The Basics of Cost

Analysis
Presented by Edmund K. Kowalski

Financial Services Office (FSO)

Updated January 15, 2008

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
3

Section 1 - Cost Analysis

Definition

Definition of Cost Analysis

The review and evaluation of the separate cost
elements and profit in an offerors or
contractors proposal (including cost or pricing
data or information other than cost or pricing
data), and the application of judgement to
determine how well the proposed costs represent
what the cost of the contract should be, assuming
reasonable economy and efficiency (FAR
15.404(c)(1)).
5

Price and Cost Analysis

Compared
Price Analysis is the process of examining and evaluating a
proposed price without evaluating its separate cost
elements and proposed profit.
Determines whether the price is fair and reasonable.

Cost Analysis
Evaluates the separate cost elements, profit, and facilities capital
cost of money (if proposed).
Used to evaluate/determine any or all of the following:
cost and/or price reasonableness
cost realism
most probable cost and/or price

It is the more costly method in terms of time and manpower.

6

Cost Analysis: When to apply it.

It is performed if certified cost or pricing data are required.
required
It may be used to evaluate information other than cost or
pricing data, e.g., non-certified cost data.
Normally, it is not needed if adequate price competition exists.
In this case, it still may be used if the price is determined to be
unreasonable or you are considering a cost realism
evaluation [see FAR 15.305(a)(1)].
Cost analysis is one of the approaches that should be used
when a cost realism evaluation is required.
When you perform a cost analysis, you should also include a
price analysis to verify price reasonableness.
reasonableness
7

Section 2
Defining Costs
Performing a Cost Analysis
Examples: Proposed Price by
Major Cost Element

Contract Price = Cost + Profit

C o n tr a c t P 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&A

F C C M (C O M )
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&A
9

Total Contract Cost

(FAR 31.201-1)
is

the sum of the direct & indirect

costs allocable to the contract,
incurred or to be incurred, less any
allocable credits, plus any
applicable cost of money (Cost
Accounting Standard 414).
10

Direct Costs (FAR 31.202)

Definition:
Definition Direct costs are identifiable to a final
cost objective (a particular contract).
Examples: direct material and direct labor.

All costs identified specifically with a contract are

direct costs for that contract and shall not be
charged to another contract directly, or indirectly.
No cost shall be charged to a contract as a direct
cost, if other costs incurred for the same purpose
in like circumstances have been charged as an
indirect cost.
11

Indirect Costs (FAR 31.203)

Definition:
Definition Indirect costs are not directly identifiable
with a final cost objective (e.g. a particular contract),
but identified with two or more final cost objectives.
The distribution of indirect costs to various contracts
should roughly be based on the benefits received on
each contract.
No cost shall be charged to a contract as an indirect
cost if other costs incurred for the same purpose in
like circumstances have been charged as a direct cost
to that contract or any other contract.

12

Alternative Direct Cost

Treatment (FAR 31.202)
For practicality, any direct cost of minor
dollar amount may be treated as an indirect
cost if this treatment:
Is consistently applied across all contracts,
and

Produces substantially the same results as

treating the cost as a direct cost
13

Proposal Major Cost Elements

Direct Labor Cost

Indirect Costs

Labor Categories
Labor Rates
Labor Hours

Direct Material Cost

The Actual Materials

Other Direct Costs

Nonrecurring costs
Subcontracts
Travel

Raw material
Purchased parts and/or
assemblies

Subcontracts
Miscellaneous material
Discounts, Scrap, Inventory
Shrinkage, & Freight-in

Material Handling
Fringe Benefits
Overhead (or burden)
G&A Expenses

Profit or Fee
Cost of Money
Escalation
14

Cost Analysis: First Step

Pre-solicitation involvement by the price/cost analyst
(FSO) and engineer (ESO) is recommended
Price/cost input
Section B set-up, Price/Cost Evaluation Template, Section L price/cost
data requirements, and Section M price/cost evaluation factors

Engineering and price/cost input

SOW/PWS

Read the solicitation, section B, and SOW/PWS

What is being purchased?
Not as easy as looking at the Section B CLINs and/or SLINs

What are the solicitation requirements for the contractor and the
government?
15

Cost Analysis: Second Step

Read the contractors proposal price/cost narrative
It will discuss the contractors proposal structure,
assumptions, rationale, etc.
The length and quality will vary
An important source of proposal information

Study/know the proposal set-up

Check the math:
Is the arithmetic correct? The Section B unit prices multiplied by the
quantities result in the total amounts?
Do the amounts foot? Do they add-up and/or calculate correctly?
Do the numbers track? Can the figures be traced among the support
schedules?
16

Cost Analysis: Third Step

What is the basis of the proposed cost?

How did you come up with this number?

What is your rationale?
What are your assumptions?
What are the calculations you used?

The contractors responses provide the

answer to the question:
Why is this price and/or cost reasonable?
17

Cost Estimating Methods Used

by the Contractor
An offeror may use any generally accepted estimating
methods that are equitable and consistently applied in
similar situations.
Common methods:
Round Table: Experts get together and make judgments
on projected costs
Comparison: Adjustments are made to a past or current
item to derive the cost
Parametric: Projections are based on formulas, or cost
estimating relationships
Detailed: A thorough review is made, with detailed
information comprising the estimate

18

Basic Cost Element Breakdown

Proposed Price By Cost Element
Item/Service:
RFP:
CLIN:
SLIN:
Date/Time:
4/21/2006 13:43
File Name:
Base Period
Cost Element:
Hours
Material:
Direct Material
Scrap/Discount/Miscellaneous
Material Handling
Total Material
Direct Labor:
Labor Category 1
5
Labor Category 2
6
Total
11
Fringe Benefits
Overhead
Other Direct Costs (ODC's)
Subcontracts
Travel
Total ODC's
Subtotal
G&A Expenses
Total Costs
Profit

Rate

1%
2%

5.00
2.00
3.36
3%
4%

Base

100
101

37
38

Amount
100
1
2
103
25
12
37
1
2
100
50

5%

193

1%

202

150
193
10
202
2

Unit Price
Quantity

204
2

Total Price

409

19

Basic Cost Element Breakdown

Cost Element:
Material:
Direct Material
Scrap/Discount/Miscellaneous
Material Handling
Total Material
Direct Labor:
Labor Category 1
Labor Category 2
Total
Fringe Benefits
Overhead
Other Direct Costs (ODC's):
Subcontracts
Travel
Transportation
Total ODC's
Subtotal
G&A Expenses
Total Costs
Profit

Hours

Rate Base Amount

1%
2%

5
6
11

5.00
2.00
3.36
3%
4%

100
101

37
38

100
1
2
103
25
12
37
1
2
100
150
50

5%

193

1%

202

300
193
10
202
2

Unit Price
Quantity

204
2

Total Price

409

20

Example: Loaded Labor Rate

Cost Element Breakdown
Loaded Labor Rate Calculation Template
Item/Service:
RFP:
CLIN:
SLIN:
Date/Time: 2/28/2006 11:08
File Name:
(1)

(2)

(3)

(4)

(5)
(3)*(4)

Rates:

(7)

100%

(8)

(9)

(10)

(11)

(12)

(13)

(14)

(15)

(5)*(6) (5)+(6) (7)*(8) (7)+(8) (8)*(9) (8)+(9) (11)*(12) (11)+(12) (13)*(14) (13)+(14)
1.00%

Base
CLIN/SLIN
Labor Category
WGT Lbr Rate
Automotive Mechanic
40% 1.00
Metal Body Repairman
20% 2.00
Elec Tech/Mechanic
30% 3.00
Fuel/Elec Sys Mechanic 10% 4.00
0001AA Composite

(6)

Composite
L Rate Esc
0.40
0.30
0.20
0.10

2.00%
Adj
LR

FB

3.00%
ST

O/H

4.00%
ST

1.00 0.01 1.01 0.02 1.03 0.03 1.06

1%

(16)

(17)
(15)*(16)

Est
Est
Labor Total
Hours Price

G&A

TC

Profit

LLR

0.04

1.10

0.01

1.11 100 111.46

21

SAMPLE COST BREAKDOWN

2001

2002

2003

90
5

90
5

108
6

2
3

2
3

3
3

100

100

120

25
4

30
4

35
4

Total Labor

100

120

140

360

Labor O/H
ODC
S/T
G&A
Profit/Fee
COM

10
5
215
20
15
5

10
5
235
20
15
5

10
5
275
20
15
5

30
15
725
60
45
15

Total Price

255

275

315

22 845

Material

Direct Material
Handling
Shrinkage
Shop Supplies
Scrap

Total Matl

Total

320

Labor
Labor Rate
Labor Hours

Cost Analysis: Profit/Fee

23

FAR 15.404-4(c) Contracting

Officer Responsibilities: Profit
Contracting officer responsibilities.
(1) When the price negotiation is not based
on cost analysis, contracting officers are
not required to analyze profit.
(2) When the price negotiation is based on
cost analysis, contracting officers in
agencies that have a structured approach
shall use it to analyze profit.
24

DFARS 215.404-4(b)(1) Profit

Departments and agencies must use a
structured approach for developing a prenegotiation profit or fee objective on any
negotiated contract action when cost or
pricing data is obtained, except for cost-plusaward-fee contracts or contracts with
Federally Funded Research and
Development Centers.
DFARS 215.404-70 DD FORM 1547
DFARS 215.404-71 Weighted Guidelines Method
25

FAR 15.404-4(c)(4):

Fee - Statutory Limitations

For R&D work performed under a CPFF contract, the fee
shall not exceed 15% of the contracts estimated cost,
excluding fee.
For architect-engineer services for public works or
utilities, the contract price or the estimated cost and fee for
production and delivery of designs, plans, drawings, and
specifications shall not exceed 6% of the estimated cost of
construction of the public work or utility, excluding fees.
For other CPFF contracts, the fee shall not exceed 10% of
the contracts estimated cost, excluding fee.

26

Profit-Miscellaneous
FAR 15.404-4(c)(5). The contracting officer shall not
require any prospective contractor to submit breakouts or
supporting rationale for its profit or fee objective but may
consider it, if it is submitted voluntarily.
FAR 15.404-4(c)(6). If a change or modification calls
for essentially the same type and mix of work as the basic
contract and is of relatively small dollar value compared to
the total contract value, the contracting officer may use the
basic contracts profit or fee rate as the pre-negotiation
objective for that change or modification.
27

Profit and Fee Reporting

PGI 215.404-76(1):

send completed DD Forms 1547 on actions that exceed the

cost or pricing data threshold, where the contracting
officer used the weighted guidelines method, an alternate
structured approach, or the modified weighted guidelines
method, to designated office within 30 days after contract
award.

PGI 215.404-76(2):

use Army Weighted Guidelines Software for reporting DD Form

1547 data.

PGI 215.404-76(4):
Contracting offices outside the United States and its outlying areas
are exempt from reporting.
28

Section 3
Source Selection:
- Price Reasonableness
- Cost Realism
- Completeness
Cost Realism Analysis

(Best Value) Source Selection:

Sect M Cost/Price Evaluation
Criteria
Three price/cost evaluation factors
Price reasonableness
No FAR definition
Price Reasonableness is determined by the results of a price
analysis.

Cost Realism
Defined in the FAR

Completeness
No FAR definition

Also Unbalanced Pricing

30

Source Selection Sect M:

Cost/Price Evaluation Criteria

Price Reasonableness: No FAR definition see next slide

Cost Realism: Measure of the appropriateness of a cost to its
corresponding work element. The Government will determine if the
proposed costs/price(s) are realistic for the work to be performed,
reflect a clear understanding of the solicitations requirements, and are
consistent with the various elements of the Offerors technical
proposal (FAR 15.404-1(d)).
Completeness (non-FAR definition): An accurate reflection, within
the cost/price proposal, of all aspects of the technical proposal;
compliance with the cost/price preparation instructions in the RFP
Section L Instructions, Conditions, and Notices to Offerors; and
compliance with any other applicable directions.
31

How to Define Price

Reasonableness?
A cost (substitute price for cost) is reasonable if, in its nature and
amount, it does not exceed what a prudent person would pay in the
conduct of competitive business [FAR 31.201-3(a)].
Price reasonableness will be determined based on:

the results of a price/cost analysis

the results of the application of the price analysis techniques detailed in the FAR
a comparison to the IGCE
a comparison of the competing offers

A combination of any of the above

Price reasonableness will be determined based on the results of a price/cost
analysis, including a comparison to the IGCE and comparisons of the competing
offers.

32

Reasonableness Per ESIs

Advanced Source Selection
Are the offerors cost estimating methods
reasonable and accurately prepared?
What is the level of quality and credibility
of the offerors basis of estimates?
For example, are costs based on actual data or
engineering judgment?

Are the offerors cost metrics and methods

logical and appropriate for the product?
33

Completeness Per ESIs

Advanced Source Selection
Has the offeror captured all proposed effort in the
cost estimates?
Did the offeror provide all information required by
the RFP?
Did the offeror claim some performance in
technical or management not included in the cost?
Are the technical assumptions used in the cost
proposal traceable to the technical volume and
vice versa?
34

Cost Realism Analysis: General

FAR 15.404-1(d)
Review the specific elements of each
offerors cost estimate to determine:
If its realistic for the work to be done
If the offeror clearly understands the
requirements
If its consistent with the unique aspects
of their technical proposal
35

Cost Realism Analysis FAR 15.404-1(d)(2)

(Cost Reimbursement Contracts)
The following apply to both competitive and sole source
environments:
Government shall perform cost realism analyses for costreimbursement contracts.
Individually determine the probable cost of performance of each
offeror.
Probable Cost is the governments best estimate of the cost of any
contract that is likely to result from the offerors proposal.

Probable cost determined by adjusting each offerors

costs, and fee when appropriate, to reflect any
understatements or overstatements based on the results
of the cost realism analysis.
For a CPFF contract, the fee would not be adjusted.

Probable cost is used in deciding best value.

value
(Competitive environment only).

36

Cost Realism Analysis FAR 15.404-1(d)(3)

(Competitive Fixed Price Contracts)
May be performed on Fixed Price Incentive contracts.
Situations where cost realism analysis may be done on competitive
fixed price contracts:
When new requirements may not be fully understood by competing offerors,
or
There are quality concerns, or
Past experience indicates that contractors proposed costs have resulted in
quality or service shortfalls

You cannot adjust offered prices as a result of the cost realism

analysis.
Results of the analysis may be used in performance risk
assessments and responsibility determinations.
37

Cost Realism Analysis

and Cost Analysis
There is a difference between the two, but
Confusion between the terms
Often used interchangeably

Cost Realism Analysis applies to source selections

Used to verify that the contractors technical approach has
been priced in the proposal
Used mainly on cost reimbursement type contracts
Used to determine the Probable Cost of Performance (Most
Probable Cost)

Cost Analysis methods/procedures are used to determine

Cost Realism.
38

Section 4 - Cost Data

Requirements
Certified Cost or Pricing Data
Information Other Than Cost or
Pricing Data

Obtaining Information to Establish

Price Reasonableness [FAR 15.402(a)]
(and Cost Realism)
Order of preference for type of data required and/or
requested:
1 No additional information
2 Information other than cost or pricing data
3 (Certified) cost or pricing data

Do not obtain more info than necessary

Rely first on information available within the
Government.
Second, on information obtained from sources other than
the offeror.
If necessary, on information obtained from the offeror.
40

Introduction to Cost Data

Two types:
1 (Certified) Cost or pricing data
2 Information Other than Cost or Pricing Data

Both can be the exact same information

What is the difference between the two?
For the first, the contractor certifies that the data
is current, accurate, and complete.
For the second, the contractor does not certify that
the data is current, accurate, and complete.
41

(Certified) Cost or Pricing Data

Defined [FAR 2.101]
All facts that, as of the date of price agreement or, if
applicable, an earlier date agreed upon between the
parties that is as close as practicable to the date of
agreement on price, prudent buyers and sellers would
reasonably expect to affect price negotiations
significantly.

Are factual, not judgmental, and are verifiable.

Includes data forming bases of judgements.
More than historic accounting data.
All facts contributing to soundness of estimates.
42

Certification of Cost or Pricing Data

[FAR 15.406-2]
When cost or pricing data are required, the
contracting officer shall require the contractor to
execute a Certificate of Current Cost or Pricing
Data.
To the best of my knowledge and belief, the cost or
pricing data submitted,
submitted either actually or by specific
identification in writing, to the Contracting Officer or the
Contracting Officers representative in support of (the
proposal) are accurate, complete, and current as of (date
negotiations completed or price agreement reached).
43

Certification Implications for the

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

Certification is expensive for the contractor in terms of time,

manpower, and cost to assemble, prepare, check, and present the
certified data package.
Administrative and legal problems for contractors with
certification:
Truth In Negotiations Act (TINA)
DCAA post award audits
Potential defective pricing
44

Defective Cost or Pricing Data

(FAR 15.407-1)
If, after award, cost or pricing data are found to be
inaccurate, incomplete, or non-current,
non-current as of the date of
final agreement on price or an earlier date agreed upon by
the parties given on the contractors/subcontractors
Certificate of Current Cost or Pricing Data,
the Government is entitled to a price adjustment, including profit
or fee, of any significant amount by which the price was increased
because of the defective data (Clauses 52.215-10 & 52.215-11).

Audit Tracking
Contract Audit Follow Up (CAFU)

Resolving the issue may involve repayment of disputed

amount plus penalty and interest.
45

Thresholds/Awards Where Certified

Cost or Pricing Data Are Required
Per 15.403-4(a)(1):
Award of any negotiated contract over $650K
Award of a subcontract over $650K at any tier, if
contractor and each higher-tier subcontractor also have
to submit certified data
Modification worth over $650K, of any sealed bid or
negotiated contract (consider absolute value of both
cost increases and decreases)
46

Subcontract Cost or Pricing Data

FAR 15.404-3 (1 of 2)
The contractor shall submit (or cause to be
submitted by the subcontractor (s)) cost or pricing
data to the Government for subcontracts that are the
lower of :
(1) $11.5 million or more;
more or (2) Both more than
the pertinent cost or pricing data threshold
($650K) and more than 10% of the prime
contractors proposed price,
price unless the Government
believes such submission is unnecessary.
47

Subcontract Cost or Pricing Data

FAR 15.404-3 (2 of 2)
The PCO may require the contractor or subcontractor to
submit to the Government subcontractor cost or pricing
data below the thresholds that the PCO considers
necessary for adequately pricing the prime contract.
The subcontractor cost or pricing data shall be current,
accurate, and complete as of the date of price agreement,
or, if applicable, an earlier date agreed upon by the parties
and specified on the contractors Certificate of Current
Cost or Pricing Data. The contractor shall update
subcontractors data, as appropriate, during negotiations.
48

Certified Cost or Pricing Data for

Actions Under $650,000
FAR 15.403-4(2): The head of the contracting
activity, without the power of delegation, may
authorize the PCO to obtain cost or pricing
data for pricing actions below the pertinent
threshold.
Shall justify the requirement with written
documentation and supporting facts, that cost or
pricing data are necessary to determine price is fair
and reasonable.
49

Exemptions from (Certified) Cost or

Pricing Data Requirements
1
2
3
4

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

Adequate price competition
Prices set by law or regulation
Commercial items
Waivers (HCA approval, documentation with support)
DFARS: Canadian Commercial Corp (CCC) & Nonprofit
organizations with cost reimbursement/no fee contracts

5 Modifying commercial item contract or subcontract

FAR 15.403-2 adds the exercise of options if the price was
established at contract award or initial negotiation.
50

Information Other than Cost or

Pricing Data Defined [FAR 15.402]
Any type of information that is not required to be
certified IAW FAR 15.406-2 and is necessary to
determine price reasonableness or cost realism.
Such information may include pricing, sales, or cost
information, and includes cost or pricing data for
which certification is determined inapplicable after
submission.
Again, certification is the difference between the
two categories of cost/price data!
51

Information Other than Cost or Pricing Data,

with Adequate Price Competition FAR 15.403-3(b)
Generally, no additional info is needed,
unless the price is unreasonable.
If due to unusual circumstances additional
info is needed to determine
reasonableness, to the maximum extent
practicable obtain it from sources other
than the offeror.
You may request information to determine
the cost realism of competing offers or to
evaluate competing approaches.

52

Situations Where Non-Certified Cost

Information May be Needed
In general, you dont expect certified data will be
required, but you need cost information to
determine price reasonableness or cost realism .
For example, you:
Expect adequate price competition on a source selection
but dont expect to be able to rely on comparisons between
offers to determine price reasonableness (e.g. offerors may
use different technical approaches).
Have determined the action is below the cost or pricing
data threshold ($650,000), but you need cost information
to determine price reasonableness.
53

Instructions for Submission of Information

Other than Certified Cost or Pricing Data FAR 15.403-5
In the solicitation, you should specify any
information other than certified cost or pricing data
that is required (Section L).
It may be submitted in the offerors own format,
unless the contracting officer decides use of a
specific format is essential and the format is
described in the solicitation.
If you didnt specify the info in the solicitation, you
can still request and obtain the needed information
after initial proposals are submitted.
54

Info other than Cost or Pricing Data:

Limitations on Commercial Items
- FAR 15.403-3(c)
Requests for offerors sales data is
limited to data for the same or similar
items during a relevant time period.
To the maximum extent practicable,
limit any request for info to include
only info that is in the form regularly
maintained by the offeror.

55

Things the Solicitation Must Specify on Cost or

Pricing Data, or Info Other than Cost or Pricing
Data (FAR 15.403-5) - P. 1 of 2
Whether certified cost or pricing data are required
That offerors may submit a request for exception,
instead of submitting certified data
Any information other than certified cost or
pricing data that is required
The required format for the cost or pricing data or
information other than cost or pricing data
Necessary pre-award or post-award access to
offerors records, if not provided by one of the
standard clauses

56

Things the Solicitation Must Specify on Cost or

Pricing Data, or Info Other than Cost or Pricing
Data (FAR 15.403-5) - P. 2 of 2

Standard Clauses are 52.215-20, and

52.215-21 (mods)
Called out in FAR 15.408(l) & (m)
You may use these if reasonably certain cost or
pricing data (or Info Other than.) needed
These cover the requirements and allow
offerors to request one of the exceptions from
submitting the data
If you want specific data without exception,
dont use the standard clause
57

Section 5
Field Pricing Support

Field Pricing Services

FAR 15.404-2(a)(2)
Technical, audit, and special reports associated with the cost elements of a
proposal, including subcontracts.
Information on related pricing practices and history.
Information to help contracting officers determine commerciality and
price reasonableness:

verify sales history to source documents

identify special terms and conditions
identify customarily granted or offered discounts for the item
verify the item to an existing catalog or price list
verify historic data for item to qualify as commercial
identify general market conditions affecting determinations of commerciality
and price reasonableness

Information relative to the business, technical, production, or other

capabilities and practices of an offeror.

59

Field Pricing Support

FAR 15.404-2(a)(b)(c)
Defense Contract Audit Agency (DCAA)
Trained in accounting, finance, and auditing
Access to contractor accounting records
Auditors (on-site/off-site) & Financial Advisors (FA)
Provide proposal analysis of material, labor, indirect rates, G&A,
COM, etc.

Defense Contract Management Agency (DCMA)

Pricing and/or Technical Personnel: production specialist,
engineer, etc.
Provide technical analysis and/or pricing support
60

Defense Contract Audit Agency

(DCAA)
DCAA provides the following:
Proposal audits by request
Agreed Upon Procedures Assignment
Forward Pricing Rate Agreements (FPRAs)
Direct labor and indirect rates w/DCMA ACO as lead

Incurred cost audits: on going

Qualifications/requirements:
Formal proposal request
Formal contractor proposal in a structured/auditable format
Minimum 30 to 45 day request processing time
61

Other DCAA/DCMA Reviews

Accounting system reviews
Pre-award/post award
FAR/DFARS 9.106/209.106

Estimating system reviews

DFARS 215.407-5 Estimating systems
DCAA performs but DCMA/ACO function

Compensation System Reviews (CSR)

Contractor Purchasing System Review (CPSR)
Reference FAR 44.3 and DFARS 244.3
DCMA/ACO function with DCAA assistance
62

Technical Analysis
[FAR 15.404-1(e)]
Evaluation performed by personnel having specialized
knowledge, skills, experience, or capability in engineering,
science, or management on proposed material types and
quantities, labor, processes, special tooling, facilities,
reasonableness of scrap and spoilage, and other factors in
the proposal in order to determine the need for and
reasonableness of the proposed resources.
At a minimum:
examine the types and quantities of material (kinds and
quantities evaluation)
and the need for the types and quantities of labor hours and the
labor mix (skill and category)
63

Field Pricing Support & the

Cost or Pricing Data Threshold
DFARS 215.404-2(a):
PCO should consider field pricing support for
Fixed price proposals exceeding $650K
Cost type proposals exceeding $650K from offerors with
significant estimating system deficiencies
Cost type proposals exceeding $10 million from offerors
without significant estimating system deficiencies

PCO should not request field pricing support for

proposals less than $650K; exceptions:
lack of knowledge of particular contractor
sensitive conditions/problem areas
64

Points to Consider When

Requesting Field Pricing Support
Per FAR 15.404-2(a)(1):
The contracting officer should request field pricing assistance when the
information available at the buying activity is inadequate to determine a
fair and reasonable price; tailor requests to reflect the minimum essential
supplementary information needed to conduct a technical or cost or
pricing analysis.

Consider cost risk!

Contract type: there is more risk on a FFP than CPFF or CPAF contracts.
Proposal total dollar value

The DCAA PLA or FA can help determine the type of field

pricing support/audit services needed.
65

FSO is the POC for DCAA

Request DCAA audits through the FSO
Submit audit request to DCAA
Receive/file DCAA audit reports
Tracking/report status of DCAA audits
AFARS 5142.1-90-2

Contract Audit Follow Up (CAFU) Program

DoDD 7640.2
AFARS 5142.1-90-2
SOP Number 25
66

Contract Audit Follow Up

(CAFU) Program (1 of 2)
Track/provide status of reportable audits
Reportable Audits
Estimating/accounting system and internal control
reviews
Incurred costs including final indirect cost rates
Claims
Defective pricing reviews
Termination settlements
CAS issues/cost impact statement reviews
67

Contract Audit Follow Up

(CAFU) Program (2 of 2)
Recent revision: DCMA database now used
Rules/procedures?
Reviewed/updated:
March 31st
September 30th

Overage Audit Review Board

Discuss unresolved DCAA audits over 6 months old with
the Commander

Bottom Line: reportable audits must be resolved in a

timely manner
68

Section 6 - Cost Allowability

Factors Affecting Cost

Allowability (FAR 31.201-2)
Reasonableness
Allocability
Accounting Principles & Standards
Contract Terms
70

Reasonableness - (FAR 31.201-3)

Definition: A cost is reasonable if, in its nature
and amount, it does not exceed what a prudent
person would pay in the conduct of competitive
business.
Considerations
Is the cost necessary?
Is the cost consistent with sound business practice and
law?
Are the contractors purchases done on an armslength basis?
71

Allocability - (FAR 31.201-4)

Definition: A cost is allocable to one or more cost
objectives (e.g., contracts) if it is charged based on
the relative benefits received or some other
equitable relationship.
A cost is Allocable to a Government contract if:
It is incurred specifically for the contract, or
It benefits the contract and other work (e.g. its
an overhead cost), and can be fairly distributed
based on benefits received, or
It is necessary to overall operation of the
business (e.g. certain G&A expenses).
72

The Most Common Ways Costs are

Incurred
Expend Cash - Actual outlay of dollars (by cash,
check, etc.) in exchange for goods or services.
(e.g. Pay a vendor for raw materials)
Accrue Expense - For accounting purposes,
because a future obligation is being incurred or an
asset is being used. (e.g. Incurring an obligation
to current workers, for their future pensions)
Use Inventory - For example, contractor buys
inventory in advance and charges it to contracts as
inventory is used.

73

Sources of Accounting
Principles & Standards
Generally Accepted Accounting
Principles (GAAP)
Cost Accounting Standards (CAS)
FAR Part 31 Contract Cost Principles
and Procedures
74

Accounting: Financial & Cost

In semi-plain English:
Accounting is the process of identification, measurement,
and communication of financial information about
economic entities to interested parties. Two types:
Financial accounting focuses on measuring the results of an
organizations operations for a period of time, reflected in the
financial statements.
Cost (or management) accounting focuses on cost allocation to a
product, service, or contract; management uses the information to
plan, evaluate, and control within its organization and to assure
appropriate use of, and accountability for, its resources.
75

Generally Accepted Accounting

Principles (GAAP)
Generally Accepted Accounting Principles or GAAP
refers to the common set of accounting concepts,
standards, and procedures which represent a general guide.
GAAP principles are those that have substantial
authoritative support or are based on accounting practices
accepted over time by prevalent use.
Financial Accounting Standards Board (FASB), American Institute
of CPAs (AICPA), Accounting Principles Board (APB), etc.

The end products of the accounting cycle, the financial

statements (balance sheet, income statement, etc.) are
prepared in accordance with GAAP.
76

Cost Accounting Standards (CAS)

(1 of 2)
Purpose of CAS:
Promulgate standards to achieve uniformity
and consistency in cost accounting practices
to be followed by contractors and
subcontractors for defense contracts. It is an
attempt to provide common ground between the
contractors and the federal government on cost
accounting issues during proposal preparation,
negotiations, etc.
77

Cost Accounting Standards (CAS)

(2 of 2)
Currently, there are 19 standards.
Cost Accounting Standards Board (CASB) administers
CAS: five members, includes representatives from
government, industry, and academia.
CAS/CASB was originally established in August 1970
under the legislative branch.
Ceased operations September 30, 1980 due to lack of
funds.
Re-established in November 1988 under the executive
branch within Office of Federal Procurement Policy
(OFPP) which is under Office of Management and Budget
(OMB).
78

Exemptions From CAS (1 of 2)

Eleven exemptions, with the most common (7)
below:

Sealed bid contracts.

Negotiated contracts/subcontracts less than $650,000.
$650,000
Contracts & subcontracts with small businesses.
businesses
FFP & FFP with EPA contracts/subcontracts for the
acquisition of commercial items.
items
FFP contracts & subcontracts awarded on the basis of
adequate price competition without the submission of
cost/price data.
79

Exemptions From CAS (2 of 2)

Contracts/subcontracts in which the price is set
by law or regulation.
Contract/subcontract executed and performed
outside the U.S., its territories, and its
possessions.

80

CAS Coverage
Two types of CAS can be applicable, depending on the
dollar value of previous awards and current acquisitions.
Full coverage:
coverage comply with all CAS in effect on the contract
award date and with any new standards.
Modified coverage:
coverage requires contractor to comply with four
standards
CAS 401, Consistency in estimating, accumulating, & reporting costs.
CAS 402, Consistency in allocating costs incurred for the same
purpose.
CAS 405, Accounting for unallowable costs.
CAS 406, Cost accounting period.

81

CAS - Disclosure Statement

Firms that have contracts/subcontracts subject to full
CAS coverage should have submitted a CASB
Disclosure Statement, providing information on how
they charge specific types of costs.
Contractor discloses/documents company accounting
practices to the government.

The ACO and cognizant DCAA auditor are

responsible for reviewing the contractors Disclosure
Statement for adequacy, and for compliance with FAR
Part 31 and CAS.
82

GAAP vs. CAS

GAAP and CAS are not the same.
GAAP generally refers to financial, not cost,
accounting guidance.
CAS is an attempt to extend GAAP-like guidance
to government cost accounting.
CAS Objectives:
Common cost treatment, same terminology, and the
avoidance of cost manipulation (gaming).
Facilitate proposal preparation and negotiations.
83

CAS: FAR References

FAR Part 30
CAS Administration
Policies and Procedures for applying CAS
to negotiated contracts & subcontracts

FAR Appendix B
Contains the actual CAS
84

FAR 31.2 Cost Principles for

Commercial Organizations
Applies to all contractors.
Defines direct and indirect costs.
Addresses specific kinds of costs as to
whether allowable, unallowable, or
allowable with restrictions.
Examples of unallowable costs: interest
expense, bad debts, entertainment costs,
donations, attorney fees for claims.
85

FAR Part 31: Examples of

Unallowable Costs

31.205-3 -- Bad Debts

31.205-8 -- Contributions or Donations
31.205-14 -- Entertainment Costs
31.205-20 -- Interest and Other Financial
Costs
31.205-51 -- Costs of Alcoholic Beverages
86

FAR Part 31 Cost Principles for

Other Organizations
Refer to FAR 31 for separate, unique
coverage of the cost principles for
contracts with:
Educational institutions (FAR 31.3)
State & local governments, & federally
recognized Indian tribal governments
(FAR 31.6)
Nonprofit organizations (FAR 31.7)
87

Contract Terms & Cost Principles

Specific costs may be addressed in RFP or
contract. (e.g. Although transportation costs
are generally allowable, the contract may
restrict them to a certain mode.)
On cost allowability, contract terms can
only be more restrictive than other factors.
(e.g. Contract terms cannot make interest
expense allowable on the contract.)
88

Conclusion

89

Management/Cost Accounting
System
Contractors have to manage their organizations,
products/services, and contracts
There needs to be a system in place to determine
whether the service, product, or contract
Is on schedule for completion
Is at its budgeted cost
And if not
Why not?
What is being done to correct the situation?

All major companies have such a system!

90

Adequate Estimating System

ACO estimating system approval means that the system
has the controls to consistently produce adequate and
reliable estimates.
established policies, procedures, and practices to persons
responsible for preparing and supporting estimates

A disapproved system is a red flag indicating that the

firm's estimating system does not consistently provide
adequate proposals.
Normally, proposals from a firm with a disapproved system should
be subjected to closer scrutiny, particularly closer scrutiny by audit
professionals.
91

Adequate Accounting System

Primary goal of an acceptable accounting system:

Ensure that costs are appropriately, equitably, and consistently allocated to all final
cost objectives (i.e., individual contracts, jobs, or products).

Pre-award accounting system survey performed by DCAA.

System should answer affirmative to specific questions:
IAW GAAP? (IAW CAS?)
Identify & segregate direct from indirect costs, allocating these costs equitably to
specific contracts on a consistent basis?
Timekeeping & labor distribution systems appropriately identify direct and indirect
labor charges to intermediate & final cost objectives?
Accumulates costs integrated with, and reconcilable to, the general ledger?
Determine cost of work performed at interim points (at least monthly) because of
routine posting to books of account?
If required by the contract, identify costs by CLIN/SLIN or by unit?

Specifically: Are there accounting controls in place?

92

Cost Analysis Summary:

Question Checklist
Understand the contractors proposal.
Review the proposal
The proposal/contractor should provide answers to
these questions!

What are the bases/rationale for the proposed costs?

What assumptions were made and reflected in the estimate(s)?
Support documentation provided for the proposed costs?
Are the costs realistic?
Are the costs and/or price reasonable?
Are all the contractors expected costs included in his proposal?
Have all the contract requirements been priced into the proposal?

93