7 Se$tember ,*th

vera1e Audit 3eview Board

7 /iscuss unresolved /CAA audits over 5 months old with the Commander

- Bottom Eine9 re$ortable audits must be resolved in a timely manner

5+

Section 6 . Cost Allowability

Factors Affecting Cost Allo7a ility !FA3 ,&.)*&.)"

- 3easonableness - Allocability - Accountin1 Princi$les D Standards - Contract Terms
;*

'easona leness . !FA3 ,&.)*&.,"

- Definition9 A cost is reasonable if( in its nature and amount( it does not e6ceed what a $rudent $erson would $ay in the conduct of com$etitive business. - Considerations
7 :s the cost necessaryH 7 :s the cost consistent with sound business $ractice and lawH 7 Are the contractor0s $urchases done on an Iarm#s$length %asis!H
;&

Alloca ility . !FA3 ,&.)*&.4"

- Definition9 A cost is allocable to one or more cost ob2ectives !e.1.( contracts" if it is char1ed based on the relative benefits received or some other e=uitable relationshi$. - A cost is Alloca le to a Government contract if9 7 :t is incurre! s$ecifically for the contract( or 7 :t benefits the contract and other work !e.1. it0s an overhead cost"( and can be fairly distributed based on benefits received( or 7 :t is necessary to overall o$eration of the business !e.1. certain GDA e6$enses".
;)

%he Most Co!!on Ways Costs are .ncurred

- $7#en! Cas" . Actual outlay of dollars !by cash( check( etc." in e6chan1e for 1oods or services. !e.1. Pay a vendor for raw materials" - Accrue $7#ense . For accountin1 $ur$oses( because a future obli1ation is bein1 incurred or an asset is bein1 used. !e.1. :ncurrin1 an obli1ation to current workers( for their future $ensions" - ;se 4n entory . For e6am$le( contractor buys inventory in advance and char1es it to contracts as inventory is used.
;,

Sources of Accounting Principles C Standards

- Generally Acce$ted Accountin1 Princi$les !GAAP" - Cost Accountin1 Standards !CAS" - FA3 Part ,& Contract Cost Princi$les and Procedures
;4

Accountin19 Financial D Cost

:n semi.$lain En1lish9
- Accounting is the $rocess of identification( measurement( and communication of financial information about economic entities to interested $arties. Two ty$es9
7 <inancial accounting focuses on measurin1 the results of an or1aniPation0s o$erations for a $eriod of time( reflected in the financial statements. 7 Cost &or management' accounting focuses on cost allocation to a $roduct( service( or contractM mana1ement uses the information to $lan( evaluate( and control within its or1aniPation and to assure a$$ro$riate use of( and accountability for( its resources.
;'

Generally Acce$ted Accountin1 Princi$les !GAAP"

- =enerally Acce#te! Accounting *rinci#les or =AA* refers to the common set of accountin1 conce$ts( standards( and $rocedures which re$resent a 1eneral 1uide. - GAAP $rinci$les are those that have substantial authoritative su$$ort or are based on accountin1 $ractices acce$ted over time by $revalent use.
7 Financial Accountin1 Standards Board !FASB"( American :nstitute of CPAs !A:CPA"( Accountin1 Princi$les Board !APB"( etc.

- %he end products of the accounting cycle? the financial state!ents & alance sheet? inco!e state!ent? etc.- are prepared in accordance 7ith 5AAP.
;5

Cost Accountin1 Standards !CAS" !& of )"

- Pur$ose of CAS9
7 Promul1ate standards to ac"ie e uniformity an! consistency in cost accounting #ractices to be followed by contractors and subcontractors for defense contracts. :t is an attem$t to $rovide common 1round between the contractors and the federal 1overnment on cost accountin1 issues durin1 $ro$osal $re$aration( ne1otiations( etc.
;;

Cost Accountin1 Standards !CAS" !) of )"

- Currently? there are )D standards. - Cost Accountin1 Standards Board !CASB" administers CAS9 five members( includes re$resentatives from 1overnment( industry( and academia. - CAS8CASB was ori1inally established in Au1ust &B;* under the legislati"e ranch. - Ceased o$erations Se$tember ,*( &B+* due to lack of funds. - Re-establis"e! in >o ember 1?@@ un!er t"e e7ecuti e branc" within ffice of Federal Procurement Policy ! FPP" which is under ffice of Aana1ement and Bud1et ! AB".
;+

E6em$tions From CAS !& of )"

- Eleven e6em$tions( with the most common !;" below9
7 7 7 7 Seale! bi! contracts. <e1otiated contracts8subcontracts less t"an +6,.%.... Contracts D subcontracts with small businesses. FFP D FFP with EPA contracts8subcontracts for the ac=uisition of commercial items. 7 FFP contracts D subcontracts awar!e! on t"e basis of a!equate #rice com#etition wit"out t"e submission of cost2#rice !ata(
;B

E6em$tions From CAS !) of )"

7 Contracts8subcontracts in which the $rice is set by law or regulation( 7 Contract2subcontract e7ecute! an! #erforme! outsi!e t"e ;(S(% its territories% an! its #ossessions(

+*

CAS Covera1e
- Two ty$es of CAS can be a$$licable( de$endin1 on the dollar value of $revious awards and current ac=uisitions.
7 <ull co erage9 com$ly with all CAS in effect on the contract award date and with any new standards. 7 Ao!ifie! co erage9 re=uires contractor to com$ly with four standards
- CAS 4*&( Consistency in estimatin1( accumulatin1( D re$ortin1 costs. - CAS 4*)( Consistency in allocatin1 costs incurred for the same $ur$ose. - CAS 4*'( Accountin1 for unallowable costs. - CAS 4*5( Cost accountin1 $eriod.

+&

CAS . /isclosure Statement

- Firms that have contracts8subcontracts sub2ect to full CAS covera1e should have submitted a CASB /isclosure Statement( $rovidin1 information on how they char1e s$ecific ty$es of costs.
7 Contractor discloses>docu!ents com$any accountin1 $ractices to the 1overnment.

- The AC and co1niPant /CAA auditor are res$onsible for reviewin1 the contractor0s /isclosure Statement for ade=uacy( and for com$liance with FA3 Part ,& and CAS.

+)

GAAP vs. CAS

- GAAP and CAS are not the same. - GAAP 1enerally refers to financial( not cost( accountin1 1uidance. - CAS is an attem$t to e6tend GAAP.like 1uidance to 1overnment cost accountin1. - CAS b2ectives9
7 Common cost treatment( same terminolo1y( and the avoidance of cost mani$ulation !1amin1". 7 Facilitate $ro$osal $re$aration and ne1otiations.
+,

CAS: FA' 'eferences

- FA' Part (+
7 CAS Administration 7 Policies and Procedures for a$$lyin1 CAS to ne1otiated contracts D subcontracts

- FA' Appendi9 2
7 Contains the actual CAS
+4

FA3 ,&.) Cost Principles for Co!!ercial 1rganiEations

- Applies to all contractors. - Defines direct and indirect costs. - Addresses s$ecific kinds of costs as to whether allo7a le( unallo7a le( or allo7a le 7ith restrictions. - /9a!ples of unallo7a le costs: interest e6$ense( bad debts( entertainment costs( donations( attorney fees for claims.
+'

FA' Part (): /9a!ples of 0nallo7a le Costs

().*+5,( ,, 2ad De ts ().*+5,F ,, Contri utions or Donations ().*+5,)6 ,, /ntertain!ent Costs ().*+5,*+ ,, .nterest and 1ther Financial Costs - ().*+5,5) ,, Costs of Alcoholic 2e"erages
+5

FA3 Part ,& Cost Principles for @1therA 1rganiEations

- 3efer to FA3 ,& for se$arate( uni=ue covera1e of the cost $rinci$les for contracts with9
7 /ducational institutions !FA3 ,&.," 7 State C local go"ern!ents( D federally reco1niPed .ndian tri al go"ern!ents !FA3 ,&.5" 7 4onprofit organiEations !FA3 ,&.;"
+;

Contract %er!s C Cost Principles

- S$ecific costs may be addressed in 3FP or contract. !e.1. Althou1h trans$ortation costs are 1enerally allowable( the contract may restrict them to a certain mode." n cost allowability( contract terms can only be more restrictive than other factors. !e.1. Contract terms cannot make interest e6$ense allowable on the contract."
++

Conclusion

+B

Aana1ement8Cost Accountin1 System

- Contractors0 have to mana1e their or1aniPations( $roducts8services( and contracts - There needs to be a system in $lace to determine whether the service( $roduct( or contract
7 :s on schedule for com$letion 7 :s at its bud1eted cost 7 And if not
- @hy notH - @hat is bein1 done to correct the situationH

- All ma2or com$anies have such a systemR

B*

Ade=uate Estimatin1 System

- AC estimatin1 system a$$roval means that the system has the controls to consistently $roduce ade=uate and reliable estimates.
7 established $olicies( $rocedures( and $ractices to $ersons res$onsible for $re$arin1 and su$$ortin1 estimates

- A disa$$roved system is a red fla1 indicatin1 that the firmSs estimatin1 system does not consistently $rovide ade=uate $ro$osals.
7 <ormally( $ro$osals from a firm with a disa$$roved system should be sub2ected to closer scrutiny( $articularly closer scrutiny by audit $rofessionals.
B&

Ade=uate Accountin1 System

Primary 1oal of an acce$table accountin1 system9
7 Ensure that costs are a$$ro$riately( e=uitably( and consistently allocated to all final cost ob2ectives !i.e.( individual contracts( 2obs( or $roducts".

Pre.award accountin1 system survey $erformed by /CAA. System should answer affirmative to s$ecific =uestions9
7 :A@ GAAPH !:A@ CASH" 7 :dentify D se1re1ate direct from indirect costs( allocatin1 these costs e=uitably to s$ecific contracts on a consistent basisH 7 Timekee$in1 D labor distribution systems a$$ro$riately identify direct and indirect labor char1es to intermediate D final cost ob2ectivesH 7 Accumulates costs inte1rated with( and reconcilable to( the 1eneral led1erH 7 /etermine cost of work $erformed at interim $oints !at least monthly" because of routine $ostin1 to books of accountH 7 :f re=uired by the contract( identify costs by CE:<8SE:< or by unitH

S$ecifically9 Are there accountin1 IcontrolsJ in $laceH

B)

Cost Analysis Summary9 Question Checklist

- #nderstand the contractor0s $ro$osal.
7 3eview the $ro$osal 7 )"e #ro#osal2contractor s"oul! #ro i!e answers to t"ese questions3
@hat are the bases8rationale for the $ro$osed costsH @hat assum$tions were made and reflected in the estimate!s"H Su$$ort documentation $rovided for the $ro$osed costsH Are the costs realisticH Are the costs and8or $rice reasonableH Are all the contractor0s e6$ected costs included in his $ro$osalH Fave all the contract re=uirements been $riced into the $ro$osalH

B,