Savior

--~1
I
j
JDENT GUIDE
CON 170
of Cost & Price Analysis
it 1, Lesson 1
1 with the
Government
October 2016
Required Student Preparation

Read Article# I and complete questions 1-5 as pre-course assignment for CON f 70 Stud
to read Article #2 in its entirety prior to Exam 1.
cnts are
Pl:-1nned Academic Time Required: I hour
Student performance will be informally evaluated during class discussions, and fonnally
evaluated on Exam 1.
Terminal Learning Objective
1.1 Given an acquisition situation, successfully

distinguish various seller pricing strategies
Enabling Learning Objectives

... --- --- ----....--
--- .. - -
- ...
--
- - ----------
----_
1.101 Explain the unique aspects of Government contracting

compared to commercial contracting
1.102 Recognize the diffcront market structures
1.103 Differentiate between seller pricing stmtegies
CONJ 70, Unit } lesson 1 - Comracting With The C
o, ern111er,11
}'J '
<,ge I -
Lesson Prese11tatio11
Read "Remaining Issues in Adopting Commercial Pra ,
.
.
c ices m 0 efense A
...
I
Michael Heber mg and Mary E. Kinsella (included as Attachment
.cqmsataon,'' by Dr.
1 herem), and answer
questions 1 through 5.
Unique Aspects
of Government Contracting
Heberling and Kinsella Article

Discussion: Questions 1-5
l. What are a few of the unique systemic and cultural differences of contracting with the
Government compared to the commercial sector? Why do these differences exist?
l
t
iw
~ilb respect to Market Forces, explain Heberling & Kinsella 's metaphor indicating
nd
' a CAS are "surrogate market forces for the defense sector."
CO,V! 70, Unit I le.\:mn 1 - Contracting With lhe

f-";:~~'tc-:.., ,. _
. . - - -,-,.,,,,";:-,,,t,,._,.,,,,,,_..,_,,,_ ___
Cim 'l:rn111e111-
Page / J
3. \Vhat ~re a few common differences in products sold to DoD compared to th
commerc1al market?
4. At a recent job fair, a hiring authority from a local contractor commented, "Many
people with Government acquisition experience have a difficult time adjusting to the
commercial environment." How does this comment align with Heberling & Kinsella's
observations?
5. What are two ways Heberling & Kinsella recommend the government improve its
acquisition process?
d th review of the Heberling and Kinsella article, it is important to recognize there

To co~clu e et of contracting with the Government. In developing our pricing skiJls we
h
'
ique aspec s
are un
. th se differences and learn as muc as possible about both Government and
'
mus t re cogmze .e through market
researc h .
commercial practices
CON/ 70, Unit I lesson I - Contracting With The Coven
zmenr - Page I 4
nf).:u Unique Aspect~ of Governme_nt Contracting
,;:,
~~
0,11# ~
Heber/mg and Kmsella Article
,u nq
Thoughts on Acquisition Reform

- Measures of success?
Use of commercial terms and conditions
Stri..,.e to make DoD work attractive to contractors
- Commercial-like acquisition system?

Commercial practices
Risk management vs risk aversion
Steps we can take to move in that direction?

- Recognize there are differences
- Study commercial practices, em1ronment
- Market research!
With some familiarity on the uniqueness of contracting with the Government, we will now
examine a range of different market structures which contractors operate in when pursuing
Government contracts. The following graph illustrates the general range ofcompetition in
markets for goods and services and can provide insight to the market pressures contractors are
facing, which will influence their proposal pricing strategy.
liiJftJ.U
Different Market Structures
Dr.'.nst AcquisitiCHI Un,vl!fSlty
f
I
There is a range of market structures:
I
;
Few Sellers
Few Buyers
CO/V/ 70 C17 .
,1 I Lesson/ - Co;
11roc 111~f{
. ..
II tth 71,e
6"t11 -ern111n 11 -
Pr~t.:e I .f
The left side of this graph: There may be several buyers on the left side of the graph b
~re only a few sellers. Those few sellers may not control the market, but exert disprop~rt~: th ~re
influence on the market.
na.e
The right side of the graph: There may be several sellers engaged in the market, but there
are
.
.
. fl
on1y a fiew buyers. Those few buyers exert d1sproport10nate
m
uence on the market.
The center of the graph indicates there are enough buyers and sellers to have competition
without a dominant influence by a single buyer or seller, or group of buyers and sellers.
Discussion:
For non-contingency, operational contracting requirements within the United States,
where would you expect the level of competition to be on this "bow-tie" graph?
For production of a new missile air defense system, where would you expect the level of
competition to be?
For modification to the missile air defense system 3 years after award, where would )'OU
expect the level of competition to be?
CONJ 70. Unit 1 l esson 1 - Conrrac1ing JI "irl, The G o v

ern,n, ,,:-:-,,--:=-,....--
o,I~ w.,::~" !).-,~c,-sf:'/
market penetration)
cost-P us (
,,
' ("skirnrn1ng )
oernand
Rule of Tllurnb
suy-in
CONJ 70, Cnil 1 Lesson 1- Cvt11ract1ng /l'flh The Gm'i!rn1t1ent- Page / 7
seller Pricing Strategies

Lamm & Vose Article
Cost-plus (market penetration)

- Low unit price
- Penetrate market
- Discourage competitors from entering
Challenges for buyer

- Obtaining cost to produce" information
- Determining if price is rationar, or too risky to
11
Government
Seller Pricing Strategies

Lamm & Vose Articre
Demand ("skimming")
- Price is set by !'what the traffic will bear"
- Earn quick return on investment
1
- Common in high demand markets wth
and rapid change/upgrades
'
no alternatives
- Encourages other firms to enter market

- Difficult to collect information to veri.fy
_ comfort level in paying a premium p~ic .
"the traffic will bear it"
e, JUS! because
' / 70, (;nit
I f,esson J
- C-emtracring lrith ;
' , ,
----
'"nn1c,~
Page / 8
Lamm & Vose Article
Rule of Thumb
- (lea.~erlfoflower"_ price setting among competitors
- Trad1t1onal: cost to produce, plus a mark up
percentage or,
- ConseNative-minimal risk for losses
- Ignores uncertainties in market
- lvfinimal--simple to understand, few barriers to

gathering information
- Ensure significant uncertainties are not ignored

Lamm & Vose Article
Buy-in
- Primary goal is to recover variable costs
-Secondary goals are to recoverportion of fixed
costs, earn some profit
- Related to "certain" conditions
- Gaining understanding of "certain" conditions

- Determining if price is rational, or too risky to
Government
'
COkJ 70, Cnit J Lesson I - Comractlllg II ith The Gm ernmmt - Page 1 9
The article explains that contractors, in selecting a pricing strategy, will consider both
and internal factors. Recognizino these factors is important to Government buyers Parte?erna\
;::,
ular\
1C
dunng
the market research....,and proposal
evaluation phase~. Lamm 8:, Vose present ' several
l
external and internal variables which influence seller pncmg strategies, as summarized th
00 e
following pages/slides.
7. According to Lamm & Vose, is there a relationship between a contract type and pridng
strategy?

Lamm & Vose Article
External market variables also influence seller

pricing strategies:
_ Nature of the product
_ Market characteristics
Level of competition
Demand for product or ser\ice
Avvareness of available substitutes
_ Buyer's control variables

Government contracting process
Contract type . special terms
Political climate
Contract type
C OiV I ?O.
e,11 ;1
I Lesson I - Com mering H irh :h e ( ioiemmenr . Page i J(}
Seller Pricing Strat
egres
L amm & Vose Article
Seller's internal variables

- Cycles of capacity-producing above
b
- F inancial health
or elow max?
- Economies of scale
- Experience. learning curve, improvement cwve
- Level of capita l investment
- Management orientation
- Accounting system
8. Lamm & Vose make a claim: "If a selling firm believes that a buyer may not be aware
of competing products or substitutes, it may be inclined to increase the profit margin. "
- Could this really happen in the commercial world?
- Explain the term "caveat emptor" (let the buyer beware):
.f
!
i'
cilr/Jough not directly stated in the article MARKET RESEARCH is the process buyers and
i ~vemr~ient acquisition teams need to us~ to learn the external (and internal) variables, and gain
n5,g1Jts mto
,
d
detail .
. a contractor s potential pricing strategy. Market research will be covere rn more
10
Unit 1 Lesson 5.
~
- - - - - - - - :C::-:'O~l\:-:-,.J-7_0,_l_1-,,,-11-,-I-Le.5-'SO_n_J-_-C-on-,-ra-c-,it-1g--::ll~
,,-:-h-;:l-:;he-, C:: : :t:--:J1~
e:=:rn=-:-11: -:-u!::::
-:J(~
,g;:;
e-;-,I/JI
11-;
1 -~Jii

Conclusion
Market research is the key to assessing seller
strategies, and working through the challenges
associated with each
For your next requirement, assess:
- The market structure
- The most prominent external and internal variables
the sellers are facing
CO:VJ 70. C11i 1 I l , ..
, t.).}rm
(.
-
.,,
un1r a ct 111~
'
11 11h . - ; - : - - - - - - - :
The C10 1 ernment - Paxe I }
xercise: Assess tlte Seifer 's Strategy

. rniug Objective
t:erentiate
between seller pricing strategies
A r reviewing and discussing the Lamm & Vose seller strategies one sh
. to
p..,1e
.
I . . h
I I
'
ou Id begm
Jntrodoctio~
.
reco ize circumstances t 1atI m1g temp
d. oy .t ,e use of .those strategies Compl etethe .:,ollow
questions
gn based on the class ecture, 1scusst0n, and sltdes.
mg
ASsessment
This
activity is not scored or graded.
student Jnstructions: Based on the readings for this lesson, what is the Lamm & Vose's seller
ategy that the seller will likely employ? Be prepared to defend your answers.
1. over the summer,
511
a self-employed craftsman started his own business, and hired 5 students.

He was aware of the general pricing practices of other painting finns, "Cost of Labor and
Material, plus 50% to cover bonding, insurance, transportation and profit." As a new company,
Il
he priced bids as "labor and material pIus 4 5%." What strategy?
2. A software corporation introduced a smart-phone to the market at a time when its capability
1
i
was essentially unmatched. Because of their significant investment, and the ability for other
businesses to enter the market with a reasonable substitute, their initial selling price was
g,uficantly higher than other phones entering the market. Their earnings skyrocketed in the
short tenn. What strategy?
51
i;
!
;.i
fees an~~me ~ecurity and fuel costs continued a rapid climb, the major airlines introduced new
3. Asa I'aise atrfares. Soon after, the smaller airlines did the same. What strategy?
mpressively lo puter prrnter manufacturer is practically "giving away" printers with an
4
i .Ah omecom
.
Purch Ity to earn add. . tee.
ter captunng market share, the company should have the
PPortun
w
market
pr
Afi
ases
such
as
to
tttonal
profits
through additional cost reductions and follow-on support
0
ner cartrid gcs. What strategy is this closest to?
'
CON/70, Unit I Lesson I - Contracting /Vith The Gmernrnenl - page/ IJ
\)HC\t\); "rn.\C\!_>cs
I I
. ,en an acquisition situation, successfu\\y distinguish v .
anous sc\\c,
f:J<pJain the unique aspects of Government conttactino c
1 101
02 "plain the different market structures
cootracung
: 03 Differentiate between seller pricing strategies
11
11
om\)a,cd to commc,C\~\
nv MICl--lAEL E. l--l[BERLING, PH.D ., CPCM,
AND
tvtARY E. KINSELLA
o an era of decr(>asing military

budp,ets aud changing enemy
ing defense indu~trial ba~ become

less arut~ if there is a ~'0Ilf.! and wffi.
threats, there has been a change

in the prio1i1iej; a~iate<l with
draw.
ing commercial base on which to
tlcknsc acqub.ilion. Dmin.J.!" the co.:.d
ComnJt:rdalizaUon goals }1ave

war lhc emphasi~ was on high per- been facilitated with the assagc of
fonnc1ncc and sd1edul~. Today th1. the Federal Acqui~tion StrC'amlining
foc.:us is increa~in~ly d1re1.:_l~:d at af- Act (FASA), the Fcleral &qu~itiun
fordability. Althoui:.th the m:!ttary ac- Reform /\.ct (FARA), and the current
quh;ition but!~cl is down 70 ptrcent !'rcforence for per fonuance and
uirements for new sy::;tcms and
m<lu~~-y ~pecif:cations over m:lilary

spec:-UJca_ti??S (?\l IL specs). n1csc roform act_L~t1cs ha\'e made both major
aud 1XJS11lve ch:u1I{es to the oov ,

~ l',
.
,,, t..:rnmcn s pro1.:1.1remcnt ~Y~tcm but.
from its 19~') p~1k, the. f>c:~rt m~~t

. f l)c{cn~ (JJOI)) cont.mm.":, to h.i,c
0
req,rat1~ tooId one'::i,

~
.
.
8
0 8
P
ncccs,;lty, the DOD 1$ turnm('.
1
.al market to take adn1merCI
to th,eco
' . fit~ products. tcchnolog1cs..

vant.agt. 0" ~ment practic("S. Conseand man~~e DOD is striving to use
quentlY,
i.al products and pm~
rnorc conimcr~ military require-tic.cs in m~etl~guisition titrate1,ry is
ments. Th 5 a~ reduce co~ts and
seen as a way_ ~cs. In addition. the
shorten (cad t1~ ~t~.,d with a dccrcas
prob ..Drn:5 asSOClv
~~~~er of complicating iss~cs
r:.
We must recognize thnt the cicfcnsc procurement systcn 1 .

com mer .,, m
part
d t,rers f mm its
I coun.
c1u
terpartb
. - ccam,e it wa~ <lesign(d and
mod1ticcl to a.cidres...q a nttmh
note--
gt11mate.
governmcnt-uniq
cerns. The~ _riif~c:renc-.t:$, h~~ ~?~now serve to mh1bit the aclo . c.vcr.
P1on of
---:-:-:-.-:-:70 [,,'n it J Lesson I - Contractmg With Th . ,

C01\ 1
e Cmiernment _ Page 1 ]6
ni1anv commerc:i:-11pr.u:lic~s A., n<>cq Ill.

sition retorm contmues, \Are nef'd to re.
.sit why :"e have governnH~nt-unique
pnictkcs 111. the firstylace and whetltrr
the ur1tle1 ly:ng cond1t1?ns nt.acessitating
these practices h~ve, 10 fart., channed.
We mu~~<ktennme what are the ~ystcrnic differences that complicate or
precim1c . the full adoption of conua'lercial pradtcc~. TI1e next step is to ~ee if
the-~ diff(:r.cnces <:an ,~c overcome (or
at least m1t1gatctl). \\i 1tho11l this information, ~e. ~ay b_e expecting more
from l<:'.qu1~1t1on rctorm thnn is rcausticll'iY po!'.sible.
Much hns be~. n written about the differc nr.rs between govcinmcnt contracting and the commercial counterpart. However, little has hee11 written
oo why tho~e differences exist. If the
government sinl(lly w:rntcrl the best
1
'
,.,
quality prnducls and services and was

willing to pay the prevailing nrnrkct
currenet a ,
~J
C.CC' J)l l l
1Jc and priv
,: a, e for all
not. 111e Date, lht- Don iro ~t:bts, Pub.
1
money.. de~ ~J~as a differ~~~! 11Y dnes
Ont- tyPe will ing on What it is co!o.r of
oprneut
he for re..~arch bt1}' 111g.
anoth 1_, .ranolht~r type for and dt-ve}.
~
~ lOr constr
t
Productio
.1or o1>erati .
, uc ton, and
n,
..
ons anti rn .
another
~tove-piping'' of mo aintenitnce. lni8
s1onal rlnd Pentugo
at the C'ongrt;.
ny
co_ntrol mechani~~. n eve! ~rovid-..as a

misuse of funds ulltt mmuniz~s the
pro<..~~ COUlJ)licatcs n3~Unatt!ly, !hi~
by taking flexibility . PrOC'urem(nt
a~ers al th~ "'xrv-ut alY.ay from n1an"' "'"' ion evel
In addition to th " 1
issue DOD
e . co or of monc,)"
:
money will "ex },. , 1
certain period of ti11 , t . ~)lrt;! aftt:r a
Th'is situation
.
leads eto, aJt. is not used.
volatility itl th 1 ,
great dc-.:ll of
.
process Thcrt! < c,cnsc procu
. rement
Imposing Pollcles
The obj1;:ctive of tlu d . . -'

e 1s a massive surge i
huymg at.the end of the fiscal year ~it~ curt"l.ll~nt system goes b :retJ ~ proYing (?O-Ods aGd ~"'" " ) ~n<l sm1~ly
the goal of spending to the pre;tab. bu
tar , 'h
' "'
1.or lhe mi
9comm
Q,~er~/iS.~al:~:;mark.et
i~tri~~~~~P:i:}}:1],
'
.
i
,
f
r{;
/
,i t ita
ke;1:2~~"\<:~
, 1~
e procurenent sy~tem ft ;
ser~e.s as av hIC e to fu r ht r h.:c..:ral
soc1alandeconom
cpo;cyf
., _
'
1
... l~ U':i(:(i to
pr~:no~ U.S. bu :n(' ses o\'er fo:-e~n
bu~mes~s a:id rna!l busine:;SE-s over
Jargr. busmtsses. These a11d oLf-i<:r St'\.'I
~ 1
,,., /:..t.;<t~hnoltr,
:~i:t:\: :i"4X~6!t,i1l!Wf
i
t;a~f~i
"te~~afrdYfi~t'a em~i
1
l: . :,::,{ :}tf1Jt ~~1it':t:J&ft~iilfti~{
on?ary socic~.<'.or.o:nic llo1l~ arc co... tly in t<".rms of the infra~tru..:tu;-e r.eres-
sary for admini~tratic,n and btctu;;r: of
the premium priers that or.:en rcsl!lt.

If l>ur national le2dcrs ft-e l thesi: ~ c-
lishcd yearly funding profile.

lJnderruuning may eveu have negative l:onsec111cnces. 111e fnigal orga11i
iation that has funds left over at the end
of each fiscal year m~y nor only lo, c
those surplus funds but find its budget
dK:re~-~ed (by that same amount) in th~
foltov.-i11gyear. Thr. DOD'~ pmcuremt>nl
system ~perntes in a "public administ.rntion" environment. In co!itra:t, tl~~
ccmunerdal sector operates ma hu~1ness adminh, tration" cnviromncnl,
where unclcrrunning is both ~rH:onr~
aged and rew.arcled.
fairness
omlary goals are a d~'-ira.!:> e iun,t;cn

of the defem:.c pro('-cr~ment w:ttr.1.
they $hould alw rc~ l:tt tb1t traceoff~
will have to be maiie in ordcrtoar:ii('VC
them. Giwn the-se ron~raints, it will be
mor diffi( ult for the ddtn':< pror.: ir~
ment sy:ittm to mirror the economi s
and efficinicit's of the marker dri',:en
procurement ~y~km tl '. al it :se~ks to
emulate.
The commercial ma:'ketplace ~ a

comp!t:x mix o{ both domt- ti<: and i,n
krnational parfri pants. Co11S(,quent;y,
when a comm~rcial firm St:tk:) a worlddass ~11pplicr, the rt:Jilly impor~nt omsidt:rations i11dudc pnce, ~11ality, p('f
formance, ddi~ery, ,a1tac1ty, ~ntl as.surance of supply. Hthe ~uppl1C'fd<"a~
eet theSf n:<1uire1mnls, it really ~~s
m -matter what size
the comp?
.ny :;,
not
. .
where it is k,cattd, or who owns iL
As a resull of numerom; abu 5t'S Ill ~te

past the government has a no~Je obJ~, ,to UC fair
. Ill a11 Of tI s Cleal11u~
wtth Mork et Forcesk~' ~ ver\. Jifferent
live
; 1': , r
Tor ddens~ mar et . ;
l
.
, I sec.toro)U r.tr.rpa!'
frolll it!- c01~1111fL.IJ - tly the only cu s1
ofkn becomes countcrpro( ~tc:l!W,
Th~ DOD
etht' llOI;
1
. , . t , to! fa1r-1ess,
ttieJ toimr foni pnK : i not lxirto,~ .I

,_. .~r11 plc 1ll t. ,em eft;::;
C~...
'
... te ns cc
. "fir1
ll consunier, ttul!t.'~
govcrnmenl allows any lll . ;!'air. !Su
party" to protC':-;t. Tiais o11tsrrowth .
sup
1it.,rs UnfortLmatd;r, this ohJcd.J\C

. . For
is ~:~~;o.~n
cial reward anc_l sur-
DOD sc<'f1)r has fewer n,a

work on its procurement S)"StC1:' b 'It
111e oommcrdal sector ha~ _a u1
in mechanism to preven~ paying_~~~

much for goods and services . ~1
called international compet1t1on. If
thev do not buy wisely, the marketpla~e is unforgiving. In tl~e ddensc
market, there is no such pm.:e ':n':f'01
mechanism. The DOD_ is a c~nlm~11.1g
entitv no mitkr how mcf fic.1cnt it is.
Will; 'limited market forces at work,
the 000 sought to find ways to .con
trol cost in a system where there 1s no
fatal penalty for poor procurement
practices.
The Truth in ~egotlations Act (11 NA)
and th~ government Cost Accounting
S:.an<larrls (CAS) sought to acldr~~ Uiis
inhennt problem. In ..~-sence,TINAand
CAS serve as surrogatt market forces for
the ddense sector. Must commercial
firm~. howcvrr, wmt no part of TINA or
CAS. 'Oley view cost and pricing data as
proprietary and key to their comp?t~tive
advJn~agc. Commercial firms sec CAS as
a rt'tlundant government ac..'t.'CUating sy~-
tun that requires a costly infra~tructure

to both install and maintain.
Risk
Mi:itak~ made in the defonse Pr<>-
~urcmcm S}:stcm arc newsworthy. Un~

tort~n~ely, isolated incidents often result 1D punishment of ti1e innoc.t>nt ..
lawi; to ma.I.cc sure th~ mi~akcs nc,er

occ~r aga:n. This potential for r><>stmcn rc:11 seoonrl guessing by oversight
as;;~nc1e~ and the media will alwa s
exist Th~ condition mak
Y
pro
cs 1t safer for
mm
manalcrs
and
conrractin
offiicers to err on th d f
I",
than to ~how r ~ si. e O conformity
5.1, ..... ..;c~
orr.merci.,}
int _tahvc lf1 adopting CCJst.... J!,
pr
,
r,
.
tcm.
-~ .... ... ~ ........... ~ ........ .. ~~ .. ; .:... ~ ............)
CustomerSupplier
R.e-lationships .
Many commcrcw1
0.
firms are fully rnpahle
___....,.~ ...... ~,
. .
. . . ~ : : .- :
of meeting military re-
for a number of rea~

sons, many r.ommerdal
.
.
finns are reluctant to do b11~111e.s."" with
the DOD. Rightly or wnmgl>, defense
customers come with a reput,dion for
excessive oversight, compliance, and
reporting requiremeats. AJthou~h these
companies are willing to provide com
merci.i.1 prnduct!-; to the DOD on normal
busines.,; terms, tlit~Y are unwilling to
change their internal opernlious to pr1r
duce small quantities of military prod

ucts.
As the single buyer in the defense
m.arkE1. the DOD had significant leverage over the ddens~ i11du!;':try. In the
post-co.d \\-arera, lht. trdtlitiunal cJdense
industiial base is decreasing in both size
~nd cap:tbility. As a result, the DOD is
mcr~~n_gly LurniflR' lo the commercial
i~ett~r to meet its SCL1.trity requirements.
In lhis ~ew environment., the DOD is no
long~~ ma position to dictate tcnns and
con?:llons to its ~1pplicr~
for commercial firms, compelilive
mar~cts _arc the driving force leading to
:rnc:e~t mternal OI)(:~r.ttions. It is rare for
s~!l custonwr to dictate terms and
~ndition~ that change the internnJ operation
fi >
.'
.
er
. of anoth
Pi1crs w1'J1
k rm. <n occasion ..'"'tin.
..,
fo
ma c- s~cial arrang-C'mcnts
~ ~reforred customers
~-~~~f~~i-~:.
.
Pcrformanca
quirements. However,
that show sig-
tihn
1:-en.t sy~em n . -&ernent Procur "" lh ~ur~uc OOI} work. In spite of

hveto do so 1'1 'et-e rnust be an in c
,e extcnsJVe a

ch
. le two .
cen- taken la, .. cqu:s,tion reform that has
ange in the Privat tna;or drivers for
a1 supplien;
c sector are fin.in- still ~ ~
1
Th~ j
. :
a
!CU 1t cu:.--tomcr.
u~! ~~~6aC:nJifnfierci
. nst,1h1laty of requirements anti
budget~, the government's right to terminate con!.racts at will, the puteulial for
a prote:-.t, an<l the penalties that result
from failing to compl}r\vith governmeat

procurement regulations "11 render the
DOD an undt!~irable customer. ln fact,

many cormnerci.il worJd-da.."s manufacfurers do not ev~n read t11e Cmnme,rce
Business Daily (CBD} when seeking new
work \,Vhether the-se l,ar riers are real or
perceived, the 00!) must work harci to
overcome them. The DOD needs to
est ..1blh,h its own "past pt.>rformance"
trae k reconl as a trusttd and reliablecus-
tu1m.-r.
PRODUCT PREFERENCES
Besides the sy~tt!rnir. and cultural <lif
fer~nct$ that exist between the de.feuse

and commercial procurement systerr.s,
there are significant product differences as well. Military pro<lucts dif kr

from commercial prnducts primarily in
terms of r><~rformance requirements,
product ion volumes, and ~rvice life.
P~rformance Requirements
lhe commercial a11proach to dc$ign
is oriented toward p1ice and qualityoften at the expense of hi,Rher pcrfom1
ance. n1e narrower the performanrc
0
fJcmtiug band, the lower the price 1n1ll
be for that item. In contrast military
r~quiremcnts traditionally ha;c cmpha
81
1..ed 11 ~dormance ovc1 pdce. A S)st~m
must be abl~ tu overate in Anil'lrctira
one day. in the dcser1 s uf th~ Middle
l~a st the n~t. and in U1e humid jun Ric's
~r ecntral _Afric.a on the following day.
<>11 mwrcial pans often arc !c.ss rob11st
th au military on~. making them unsuit
able for ddcn,r.;<' systems \vith h igh per
formance r equir~rnt'nts.
f (iJP IJ A.PV i lOtt 4
cov J70, lmit

. J Lesson _ C
.
1
ontractmg With
I
'.~ .. : ..
. ..~ ...... ."........, ~-r~~~-t.t.s_.

.~ ... :.;... .. ... .... .. .... .....
. . ... .
lor1g-tcr111 commitment Ho,""'

b:f no means ha; a actices. The DOD enr i~:a11t
iew co
l
,....
takes ar.d poor uc1 rnonup0}y on nti& D()l) . t}r~merci.1 finns would put the
m us prdcrr~<.l ca!.etrorv
diffcrC:n(:c h J g~ent. The.'. maJ(
1r
, owever IS. tl
Pur<'I
"' J
takes are resQJved i in ie.wa,., mis- ;i ed , Ycomml"'rc1al firms ha\'c rnanl<,r. mi~t..:.kes a , . n the private 'S(:csuccessful businesses without
"'. ilhout
corrt!ctt-d internally v
custorncrS: And, since they do not
AAC' is tru~.
n lhe DOD th<:'. OPJ)O- ~~f OD_husmess as a big money
Jf lh< f>Or>.1
thc'ie ;1:laltve lo _lhei: other customC'rs,
s tom0\1(4
. froin a n' rk
avc::rsr to a r1' 1;k -n1a1::i
cr
~
livafed t~nun:rc1al firms are not. mo-
tanc~/1
. The Prlc!!:1~r;_;~~~-~'.~~~- Militaty i

.. :~ ~- :......... :
. ~ I niesc two me.en

. service as .d0 a.11t'O.am1l'f
c
a produd 01 , . . DOD agcna~ are VIV,1.
tiv1!S
for change a1 .'
ci31 firms. In addmon, have the threat of
nonprofit anct ~o not flici ~ncie$ into the for all practical purbankruptcy to torce e . :
~ It the pos<'.8, absent from the
oces"
A~ a resu .
procurement pr ~~. '~ rliet forces at DOD procurement sys,.
(;(.HJIJl-' C
UANA GE 11,HN f
lh . G
e mernment - Page I / 8
11
ore ndJary designs

<kviak
,..
., l
11lt, ~
' , c,ntmerciJHy avmiat> <~on~, tli{
tn,n1 ,.."0' stJv th ey nre ;md the le~E. lik~ly
>t""el.. ~
1 l .
&1 11
,
n :nEn :ia
so utwn (st'e fifJ'.
e i:;
~ ... , 1
_
b
Ht~ 1). To Incrcas.e. affordab_ility, fht"!
l
'1 , .. , ,,
mee t its niilit -\

.
h<:corn"ryun,
pncmg
,
(Jue.- reo 11 ir .
s
I
t.sarna
., (rJJ<r,t
f'Ver:- y com1llicafhi yorch,dlc:nuc If _s,
merc1al sector
ctect>ss fo ti
i,11
I
.
iecn,,._
n Ol~nv- rec
,\gct s, [JOI
_ ,,tI',,
a more <liflirlrlt
1>nqn
: ,..) ,buyc~

-~hd\~
~.~:.11u$1.ruent of m_al1tary req!u renwuts

:,,:J ~tv go hand m h;1nd wrth a thor- commcrc,al c
g 14 :,;k U1an ll .
t1
ounterpart
it rr
nt~
t
~,ir'erstauding
of
the
t:ommt'.rcial
Jere are rnanv p
s. AHhouuJ
O' r I ,. '.i
J
.
J
~ducts and t~chno. og:es t lat ar~ most are bas~cJ~ nung roo1~ ava11a1 1 1
.
on SUOJf! t
J e,
pr able. A more pract1cn.l approach to
panson (slm.iJar Items in Ype of com.
j V31.
J
1
Je::;ign considers co~t arn qua 1ty more a s~~mdard market . .. C<1t?lORsorWith
pn,e) fhe.,.
. nrtmt than pt)rfonmmce at extreme P~.wn pncmg techni
.-.e corn.
1
~!~1'onmcntal conditions (i.e., tcmpcr- ily adaptable to militarqut-s ~re not reade .i ~h
I
d 'I. .
rure, humidity, ShOCt(, an \.'lurall~U). '\:omn1~rdaJ-like" it Y~lllqu~.or (>Ven

~ flJS matl .., I
trer.d to da:e stig-J?ests that Ut."s1gu- quaJllJtlcs.
Tiic nonr . . ,_ n smal~
r<;0f DOD systems should consider a distributed ovcr,uc1 ;~un~ng cos:s are
.
, ~~,cw Items t h
d 1storts
~ ~way tradcoff a:mong pcr~~rmancc,
any compariso
.. , w,uc
1
, ......:c and comrncmat ava (fab1Jity.
nique.
As
stHted
eariiP~
tnh~ncmg
t~ch lV-' ,
1
' <. more diver
gen t th
. c m1 1tary it~m is fr<>m
Production Volume
m~r~c1aJ item, the more diffkil~~/;:
i,
f',
'. ;r1
'
n,r
Th cold war defense marlH~t wa8 pm:mg prohlem.

e
gfarfd for n. high-cost. !ow-voJum~ pr~o111i~
frnew environment sl11'"ts
,, . t.11 t emdudion rnv1ronmcnt The com!"1erc1al PJ~a~,~
_ om cost analy5is to price anaJ.
S('(lur, in contrast, focuses on tugh-vol- y_sr~ ..1 nee analysis pJac~s more responume, low-cost pro~Juction. High vol- s1b1hty on ~he c~ntractmg o!ficer than
un:r:; allow econo1mes of scak> and dfi- cost analys1s. \\ rthout suppher-providcie!lcits unad1ievabJc with Jow-rnle mil- ed dala. the onu~ for ddermining a fair
itarv pnxluction. Highvolm~ cornm<'r- a11d reasonable price now lie$ \\ith the
c:afm.anufacturer~ rr:axiruize dro11 n1tes
andequipnwnLutilir.utiun to nwk~ their

products very price competitive . .Many
1n.anufal'. ture1-s have C'~tahlishf'ci mini111rn1 order qwmtilics bdow,\hich 1noduction is not cost effective. DOD volume rcquire.m~nts typically are bdow
lhi~ levt~l. Some manufacturers will not
a1x:ornm0<late srnaJI orders at am co~t.
Otht>rs will, bur at a premium. '
r
[l
;,
111-
.~c
i.i-ill
1rY
,h~..ert1
tiC.~
;d\e
~\eS
dai
btl~t
,st,it
I
pel"'
In this era of lean and flcxihlc manu!a_<~t~ri:1J!, "Supplk-rs ar('. ltarni,ig how to
t>l!K'.1e,illy mo,:~~ toward the theoretkal
"lot siz~ ont-." This allows unique cus~omer nt.='etls to he met without s;-K:r:fk
1~ lirie efftdrncy. The DOD c.111 bent.'fit lrGm th.:~ approach a~ fong as a design
for ~nufa<;tttre (DFJ...-1) hHosophy is
ti):~)yed. DF.\1, in conjunct ion with
b:bicm~nufacturing, is a comnrerdaf
I 1mictice and ~Ul l'UabJer for non lo
t'Vt nrre ex ,..
I. t
n.. . :" ..~t Ulg 11g1HJnahty efficient

l~Jl,lt;,.cturJ1g liue~.
'
governmeut buyer. Certified cost and

pricing data no longer will be there t()
provide rover for the contracting officer's ckdsion. fn addition, price ar.a/y.
sis is Jess concrcfr. and more suscepti
ble to second gm~s~ing when compared

to t'ost analysis. 'Io mirigatt:> this prob
km, price analysis requires a dose
teaming arr-anw:mcnt b~twcen U1e govcrmnt~nf buyer and engineer. In addition. bofl1 pru-ties rec1uire bettertrain!ng
in market rc.-scarch amJ price analysis.
}<~.\SA and FARA greatly expanded
Uobllity ond Worrontfe-s

'lne isSUt-S surrcw:tiin.g !ialxli:y ar..d
('Ommcrcial item. ?vfany in the acquisi w-Jrranties are ve-ry much ir.:errt- J ted.
tion community are having seco_n~ In the commercial St'C"~~ it _i_~OJ(!'.r~n
thoughts over this par1icu1"r r~for:m HH practice to include the :1ab.1:.~ n~ -~
tiativt'.11Jis is er,pecia!ly truem "-,ew of he rice of the producl 1111s JS s:p. ea
d 1 dre.d~ ofrhoo.;an.-15.
the increasing numhc-rof procuremPnl I P
O\'ff tJiou~n. s, mf it~ The liabifity
honor srotit.>f.. reminisct-mt of the l 980s. or
even m.tllronso vn . . . of mil.
"th small quant111es
have a
TI 1eir conct>rn is misplace,t We
associated w1 . s wel! de:inc'd and
p rob
l titrntioH
pricing p.-r,blem, not a cc
.
ita:Y pnxiuct~ 1e;;ii;:-her risk for the
1cm. Sirnply callin~ an itcn! C:.mmerci bnngS poteCJtl.l )n ~
. cr"Jsi'I'~u..e ofd
, l {inn. 1e m ~ , . o
docs not absolve rcsponsJbthty ford
cornmefCl..11 . r;cauon.c:; as orQose
tcrminiJ1g Llwt the price is fair and rc- performar:ce i;.!w7rs tJ:t' Jiabil1ry 1
asonLble It is incumbent upon th e cofn- tu MIL s ~ pOD ro rhe cornmrt
,
1.
-t ~ to veri v
1.i-adirw officer to lal\c s cps
f ,,,.,.,.ay from we od cer.
~
,
J r"J~OOJ) 1e.
d pr u
.i. d;J ~
designer an
t aaan ics, wt',.. ed
t~ial th~ price JS .i.aar ank
the
days
0
Ju thf' ~ od~~nallY self,~~ur~
1 ru. .r e 1s no tun_w~ ba<.:1
JfCu"t
1<.~
~ reams:ir1 offer:
"'
crnm~nt has tra . -ourccs n1ace P: ...
wheu suppliers
prvvil
;md pridng da_ta to ~upport'11 ~ommcr because its ~ ~ ; ~upl1IC loSS u: .nt'<
the definition of what constitutes a
irl
~%~
tcctiun ~
Vnlikc the detcnse mdu 5 fn, 1 with

ciul firms arc unwilling to c:o1l1P)
. L
rn \ "I 70. l
1111
_ ( 0 n1rac 1111.f!.
I Lesson 1
JI 1tr1
1he
1.n>
( ,01
er1
,,11t'111 - P t{l!.e
cssary. Oitcn U1c DOD is the only buyer for a product and is. as a result. till
uh\<' \o i:;hare the ingurancc cost with
other buyers. Since a contractor cannot
n\\ocatc the co~t of insuring against the
risk of failure among mu ltiplc buyers,
the DOD is forced to bear the entire
estimated warranty ~o~t. ln this new
unique orocurcment system, lea.ming to

buv as ~1c commercial isa daunting Uu:-k.
Kevcrthclcss, it the I?OD is t? J~ ly
ca11italizc on the cxtcn~1,:c acqu1s1tJon
reform ll1:1t ha~ taken place. there rnu8l
be a matching cultural chnn~e. in t_he d~
knsc acquisition work force . This prereQul~itc for reform has been very slow
era of au~tere defense bud~ets, the

DOD may he \c~f, willing to pay for wm...
rnnli~s even when the commercial fir Ill
is w11\ing to offer one.
Il~ginning in 1D85, the Ddcnsc Au
thoti1,.ation Ad. require~ warrantit'.8 on
weapon sy!,km~ thal l'iave a unit cost of
mor~ than $100,000 or an expected total

procurement cost of more than $10 milHon. \ low~v~r. the GAO finds this requirement impractkal since it does nnt
provide tl1e go\crnmf'nt with nutth in
the way of h~nr.fits. 'nu~ mililary ~ervice~ spend about $271 million annually
for weapon system warranties. To dale,
these ~xpenditun.~s have re~ulkd in a
financial return to tht! DOD of 011\v
in comini'?. l>eknse acquisition practices

nm\ culture have been ~volving npnrt
from the c,1mn\f:rcial ~tor for drcactcs.
Change needs to pervade not only gov~
~rnment organi1..ations hut the prime
contractors and traditional defense ~Ul>pticrs as well. This impacts practices
throughout the enterprise, including
1.:ontTac1ing, pricing, quality, desgn, and
manufacturini~. Given that the ~ize of the
dcfen~c work force ha~ dropped at a
faster ratt! than the workload , change
an<l innovation must be led by upptr
management and must be incentivized.
fleet industry practicc:s b
work? Or. arc w<>rkkla~s firm P: d?t~se

DOD businef.s. f'ven wh~n r1.:~ s'.'lg
sou~ht? 'Whnt c:rn the DOD do :ct.v~ly
world-c ass suppliers? What :~rct{:t
DOD do to become a valurd c. t the
A pref~::ned customer? i\n~c~~:':er?
queRllon~ 5hould be ohjcctiv ., ~

. (l anH,
.t r l
'
e1y ana.
lYZ(
1 t.l~ ,t1cls warrant ~1... 11
,
OU1t be
use
.. !S}
..
. future DOD nC<J.U
d to .h e1p ~hape
t10111m1icy, practices
and regillat
. ion~.
>
ISSUES C<>nf'd <>U P,?iJi! 21
EVOLV1NG TOWARD A
COMMERCIAL-LIKE
about $1 for every $19 paid for a cot;- PROCUI\EMENT SYSTEM
1
tractor warran\y.
As the DOD increasingly turns to

commercial 1,rotlucts to meet its requirt!ments, it 1nust decide how it will
addres<3 the warranty issue. The options include going with the exi~ting
commcrdal warranty, paying a p1'\~mium to cover low-volume products with
unique rc<1uin:ments, or for;oing the
warranty alto~ether in return for po~sib1e price reductions.
More has been done for acquisition

reform and commercialization in the
last two years than in the previous 20.
Howe_vcr. to dcdar~ that acquh;ition reform i~compl_ctc at this point would be
prc1~\Ulun~. g1vt:n th<! numb,~r of diffic_u~t i~sucs that remain. Fult implementatu,n a1ul
,,{acqu
't'
. accentance
>- ..
v
U~h1on
re-
The Need for Change

Acquisition reform and a SV't'ilch to
commercial practices rcprc~cnt a sig.
nificant and sometimes unwelcome
change. ln some ca8cs the a<loplion of
commercial pracllccs and the S<.!dd11g
of more c:ommcrcial sources is a far
more laborinten~vc form of acquisition
l:OtllJ)ar~d to prercform days. Cont.-a.c.t
inR per'.'iOnncl now need to dt".Ve\op ~olicit;\tions ha~d on <lclaikd market research an<l on actual cmnm~rcial praclkt:s, which vury significantly from in<lu~try to imluslry. Market research is
form w1 11 take a very long r

What

,me.
.. l th acquisition reform has don<; is
\aH c grounctw k f
., .
or or commt~1cia\..
izatlon. fvfany harriers to

. .
procurement h b" more efficient
deed th
av~. een removed. In
C COOVCrston t O
l"
dustry standards fr
r<: ~ancc on inarcls is well undirw~n~ nuhtary standconh act strcan,lini~ ,m<~ m~thod~ for
readily available Th g ate now rnore
is to look at noo a: ;e.xt step, then,
mc.-asure progress f. customrr and
sup11licr'R llOint of vroni a World-cl11ss
A- l . .
ir.w
cqu sat,on reform . . .

date, ha-:s bet'.n anea~u eff<..c\l~eness to
IJOD melrics as , retl U'cln1g sucl1
. . . numht'.r f
men ts e1im1uated H. d .. o rcquireliir'lc con~uminit and re(luires. cxtcn~i\c hcrof page~ of a p e Utmg the Olrn
ro()o~ \ h tC'chnica\ undcrstancling of products
sen:icr.s. ancl industlie~.
' ~ si~mfic:.ant from, a Dot Y ~Ouercent
ut perhap~ cornm . 1 >Per~I>ec:tive
Furthermore, the bur'(lt>n of accom- should not be me:te~1a tzalinn succe . ,
modalin~ terms and conditions shifts perspective. Since ~red frorn a D()~
from the contractor to the dd~nsr. cu~ mg a~mall
c DOD. h
tomcr and r~f\uire~ a great deal more eu that n ~ustnnicrt rnctn .. is ecom~
lt'asure u
cs are n tl
homework. 'For tho~~ who have ~t>t:nt a~ a_customer.
. ic value of the r~1;
theircanx rs rna~enug the government
Ib:?5~:li Wi\ k*!l

STi\FF COY(RACTS
~EOOTL\llQ~SPfUt\lJfil:
[FL Monmouth, New Jersey]
Lxkhc:d Martin. is proud to couo1
1hc Army M.1n~u,cr C()ncrol s~1cm
U
OOC: of our DUjor d~fc:lSC
informui<>n ~ , We hn,: an
opportunity for :l Sta.ff Cont.-uts
~cg.otialion Specialist to iocn us
and m ake:: si~fiont C01'trtbuoons
\o th~ compk:x prog,r,m tonl(d in
F\. MooRJQurh, t,.1sr a ~.hon dm'C
fmn1 Kew York Cit)', Ph~dp .ia
::md sourhem CconectlC\ll.
n1c $0(,cc~~ ii appbont w ill tine:
.a BS/BA in O.\ ~~u or ~ l1tc:d ft(!d
(MBA. or CPC..M preferred) w,th
10 ye3rs rckv~ut c:q>ericr.<:c
(minimum 8 yea~ cxpcric1'4:c
m }'cdcr:i.1 Contr1cu/5libcoc-.tncts
Ma11~gcmcm); llct.&i!l koowtcdi.-.c
of mkral i\u1ui51tion Kcgub tl00 5
& lWAR. (Truth in Nt,."Oti.1ti(l(l f.,(t
compl\2ncc); PC dcm, lo '\\'oro,
Excel. F.-mall ant\ Intcrn~l; srro<l&
wnuc:n :sni.1 ~w ,'Ommuf'Jcition
1
~ilb, ;and be a.bk to q~lil! lor
TS/SCI sccw ty clc:U-,Ull.:C. J(Jlo-.V
lc:J~c of soflw~n: J.c"elcpll'lcnl
pn)Snm~ :tnd iotd(O:IUll pror~
issU(s i$ hi~hlf dcsirabk: .
("l)J'!l''':
l.oc::kheed ~farfin offer 2

he n~1vc
n.icJ.,J....I
compcns.1.uon
,,inrlurlmg o:ccllcnt h(-rrfln. 1<~A
Q u,bf~
a$ rcloc;ttaon auistllX'.C.
me
at>1,b::ams n:ay forward thClt rc5u: t.
to: . Lockheed M:LrWl
01\~.U~Ol!a, ttldg. 10. l(fl()C'fl IOI*
P.(). Box "04~, PhUaiklphi2,
l)(r~
l or ex;\m1,le d 0
n
on ()rupusah, re-
colvJ?O,
'
. 1~
Unit
tluslry terms and co1 tlitlon) ~s:ng ir;

cla~s commerdal firm~ ser-i<ii~ c "'?iu.
19101. FU (flnc rnoc.k):

?J.
(hlO) 35,..}-151, ~llL <1A 9tW
f.qual C)pportunitY t)nplo)'('f'
----f
L ...... -~
~
.' _>;:-
-~
$$
ment systems is a .
r.
t?\~ard cultural chat~~!n{; 1cant move sition work f

orce
~ . c..,~t'tl frt)m p,;ga 17

~ .J
s1lwn reform effort ~ho.ultt:re a~qui, estabhsh a

r~,t111L?l sy8tem that
meets military
"-'-1
dllCtll~ wl II1
corporalmg
.. , for ron
e m. ,. . charach'r
. rntH:s
mercia1twt1oa.
First
it
sho
ld
., .
' u rema1
St.ns1t_1v.e_ t_o t~e fo;cnl anc1 cthica1 m
spons1b1ht1es
mh<'
,rcnt in e-.00\iernment
,
re,
1>rou1rcmcnt. S~cond. it should fa .._

tate th? product10n of both comm c~~~>l
,d 01 , l1t ary-umque
~ar
procl\lcts in e rci,t
.
1 . voo~- 11i1rket
share is di...
~
c: ~enc
'
.
..,~1,.;
its tcverage to attJ-act quahty <ld en se procureme
1
,reasng,
. l1mg.
. an<l tl H~unpor~
:en- is dimim:;
1
~uPP of.. ~:,,1uiating" commercial prac
tan e ,,
.
. ~ , i1''':>win~. The dctcnse manufac.oc~"
,~
g, ,_
. h .
.-~gf-:i c:1 ..~ torwtuc_ 1t makcs sense
1
ninn
u ,
111, , , .
ntinue fundir1R st1ll have much to
t~;~n from co.mm(~rdal in,hrnt~y in

terms of efficiency. The poten!,_al to
inerge traditionally sepa_rate _nuhtary
an<l commercial product1~n h~cs tl_l~t
produce _similar items still -~xrnt,s. I~
date the t )0 J) has merely ~t .1tchul ~he
sudat e ill its approach to kverag1~g
h\gh,quality. highvolume commcrcwl
production facilities for the manufacture
oi ,ow-volume miiitary products. In ROY
of these ca~es. the DOD must continue
its efforts to he commerciaJ-like in its
acquisition prad.ices, csp~dalty to expand its industrial base to mclude p ireIvcommercial firms.
Reeognizing arnl mldrcs::.ing the jnhr.rr.nt differences that exi8t between
the dden~e ancl conunercial procure,.
Pricing, and
n m"rk,s-t
tires. Fin'1 ll other comm~rn:-~arcn.
build
Y, Sl~p~ sho kl C.a. P:-aton lht strou r u ht: l c.l,(
b~en es tab ishc:i, fo.~r.daConthatn~o
w1lh these goals f anu .follow lhr .
or fu.ure r ,.
-~ -1
ENDNOTE
t orm
.
.
. .
a smg 1c .busmess umt without altering eill
thcll" accou!1ting systems or mana~:
m_ent 1_11:acta~cs. 'l~hird, it should give
pt ope! cot sHkrnhon to. thc_customary
practtc~s of commcr<:'1al fmns when
developing acquisition strategies and
contracting arrangements. T his indudes adopting industry standards to
define r equirements and adopting a de-
signfoNmmufadnrabi1i ty philosophy.
Next, ii 8hould encourage a cultural
chan1!e that focu ses on risk management ralhcr than on rjsk aversion.11,is
will require management support at all
levels and better training of the acqui-
\
,;
i.
\
'
IJ
STUDENT GUIDE
CON 170
Fundamentals of Cost & Price Analysis
Unit 1, Lesson 2
Truth In Negotiations Act
October 2016
.\ \.
..
-~\>..
"'
.
tirnl~:iaa,tazs,,sitJ~::=.=::=:==~==~=::::::J
Hequired Student Preparation
Read Tl>fA Language, FAR Pan 15, DFARS Part 2 J 5, and CPRG \'oJ I Ch. 3
Planned \cademic Time Required: 3.5 hours
Student performance will be informally evaluated during das discussi n . and i rmalJ
eval uatcd on Exam I

1 2 Descri be the Tru.h in Negotiations Act. including
pu pose in r 11t1gatmg gove nmen cost nsk
,rs
ELO 1 201 &p lain appropnateconcrtlonsforre

Pnang Data
Quiring Cert1f1ed Cost or
ELO 1 202 Recogniz.e ttle proh1: itions ano Pxce t,

CostorPnangOa ta
P onSforequ,nngcert,fiea
ELO 1 203 IC!entify tne reqwementsforapplfingth

exception for newcontraets
e
ELO 1 20J ICentiff tne requ irements for applyin~ the c

-Om mere,~ ,ten,
exceptlun for moc1flcat1onsto ccmmemat items
commerc,~ item
ELO 1 205 Exp lain the requirements for ,vai, ingthe TIN~
ELO 1 206 Identity tne cue d1hgence requirements tor obt

1nformat1on when certrfled cost and pnang data are not
ain,ng other
requireo
ELO 1 20? ElP l3tn tne hmrtat,onsto o:it3 rn,ng no cost or Prl .
cmg data, ana
03 ta otner than certified cost or pn =ing cata
ELO 1 200 G en a co ntract scenario determ,ne the

certified cost or prlo ng daf3
requirem
ent for
( '().\' / 70, (,'nil I / ,esson 2 Trut/J in I\'

,.
C:gut It l!
'< >l1s .l c r
- l>a"c-'
~.. . '
.....
Lesson Presentation
Onderstanding the Truth In Negot t
b
f h
.
ia Ions Act (TINA).
for mem ers O t _e con!ractmg profession. Thi
Is, one of the most important lessons of all,
blocks - one here m Unit 1, and the oth .
~courses coverage of TINA is packed in two
rt an t pnnc1ples

m Unit. 5 Th.. IS 1esson provides a solid foundation
about th_e 1mpo
relative ter
TIN
O
.
for Certified Cost or Pricino
Data ex
A mcludmg what it is it's purpose the requirement
0
'
cepttons to TINA, and the application of TINA in
contracting scenarios.
TINA Overview
The Language of TINA
FAR Implementation of TINA
-
Requirements for Certified Cost and p . . D

E
.
_
ricing ata
xce_pt1ons to and Prohibitions against Requiring Certified Data
De~ning Data Other than Certified Cost and Pricing Data
Delib~rate Process for Requiring Data Other than Certified Data

Specific Exceptions
Adequate Price Competition

Prices Set by La-., er Reculaticn
Commercial Item Ex ception
'N aiver
Modification to Commercial Items
The Rest of TINA--i n Unit 5

-
Format for Certified Cost and Pricing Data
Sweep, Certification, Defective Pricing,
What is TINA?
Public Law 87..:653 (codified by 10 USC 2306a)was
originally enacted in 1962 to place the Government on
equal footing with the contractor with respect to
negotiating contracts and modifications
- Requires contractors to give the Government cost
and pricing data with their proposals--as a (\surrogate~
in the absence of normal market forces
- Gives the Government informational parity with
contractors and subcontractors during price
negotiations so Government avoids excessi.ve prices
Purpose: enable the Government to determine proposed
prices to be fair and reasonable when normal market
forces are not in effect
\.
~;
CON /70, Unit I Lesson 2 - Truth in "t\'e goliations Act - Page j 3
!o begin, let's consider how the Truth in Negotiations Act works to protect the Government 's
interests:
Imagine yourself on vacation, driving across the plains of northern Colorado, through Wyomin
up to Montana. Suddenly, your car breaks down in the middle of nowhere. There is no cell g,
phone coverage where you are. After hours of waiting, a mechanic puI1s up in a tow truck. He
the only person who can fix your car within a reasonable timeframe. Under these circumstance is
how would you fare in negotiating a price to fix your car, compared to shopping for a mechanics,
in a local city?
OR
After some storms in one of the plains states, nearly a thousand residential homes in a particular
town or city suffered severe roof damage. With winter weather approaching, roofing companies
could not keep up with demand for repairs. With every roofing company booked solid through
the end of the roofing weather timeframe, competition was typically limited to a single offeror.
Roofing materials and labor prices were skyrocketing. Under these circumstances, how would
you fare in negotiating a roof repair?
In situations like those with limited competition, or extreme market conditions, determining a
fair and reasonable price can be particularly challenging. How would you determine a price to be
fair and reasonable in the car repair scenario? How about in the roofing scenario? Would it help
you in those situations to have a law which required those contractors to give you the factual data
behind their price? Or at least required them to give you some insight regarding their customary
prices for the same goods or service under similar conditions?
In a sense, this is what the Truth in Negotiations Act (TINA) was designed to do. In order to
safeguard from excessive expenditure of taxpayer dollars, TINA requires contractors to provide
the Government with pricing information when normal market forces are not present, or almost
any time a Contracting Officer does not have adequate data to determine a price to be fair and
reasonable. This information gives us insight in to the contractor's actual costs and cost
estimates, ensures we have enough insight to determine "fair and reasonable," and mitigates risk
of the Government paying unusually high prices.
TINA - What it Does

. Require~ contractors to submit cost or pricing data under
certain circumstances
. Defines cost or pricing data
. In certain cases, requires certification that data are current,
accurate, and complete
Delineates exceptions to the requirement
Provides right for Government to examine contractor
records
Provides rules governing defective pricing
- Downward contract price adjustment
- Recovery of overpayments (cost & profit) & interest (as
of 1985)
TINA, as implemented by FAR Subpart 15.4, requires contractors to submit certified cost or
pricing data, or data other than certified cost or pricing data in certain situations.
Where can you find the definition of certified cost or pricing data? To find out, review the TINA
language (Attachment 1) and FAR 2.101, and notice the definitions for these tenns are included
atthe citations shown below:
TINA - Key Definitions

(check TINA language, and FAR 2.101)
Cost or pricing data
TINA paragrapn (h)(f)
. FAR 2. 101
Certified cost or pricing data

TINA paragraph {a}(2)
FAR2.101
Data other than certified cost or pricing data

TINA paragmph (d)
FAR 2.101
CON/70, Unit I Lesson 2-Truth in Neootia,

A
b
,wns ct - Page I 5
'
. lO
1. TINA Language, Title
us
Definitions:
c 2J06a
~
(h)(J) Cost or pricing data the tcm1 "cost or pricing data" means ~II fa~ts that, as of the dat
or if appJ
e of
agreement on t l1e pnce
ofa contract (or the price of a contract mod1ficat10n),
b
h
'
Icab!e
consistent with subsection (e)(l)(B), another date a~reed up~n . etwe~n e parties, a Prudent
s1gmficantly
Such t
buyer or se 11 er wou ld reasonably expect to affect pnce
. c
. negotrnt10ns
I d
r.
:
errn do
not include information that is judgmental, but does me u e tI1e iactua 1 m1onnation frorn Whiches
judgment was derived.
person required, as an offeror, c_ontractor, or

subcontractor, to submit cost or pricing data under p~ragraph (I) ( or requ~red by the head of the
agency concerned to submit such data under subsectwn (c)) shall be reqmred to certify that t0
the best of the person's knowledge and belief, the cost or pricing data submitted are accura{e,
complete, and current.
(a)(2) Certified Cost or Pricing Data A
(d) Submission of Other Information: When certified cost or pr~cing .data are not required to
be submitted under this section for a contract, subcontract, or mod1ficat10n of a contract or
subcontract, the contracting officer shall require submission of data other than certified cost or
pricing data to the extent necessary to determine the reasonableness of the price of the contract
subcontract, or modification of the contract or subcontract. Except in the case of a contract or '
subcontract covered by the exceptions in subsection (b)(1 )(A), the contracting officer shall
require that the data submitted include, at a minimum, appropriate information on the prices at
which the same item or similar items have previously been sold that is adequate for evaluating
the reasonableness of the price for the procurement.
2. FAR 2.101 Definitions:

Cost or pricing data ("Cost or pricing data", 10 U.S.C. 2306a(h)(l) and 41 U.S.C. 254b) means
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. Cost or
pricing data are factual, not judgmental; and are verifiable. While they do not indicate the
accuracy of the prospective contractor's judgment about estimated future costs or projections,
they do include the data fonning the basis for that judgment. Cost or pricing data are more than
historical accounting data; they are all the facts that can be reasonably expected to contribute to
the soundness of estimates of future costs and to the validity of detenninations of costs already
incurred. They also include, but are not limited to, such factors as Vendor quotations
Non-reoccurring costs
Information cha~ges. in product~on methods and in production or purchasing volume
Da~a supportmg proJect10ns ofbusmess forecasts and related operations costs
Umt-cost trends such as those associated with labor efficie
Make-or-Buy decisions
ncy
Estimated resources to attain business goals
Information on management decisions that could ha
. .fi1cant bea ring on costs.
ve a s1gm
?"
/ ~
I
I
dcost or pricing data means "cost or pricing data" that were required to be submitted in
certtde ce with FAR 15.403-4 and 15.403-5 and have been certified or are required to be
acc (1ran
d in accordance with
. FAR 15.406-2. This certification states that,
, to the best of the
cert0 ie, 'knowledge and belief, the cost or pricing data are accurate complete, and current as of a
..
,
.
.
.
1certain before contract award. Cost or pncmg data are required to be certified tn certain
f sons
(I
,late
ments (IO o.s.C. 2306a and 41 0.S.C. 254b).
procure
pata other than certified cost or pri~ing data means pricing data, cost data, and jud_gmental
. flllation necessary for the contractmg officer to determine a fair and reasonable pnce or to
:t~fllljne cost re~lism. Such data may include the identical types of data as certified cost or
6 data, cons1s tent wIth Tab le I 5-2 of I 5.408, but with out the certification. The data maY
pricing
include, for example, sales data and any information reasonably required to explain the
~fferor's
estimating process, including, but not limited to10
(I) The judgmental factors applied and the mathematical or other methods used in the
estimate, including those used in projecting from known data; and
(2) The nature and amount of any contingencies included in the proposed price.
(;got,atwns Act - Page I 7

CON 170, Unit I Lesson 2 -Tmth in N,,
. .
corit(8
iso ri
,e
p0 tiCY'
With these definitions, you can see how TINA is the foundation for pricing policy across the
Federal Govemment. Notice FAR 15.402 is written such that the imperative is for contracting
officers to purchase goods and services at fair and reasonable prices, and to obtain certified cost
or pricing data unless there is a specific prohibition or exception. Another key element of pricing
policy pursuant to TINA is that when certified cost or pricing data are not required, there is a
speci tic order of preference contracting officers must foll ow before even asking the contractor
TINA-foundation of
FAR 15.402- Pricing Policy
.,_,..,~,;,..,
. . co s
tlte
Jet
...,cot1S
0 ot
for data other than certified cost or pricing data.
~AU
cO ~
"" tlta
,,,.. {leqtl
at v
tbe
TINA is foundati~al to FAR Pricing Po~~y - -- -
What are the "imperatives" in FAR 15.402(a)?

Review FAR 15. 402( )( 1). (2) ;Jnd (J) :
(a} purc/Ja !? . .at farr and reasonable prices
(a)( -f) obtain certified costJpncing data wh n req 'd
(a)(2) obm.in data other tl1Bn ...by order of preference
No add1t1onal data If adequate price competition
Price
,elated data
Govt s-ourc s. otller sources, and
from contra,:tor
as from
last resort
r1te fol
infofill~
fj!:f- ]
contrac1
due dili
Cost data
(a)(3)than
obtain
type and quantif
necessary
Y necessary .. .but not more
data
Who makes the determinations t .

.
cost and pricing data? Determ o req~ire the necessary
. The PCO FAR 15.402(a)
mes fair and reasonable?
~ay
FAR 15.402 - Pricing Policy
When
----~_- -~ ==-------pr f certified dat-a-are
not re
e erence for obtaini
quired, what is th-----. (a) (2) obtain dat: ogtl~ata other than certifie~ ~radtea~ of
_ N
..
) ,er than b
.
o. add1t,onal data if ade . y or~er of preference
. ~~i7c~elated data
C
s, and from
ost data
from ::;;e pnce competition

contracto sources, other
r as last resort
(a)(3) obtain ty e
more data lhan~ie~:is~~an

tity necessary b t
I
ontracting Offi
Y
u not
C
rea
ceralso
must det~rmine the ric
sonable,
while
requesting data Wh considering the~ e lo be fair and
. FAR 1" 4 .
at are a few of tho rawbacks of
costs. ,onO~~a~/3) . increased pro ose drawbacks?
additio1Ja?cont~q~1s1t1on lead timts s:i pre1 aration
_ _ _ _ _ _-.-::.==:_:_:a~c~o~r~a~ndd Gove rnment
. onsumption
reso urces of
-
CONJ70,
v,mt. 1 Lesson 2 - Truth .

m Negotiations Act - p age I 8
'[hird: l
to pursu
env1rom
Fourth:
thorougl
the Govt
preparin
Additio~
used to f
only on,
better ap
then, onl
from oth
negotiati,
~I
ecessar
by th )
e oe
. officers and price analysts must work together to determine prices to be fai~ a~d
0 tract1I1g Notice the order of preference for requesting "data other than" here in the pncmg
C~50oablde.theI1 elaborated on in FAR 15.403-3(a)(l)(i) through (iv):
re . an
0
1,cY,
p
btain whatever data are available from Gov't or other secondary sources, and use
I0
. detennining a fair and reasonable price
shal
O
,. . C data 10
. .
'
that II equire subm1ss10n of data other than certified cost or pricing data from the offeror to
,..CO sha rnt necessary to determine a fair and reasonable price if the contracting officer
e exte
d J.".
th
nes that adequate ata 1rom sources other than the offcror are not available;
det~dflllI whether cost data are necessary to determine a fair and reasonable price when there is
C0ns1 er
..
,...
d quate price compet1t10n;
not.a :he data submitted by the offeror include at a minimum appropriate data on the prices
,I{equthr~ch the same item or similar items have previously been sold, adequate for determining
atW I
.
sonableness of the pnce
therea
llowing learning points are important to keep in mind when you are contemplating what
fhe tion and how much infonnation to request of offerors:
infonna
(l
.. . Even if the Government asks for data other than certified cost or pricing data, the
[J!Jl:.ctor does not have to provide such data unless the Government can show it has exercised
contra
.
due diligence in exploring Government sources and other sources per the order of preference.
cond: The FAR order of preference should shape the way contracting officers and
5
cfo;;ment acquisition teams conduct market research.
Third Even when additional data may need to be requested, FAR instructs contracting officers
~ue information regarding previous sales prices in a commercial, and/or competitive

environment, such that price analysis rather than cost analysis can be accomplished.
Fourth: If we're doing "true" market research (which is an on-going process), we should have
thoroughly explored Government sources and other sources as part of building and evaluating
the Government cost estimates, conducting risk assessments, refining our requirement, and
preparing for negotiations. Asking for data from the offeror should be our last resort.
Additionally, when asking for data from the offeror, it is recommended to request specific data
used to fill in the "gaps" within our own research and analysis of the proposal. Imagine relying
only on a car salesman for most of the infonnation you need when buying a car. In contrast, a
better approach would be to conduct thorough market research and price analysis on your own;
then, only ask the salesman for a few specific points to help fill in the "gaps" from your research
from other sources, which would most likely provide a more solid foundation for you in
negotiations.
Einallr.;_ Notice both TINA and FAR 15.403 require us to limit our requests only to data
necessary to dctennine fair and reasonable, and limit our requests to a fo1m regularly maintained
by the offeror.
CONJ 70, Unit 1 Lesson 2-Tn.th in Negotiations Act- Page/ 9
--------------
. d TlNA and have an understanding of cost or pricin,

Now that we understan~ t!1e reasons beldun her (han certified cost or pricing data, we will g
data ' certified cost or pncmg data,
. d
and ata fotdata are require
explore when each of the following types o
The Applicability of TINA

(As Implemented by FAR 15.4)
Turn to FAR 15.403-4: unless an exceptio.n .or
prohibition applies, certified cost or pricing data are

required for:
-Any negotiated contract award expected to be
$750.000 or more
-A modification of a negotiated or sealed-bid contract
involving a price adjustment of $7501000 or more.
Pnce ad1ustrr1ent amounts must consider the aggregate
amount exceeding $750 .000
- ~he ~wa.r~ of a subcontract totaling $750,000 or more

(1f _p~1me.1h1gher tiered contract needs to provide cost or
pnc1ng data)
-A ,:nodification of a subcontract involving a price
adJustment equaling $750,000 or more.
.
Now, read and review the TINA 1
.
c
h
anguaoe tnclud d
citations 1or t e answers to the qu t ::::,
e_ as attachment 1 to this lesson and verify the
es ions on the shde below
A Walk Through TINA

(see Attachment 1)
What does TINA
.
( a)( 1) coS[
require contractors to submit?

nd pricing d --ta when over$ threshold
What are the

r
to submit cert~?<cdep ions to th~ .requirement for contractors
1 e
cost and pricing data?

( )(1) and (b) (2)
.
Are contractors obligated to certify the data?

(a)(2) and (a)(3)
To
..
whom does the contractor submit this data?

(a)(3)(A) p r ime give to the contracting officer
( )(3)(8) a sub gives to prime
(How~vor, PG/ 2 15.404-J(a)(i) givos latitude for subs they c an avoici giving data to primes, which we 11
addres tater)
Also, notice the last question on the slide above - a common issue in the acquisition community
is, "what if subcontractors who are required to submit certified cost and pricing data, refuse to
submit such data to the prime contractor (especially when they may be competitors on other
contracts)?" Does the subcontractor have any alternatives? The answer is YES. In such cases,
the contracting officer can pursue the support of the ACO, and have either DCMA
representatives or DCAA representatives serve as the focal point for receiving and reviewing
subcontractor certified cost or pricing data.
Recall from earlier in the lesson that TINA and the FAR require contracting officers to request
certified cost or pricing data from offerors unless certain conditions apply. Now, we wi11
examine those conditions .
Per FAR 15.403-l(a), certified cost or pricing data shall not be obtained for acquisitions at or
below the simplified acquisition threshold. This is a statutory prohibition which cannot be
waived. In addition, FAR 15.403- I (b) also states that certified cost or pricing ~ata shall not be
obtained when any one of several exceptions applies. The five exceptions are hsted on the
following slide.
,
h "'
1ations Act - Page / fl
CON 170, Unit J Lesson 2 - Trut m JVego 1
,
Shall Not Obtain Certified Cost or
Pricing Data When ...
FAR 15.403-1
Prohibitions: (a) & (b) Certified cost or pricing data shall
not be obtained for acquisitions at or below the simplified
acquisition threshold, or when an exception applies.
Exceptions: (b) When the contracting officer determines:
1. Prices agreed upon are based on adequate price
competition (see also Atch 2)

2. Prices agreed upon are based on prices set by law or
regulation
3. A commercial item is being acquired
4. V\/hen a waiver has been granted
5_ VVhen modifying a contract or subcontract for commercial
items
Note, FAR 15.403-I (a) does not aIJow the submission of certified cost or pricing data below the
Simplified Acquisition Threshold (SAT); however, the Contracting Officer may require such
data between the SAT and the TINA threshold, with the advance approval of the HCA (see FAR
15.403-4(a)(2)).
TINA and FAR 15.403

When to get certified cost or pricing data:
Never
Shall
I exceptfor
May
-----! SAT I
r- -
lJ1so,ooo /
----- J
TINA
/ $750,000 /
<
--------
dlm) ' -, ~
(~
..
CONJ?O, Unit l Lesson 2 - Truth in Negolialions Act- Page I 12
we review each of the five e

.
fore
.
b .
xception .
h do not reqmre su mission of
. s in detail
wbtC
certified cost
' note there are
ae.
or pricing data:
two other circumstances
Cost or p . .
nc1ng Dat N
(two additional . a ot Required
circumstances)
Other circumstance=~~====~::~~==========
Data are not re-quir~d~ihere,
Certified Cost or Pncing
. .
__
-FAR 15.403-2(a)
The exercise of an opt
contr~ct a,Nard or initi~lo~at t~e _price estabhshed at
submission of certified . . Qotiat 1?~ does not require
cost or pncmg data
Certified cost or pricin d .

P'.~posal used solely f~r
are not ~equire~ for_
b1lhng price adjustments verrun funding or mtenm
ita
Now, let's examine each of the five exceptions to certified cost or pricing data requirements in
detail. Per FAR 15 .403-1 (b ), there are several exceptions to the requirement for obtaining
certified cost or pricing data. Each of the following exceptions restricts the Government from
obtaining certified cost or pricing data. Thus, it is common for contractors and Government
leaders to disagree on the definitions for each exception. Therefore, defining these exceptions
accurately is critically important to protecting the Government's ability to determine a proposed
price to be fair and reasonable.
---- - -------~~-
EXCEPTION l: ADEQUATE PRICE COMPETITION
The first exception t0
. .
.
.
..
D Db .
requmng certified cost or pncmg data 1s adequate pnce compet1twn. For
F~ 1~~mg_ offices, contracting members must not only understand the FAR r~quirements in
DFARS 2
and the standards at FAR 15.403-l(c)(l), but also the reqwrements stated in
~;.J~~~(I)

Definition (summary-review the full text). per FAR
15.403-1(c)(i), (ii), and (iii):
Two or more responsible offerors, competing
independently; or
There was a reasonable expectation, based on market
research or other assessment, of two or more
responsible offerors competing independently even
though only one offer was received; or
Price analysis clearly demonstrates that the proposed
price is reasonable in comparison with current or recent
prices for the same or similar items. ad1usted ~~ reflect
changes in market conditions. economic cond1t1ons,

quantities. or terms and conditions under contracts that
resutted from adequate price competition.

Additional regulation (summary-review full text) in DFARS
215.371-1 through -5:
215.371-1: It is the policy of DoD to promote competition,
ensure fair and reasonable price., and comply w!T/r-JA
215.371-2: If only 1 offerer is received and the solicitation
allowed fewer than 30 days to respond., PCO must consider
revising requirement in order to promote competition 1 and
resolicit for at least additional 30 days.
215.371-3:
- (a)'reasona~/e expectation of more than one otreror does not constitute
adequate price competition. unless one level aoo,ePCO approves
PCO determination that price is fair and reasonable.
- (tJ ) PCO shall conduct price or cost analysis to determine F & R, obtain
appropriate cost and pr,c,ng data per F.AR 15.403-4. and 52.215-20.
negoti.,te as necessary-negotiated price should not exceed the offered
pr,ce.
215.371-4 & -5: state exception and waiver provisions
CONJ70, Unit I lesson 2 - Truth in Negotiations Act - Page I J.I
'I.
~a
1
Exercise: Adequate Price C
..
ompetu1on E
.
Xerc1se
Learning Objective
Explain appropriate conditions .[:'.
. d
.
i.or reque f
.
scenano, etennme the requirem t .[:'. s Ing certified cost O
.
en 1orc
.
rpncmgd t a
ost or Pricing data.
a a. iven a contracting
Introduction
This lesson introduces the Truth . N
. .
m egotiations A t
. .
Now, a ft er researc h.tng the standards
t d
. c and Its importance in .c-.1 d I
.
etennm
r
d
e era contractmg
o
h ave to d etermme what cost or pri d
. e 1 a equate price comp ff
.
:
situation.
cmg ata, tf any, may be
. d
e I 10n_ex1st~, you will
reqmre of offerors ma given
Assessment
This activity is not scored or graded.
Student I~structions: After reviewing the full text of PAR 15
the followmg scenarios, and determine if adequate p .
.4.0.3 and :FARS 215.371, analyze
.
.
nee compettt10n exists. Based on the given
scenanos, answer
f your resu Its to the c ass
. the accompanymg questions Be prepared t o bne
1
You have 45 mmutes to complete this exercise.
Scenario I. You have a solicitation posted for grounds maintenance (commercial service) across
3 DoD installations. Market research report indicates 5 small businesses have relevant and
recent experience in this mission area, and several of them submitted proposals for the previous
contract 2 years ago. Our new solicitation closed after 20 days, and 3 offers (all small
businesses) were received. The proposed prices are consistent with the Government's cost
estimate, based on Market Research. Does this constitute adequate price competition? How
would you proceed?
,.,
2 Truth tn /Veg
CONJ 70, Unit I Lesson -
otiat1011s
. -Page/ 15
At t
----- - --
. itation posted for grounds
ou have a so\ic
h
. .
Scenario 2 Using FAR part 12 procedures, Y .
\\
t'
ns
Market
researc
report
.
. )
3 DoD msta a 10 .
d
l O f th md1cates S
maintenance (commercial service across ience
.
.inth.is nussion area, an severa . 1 em
contractors have relevant and recent
exper
ntract 2 years ago and you again have
la snm
d ar
f
submitted proposals for the previous co

fl, Our new solicitation c ose a ter 45 day
reasonable eKpectation of getting more than one O er. . tent with the Government's
s.
Only 1 offer was received. The proposed pnce was kconRSlS arch of other competitive
mdependent cost estimate,
wh.1ch w~s based on Mar. et ese

t't1 te adequate price competition? How
acquisitions and previous contract history. Does tlus cons u
would you proceed?
Scenario 3. You have a FAR part 15 solicitation posted for satellite control station maintenance
(noncommercial) in a remote location. Market research report indicates 3 contractors have

relevant and recent experience in this mission area, and submitted proposals for the previous
contract 2 years ago. Our new solicitation closed after 45 days, 2 proposals were received. Does
this constitute adequate price competition? How would you proceed?
Scenario 4. You have a FAR part 15 solicitation osted for

.
.
.
(noncommercial) in a remote location Market researc
p h report
sat~lltte
md control
t 3 station mamtenance
relevant and recent eKperience in this mission ar
d b .
ica es contractors have
contract 2 years ago. Our new solicitation close:a, :n :; dm,tted proposals for the previous
received. Does this constitute adequate price c
only 1 proposal was
ompe ition? ays,
Howbut
would
you proceed?
a;r.
CON 170, Unit 1 Lesson 2-Ti
rul h m Negotioti,w-
Scenario S. You have

a solicitation posted for satellite control station maintenance
10
(noncommercial)
a
remote
location. Market research report indicates 3 contractors have
nd
relevant 2a recent experience in this mission area, and submitted proposals for the previous
cont_ract years ago. Our new solicitation closed after 20 days, but only I proposal was
received. How would you Proceed? Do you have an alternative to resoliciting?
Scenario 6. You have a solicitation posted for satellite control station maintenance
(noncommercial) in global, remote locations. The current contractor was awarded this work on a
competitive basis IO years ago, and was the only offeror who bid on the renewal contract 5 y~ars
ago. This year, market research revealed I other contractor with experience in one area of this
maintenance, who responded to our Sources Sought Synopsis with the intent of winning a .
subcontract from the incumbent. One other contractor a small business, expressed interest m
this contract award. The Government technical team ~ssessed their capability as minimal, with
no past performance in this mission area. The solicitation closed aft~r 45 days, .a?d the
incumbent submitted the only offer. Does this constitute adequate pnce competition? How
would you proceed?
Adequate Price Competition Exception

Summary
. T
PCO must determine if contracting
For every acquisi ion. . . on of Adequate Price
environ~.ent meets d~f~m~AR 15.403-1 (b) and (c); AND
Compet1t1on, pursuan o
OF ARS 2~5.3:71 .
to determine if certifi~ cost
This dec1s1on is necess~uyd or shall not be reqwred
. . data are require ,
.
. .
or pncmg
. . . I different than the determination
Th s decision 1s distinct Y.
I
able pnce
. .
of fair and reason
n PCO to favor .a determmat10~ _of
Recognize pressure O . . . _ 0 requirement for cert1f1ed
adequa te Price competit1on n
cost or pricing. d~ta . . f a !realistic expe~tati?n of 2 or

asis for determination
o te price competition is
B..
,. for adequa
more offerors rket research
documented ma
..
. 1 Tnit J Lesson
CON17 0'V
l t ~ Paf!e I I 7
2 - Truth in Negotiatwns l c
EXCEPTION 2: PRICES SET BY LAW OR REGULATION
The next exception to requiring certified cost or pricing data is when ~rices are _set by law or
regulation. This exception is explained in FAR 1S.403-l(b)(2). Here ts a real-hfe example of
this exception:
Prices Set by Law or Regulation Exception

FAR 15 403-1(b)(2)
From Reuters news service, Wed Jun 24 , 2009 8:29pm

EDT) LAS VEGAS, NV -- The Public Utilities
Commission of Nevada (PUCN) today approved an
increase in electric rates for NV Energy's (NYSE: NYE)
utility serving southern Nevada. The increase is a result
of the company's mandatory General Rate Case (GRC)
filing made in December, 2008. The Commission has
instructed the company to implement new rates in a twophase process. The projected net impact on residential
customers from both phases is expected to result in a
total increase of approximately 6.9 percent annua\ly .....
0
Pe~ FAR I5.403-l(c)(2), "pronouncements in the fonn of . d.

.
.
actions of a governmental body or embodied . th 1
peno tc 1:1Imgs, reviews, or similar
prices that might be set by law ~r regulation d: n ; aw~, are s~ffic1ent to set a price." Therefore
specialists will not face this scenario durin th o require c~rt1fied data. Most contract
'
g e course ofthetr career, but just in case, refer to
FAR I5.403-l(b)(2).
CON/70' u,mt. 1 Lesson .,

"-Truth in Ne~n,;,.t; -.
,
EXCEPTION 3: COMMERCIAL ITEM
The next exception to requiri
.fi
. d F I
.
ng cert1 ied cost or . . d .
acqmre . o lowing is an exam 1 f h.
~ncmg ata 1s when a commercial item is being
P e o t 1s exception.
Commercial ltem Exception

(TINA language)
Regarding acqu isition ~f commercia-1it~:.: .m

:-==s=.= = = = ==
Can the Government r - t-;:---.-.
.
when a
..
eques cert1f1ed cost or pricing data"
cqumng commercial items?
No. Commercial items are an exception (b)(1)(8)
~an _t~e Government request 'data other than certified cost

r pnc,ng data when acquiring commercial items?"
1
Yes, within limitations of (d)(1}. and (d)(2J{A thru C)
FYI: if an exception or prohibition (at/below the SAT) exists.

yo~J can not ask for a wa;ver in order to obtain certified cost or
pncmg clata. (i.e .. you can not use a waiver to force the
con/:f!Ctor to ~ubmit certified data for a commercial item). By
def,r,mon, waiver.., enable us not to require certified date
vvhon an exception is not in offoct (TllVA pa.rc1 b{1.)(c})
Consider the impact if a contracting officer determines an item to be "commercial;" but later,
after the solicitation is posted:
only one proposal arrives--the contracting officer cannot request certified cost or pricing
data;
two or three proposals arrive--but their prices have an unexpectedly wide range of
variation; because the item is commercial, the contracting officer cannot require certified
cost or pricing data
Remember these limitations when studying FAR 15.402(a); 15.403-3(a). Now, let's explore
several scenarios where a contracting officer must detennine an item's commerciality, in order to
detennine what type of cost or pricing data can be requested.
CON JlO, Umt J Lesson
2 - Truth in Negotiations Act - Page \ 19
-----~.',;.U
.
Commercial Item Exception

31
FAR2101 : 15403-1(b)(~
"
d
- , "commercial 1tem
See FAR 2 101 and 15.403 regar ,ng
I
.
.
US F deral Gov't and to severa
USAF F-16s are sold to the
e basis Could we treat
foreign governments on a compe ' iv
.
them as commercial items?
Orhn\tArQLl"1,mll1,tn~
tr
No.
~
t
h reign Go 11 could
A) ""ome may argue tlw co 1 p~~1.' M: sa 1e o a '. '1 bee u... e a
sat1sfl1fhad1~f1mtionofcomme rc,afatFAR - . 01,
it3/ent1ty
foreign gove-mment can be con id red a "non-go1:einm ~t ' .
HO\IVf.l VOI', the definir1on Of no11-{.JOW1rrunrn!a1 entity f!'e~ns imed
en t1tv the r than F-ecJeta,'. State . loG81. or ,o,e1gn Govt s. (reaff .
per FYOo NDAA Section 8 15, para (b))
B) Others may argue . F-16s ar~ no lo_nger u:rder de~- lopment. ari.d
can th ererorn be co,sidc red commcr _,1al pursu ..w t tot-AR 2. 10 1(8) s
defi111tio11 of nondevefopm Jntal !ierns .
However. F-16s do not meet the defimt10() of [lQI1cfe 1elopf!J!l.!]tal
!!!.!11 because iH~Y were not developed at puvate npense.
1
r,
The next scenario presents a common situation regarding ''nondevelopmental items." Pursuant
to FAR 2.101(8). Review the following scenario along with FAR 2.101(1) and (8), and
determine if the items being acquired can be considered commercial items.

FAR 2.101(1) and (8)
Body armor and fire-protection equipment
is
sold on a
competitive basis to multiple State and local governments.
Could we treat those items as commercial?
Yes. In some cases. uch equipment 1s not sofd to the general publi~
and tf1us. would not rneet the clefm1t1o n of .. commerci3/ '' per FAR
2 1O1( 1); but. may still be cons1de red commerc1aJ pursuant to FAR
'
2. 10 1(8).
Per FAR 2 101 (8~ ft we can demonstrate tt1e ,rem was d ve topec1 at
priva te ex pens& (rather th~n on a Gov t contract), and 1t th 6 se items
are then sold on a competitive basis to multiple State ancJ local
governments {not mcluding Federal or foe .ign ov mments), they
would meet tt1e det1m!1on of nondevelopmentat 1terns , and could be
con 51dered commercraf.
CON170, Unit 1 Lesson 2 -Truth in Negotiations A
<\.
1
. ,
To help illustrate the relatio h" b
"d th c: 11 .
ns Ip etween nondevelopmental items and commercial items
const
oraph A s 111 us trate db Y t he overlappmg
circles,
. 0 0
d er1 e 10 owmo
only a subset of '
non eve opmental items can be considered commercial.
VVhen is a Nondevelopmental Item (NOi)
Considered a Commercial Item?
FAR 2.101
General Public
Nongovernmental
Nondevelopmental
FAR 2.101(8)
Commercial
FAR 2.101
(1) through (8)
Only a certain su bsetofNDls can be commercial :
- Developed exclusively at private expense

-
Said in substantial quantities
- Under competitrve situations

- To multiple State ana local governments
The next scenario illustrates an example of determining if an item is commercial when it appears
to have significant commercial properties, but is not exactly like a good or service sold in the
marketplace. Review FAR 2.101 and 15.403-l(a)(3), and determine if the following service can
be considered a commercial item.

FAR 2.101; 15.403-1{c)(3)
Your battalion needs specialized diesel engine
maintenance that is not a commercial service, but is nof a

type" of service offered and .sol.d .in the marketplace. Can
you treat this as a commercial item?
.
y -) 5 oot FAR 2. '101 (5){1.1 a11cJ (ii}, onlv if this specii.1li1ed sef'Ace
supports a commercj3{ end item, qll_(f tf flus 'HViCB ,i- 5'.1Wfar (O
r:;etidCt.?S offered to the gene,af pulill' c. For exaa pie, tfns
;oec1a/red ""er/iCe CO~dd be very- smular to stan~_,,rd Ciiesel ang1ne
;; ai.r}tem,rice, lJvt in ,rult'a.,y- .iilquo /-,cctf,ions. wttn e.~tn.,ma
1
~limatos {hot. cold} 0( opewtJng environments (s ..ma. mm) (l()f
tvpicai tor con,men;18l;e1v1c!s _ . . . . _
. " ..
r" ~ f.fit;on bJseg .Qr.r tM3--1..:."?.jJl1.1LcJ1-'Jl 11}(,~l.. cJt,1!!:...C!:.-1
'~~!!L
;c.y~/ 1-t;;t
,~~-;,.._h
d~t:,.rm.rnes m .ivntm(l the otter )r t,as svbm1 led
..... ~1L
,.... ,.., '-, ' ---~------U

~"
. t, 1,""rn malion !o dvtvrr m c fai1 mui re dsonablo
adt} t} 0 C: 1 1 I
i,..t
,t
~, __,: .. ..
i
:i,.. t_
P,url' I
.:? /t
The next scenario is common in systems acquisition where the overall system is not commercial,
yet subsystems may be considered commercial. If the contractor buys subsystems as commercial
items, they may pay a lower price at more favorable tenns; however, this could also limit the cost
a~d pricing data available for those items. Review the references at the top of the following
sltde, and determine if the contractor could acquire the subsystems commercially.

FAR 2.101 ; 15.402; 15.403; DFARS 234
~~i( team is upgrading a military-unique major weapon
~~m:~r
and
t~ontractor cl'aims you courd treat a subsystem
. t . .
e spare parts as commercial. Can you?
Hin . mclude th "
DFARS Part 23:. ma1or S1'St~ms acquisitionll text and

tn your FARJOFARS review
.s
Per
OF.AR
234-7002{b) anci ,, )
t
, I-\
ii
subsystem ancf spar-es . C , c.WSlle( IS . yes, on/y if
.;;iystemJ Sf!bsystem or spa
of a ,na1orweapon
commerc1at itern: or
, "' Par bemg acquirec/ as a
::l~
r ,
!'e.P/1'1
The CO c.t-t
, in ~, fi
_t: er,rnnes
,
~ommerc,al, and that ti w1 iru;; tnat !he item ir:::
c1Jeq1 rte
le ofteror f1 ,
'"'
rFv . ua . m,ormation to e1 I ...
ias suL)fnitted
. . .asonab/e
VB Uflte fhe /.Hice o::1s
... fa ir. and
f.
By this
. pomt, you can see that
service can be conside
you may have to do
references in order to ::ir;ot~:;:cial. In the next s~~:n:s;:r~h to determine if
swers to the questio
' view the FAR
a good or
ns presented.
and DFARs

FAR 2_101 ; 15.402: 15.403
.
Your team is acquiring

. I .
a derivative of com
a .r1 mote Y piloted sensor system which is
communication eq r:nerc1a 1Y av_
a1lable, radio controlled boats and
sale to the . e
uipm~nt. This system has been offered for
you consid~r i~eral p_ubl1c no record_ of_actual sales. What will
R&'/i'E:L' FA,q ~~~ ~.-,a c. ?~~er;1~l.. 1t~r:.1 detern:inati~n?:

1
t 1, l r). o .. ertocl , or . . ,a re meets tni?. det,n tron
Th
e contract
more
than e or sug~ested t~e ~overnment should already have
price reason~iy~~ 1nform~t1on intern~lly to adequately assess
information on th es~. Will Y0 L! require the contractor to supply
have previous! e pnces at which the same or similar items
authorit ?
y been sold? VVhat would you claim as your
Y-
~ Ysis.
an im,c . . rativ e 'c ,._qr FAR
15 .V)')f ..,i )1
{~)
,~r1 t?J
' ,'t'v.::, .t ...1 and '-',, 15.403-3(c){1)
a 1u I.0
This i.s- consmtent v,,!th T. ,\i'A langu age

FAR 2.101; 15.403
.
What are the circumstances where you would, or would not request
this data from the contractor?
. Would not request: per FAF? 15. 402(a)(2)(if), if di. ta from Govt and
other sources i,vas adequate to cJetennine fair and reasonable
. Would request if, per FAF< 15. ,1QJ(a)(1), after revi ~ling datd from
Govl aw:J other sources, rt w.as necessa.'v to obtam dat(t from the
offeronn order lo deterrmne price to be reasonab:'e
What would you have to do first, in order to request the data?
Th.rough focwsod tnurket research. follow the order of ptdt::rence
stated m FA!~ 15.402(a)(2J(ii) no data, Govt sources. thfm
sources omer than the offeror
~ An(l alJkfe by the limitatrons .rn FAr~ 15.403<3(a} states contrac ing
offrcer.s rnust keep re asonabi'e lirrnts on requests, the mtormatron
sf1ould bf: of a form regularly maintained by Uw contractor. and
Gov t cornrmts to nond,sclosu e.
What if the contractor refused to give you adequate data?

. See FAR 15 403-3(aH4)- o_tterorls ineligi1bie fo r awar,1, unless
,_. ,,.,,A appr,wes, based on etfor'ts Miffm ,.md impact of n:qwrernent
1
Exception
commerc1al Item
.
FAR 2.101; 15.40J

Oiltnl*l.tqu>1hcnLh,~ll'1
.
. ~ n certified
- , - For the acquisition of commercial ,~em~~t: other than
data are not required, and we requ1~e erence from FAR
certified data, we follow the ~r~er? pr does FAR 15.403
15.402(a). What additional llmitat,ons
establish?
.
ffi' rs mu t ket.; p
- . .-,;r--
......:.
~:::::;:::::::-
ef
. FAR 15.403-3(a) statec contractmg. ~ 'c:iation should b

reasonable limits on requests, th0 in or. . t t r and
of a form regularly maintained by f/Je con rac '
Gov't commits to nondi0closure.
t
Where else have we seen those limitations? (hint ... Sfatu e)
. TINA language (d)(2)( A thru C)
. (A) reasonable limitations on sales data
(B) only in a form regularly maintcJined by the offeror
. (C) non-disclosure
There can be a tendency for contracting officers to simply ask for data, then not use it in
evaluating the proposal. When evaluating an offeror's proposal, strive to understand the
proposal well enough to ask the contractor for specific information to fill in any gaps in the cost
or price analysis. Remember, FAR drives contracting officers to ask for as much information as
necessary to determine the price to be fair and reasonable, without asking for more than
necessary.
EXCEPTION 4: WAIVERS
Before we address ~ur ne~t exception, let's review. So far, we have seen we cannot require
contractors to submit certified cost and pricing data if there is adequate price competition, prices
are set by law or regulation, or when the item being acquired is commercial.
The next exception to certified cost or pricing data to be discussed is when a waiver has been
granted. You cannot process a waiver to require certified cost and pricing data when an exception
or prohibition applies. Instead, waivers are another means to relieve the contractor of the
requirement to submit certified cost and pricing data. The waiver is used when no other
exceptions to requiring certified cost or pricing data apply; but, the contracting officer does not
believe such data is necessary, or in the Government's best interest. Contracting officers must
obtain approval of a waiver by the Head of the Contracting Activity, pursuant to FAR I5.403I(c)(4). To determine the HCA for your activity, consult your agency's FAR supplement.
Now, read the waiver process described in FAR 15.403-I(c)(4), and DFARS 215.403-I(b)(4)(A),
and fill in the missing information on the slide below:
Waivers
Olfrnsr- .lacq u!ib::n IJitnf.'I
- ----===-======:::====::;::.;;===:::=;;~ T7~~~~~~~=;=;~~~~
.--vv,here are "wa,vers:r toihe requ reme.nt or certified cost or pricing data a
in FAR?
15 - 11 o'?> -1 (<-)(. 4)
summarize m e waiver process, including the waiver auth ority
H (.A
may, with out pov.,er of delegation, ~atve the
~:qeuirement for su bmission of certifi ed cost or pricing data. in exceptional
cases.
0 .
tAnJ rea..<io-,blewimout submission of
ifthepnce de+erM;"eJ -r-0-,.r
certified cost or pric ing data .
DFAR S 21 5 403- 1(4)(A) VValvers.
. . . H (_ A
may, without pov.er or_def~gation, apply
The
.
f .
mstances at.1thority when a determination ,s made thatthe exception a c,rcu
ices cannot reasona bly be obtained undet t~e .
( 1) The property or ser\
difi cation . .vithout me gran ting of me waiver,
0
contract, subcontract, or m.
I'" .
b':: '*' i.thout the
d to be f'Ci..,.- 1 r-ec."\.So/l'" ~ v
(2) The price can be det ermrne
~
.
d
, . - - . f <.e,,-+,. t-~ l e,oyr- C ~~7 ~w-- an
.
.
submrss,on ~
to g ranting m e wa,ve,. FoUow _the
(3) There are
..
1 l 4 A , for detem1ining when an exceptional
Procedures at PGI :2 15.403-- ~~\{ }~o~al or ;uch waivers, ror partial case wan,ier rs appr?pnate, r . pp t
n -pri ced s~Jpplies or service~ .
.
. d- for
aoo
fl cable Ou . - warvers,
an
- ,varvers
""<;'.
..
1
'
CONJ 70, Unit 1 Le:,~mn - - Tru
- .
1.
th in Negotiatwns . let
Paf(e I 25
EXCEPTION 5: MODIFICATIONS TO coMMERCIAL ITEMS

Finally, the last category to the exceptions to obtaining certified cost or pricing data is when
odifying a contract for commercial items. This issue is addressed in the Tl~A language, FAR
Ol, and FAR 15.403-1. A useful tool is also located at Attachment 2 of this lesson-a
1
flowchart
of the process for detennining the need for certified cost or pricing data for
commercial and noncommercial modifications to commercial items.
modificatio t on, we ~u~t understand the process for requiring cost or pricing data for
To begin this secti
ns O commercial items.
Modifications to Commercial Items

TINA. FAR 2.101, 15.403-1(c)(3)(iii);
and Lesson 2 Atch 2
Can the Government r .

. .-for modifications to co:1uest. c~rt1f1ed cost or pricing data
merc1al items? It depends ...
No, if:
. It is a ;'rninor mod/.'
-.
from commercial ;~catt0n" (does not change item

The mod va!J,e . I noncommercial); and
o,
. . L ts ess th th
---"'
_lo of ongmal contra""t a,n
e greater of $750K o
5
TINA (b . ,
.., va ue
r
~es.
- we must
, )(2)iA
_
if: thru B); FAR 15,403-1 (c)('J
t(;r) (
If
' II; B)
_
fi,, IS a "mmor
modificati ,,
rom commercial ton . on (does not change 't
The mod value e
oncommercial), but
- I em
of ongmal
contractxceeds th e greater of
-=
$7r..OK
TINA: (bl(J' '

- -~ --
11A
vg/ _
' ue
::>
or 5%
..
thru C); FAR 15.403-1(c'(J)
, l
(11i)(B)
You might ask why contractors would have reason to

.
.
item?" Simply put, there are several reasons namel a_~gue fo_r classification a~ a "commercial
requirement for CERTIFIED cost or pricing data.
i~~~s1fied_ as _c?mmercial, there is no
for contractors. In addition if determined to be
. uge habihty and resource consumer
'
commerc1a1 we use FAR part 12 w/
h
. . .
.
.
respect tot e
sohc1tat10n, mspectton, acceptance changes payment
d
'
,
, an c1oseout process.
Tt;
In assessing m~di fications to commercial items, begin by reading FAR 2.1 o1(3 )(i) d C)
1
(3) A?!' item that would satisfy a criterion expressed in paragraphs (1) or (2)a;f th\
defimt1on, but for __
s
(i) Modifications of a type customarily available in the commercial
marketplace; or
ii Minor modifications of at e not customaril available in the commercial
mar~etpl~ce made to meet Federal Government requirements. Minor
mod1ficattons means modifications that do not significantly alter the
nongovernmental function or essential physical characteristics of an item or
component, or change the purpose of a process. Factors to be considered in
determining whether a modification is minor include the value and size of the
modification and the comparative value and size of the final product. Dollar
values and percentages may be used as guideposts, but are not conclusive
evidence that a modification is minor-
'
Then read FAR 15.403-l(c)(3):

(iii) The following requirements apply to minor modifications defined in paragraph (3)(ii)
of the definition of a commercial item at 2.10 I that do not change the item from a
commercial item to a noncommercial item:
(A) For acquisitions funded by any agency other than DoD, NASA, or Coast Guard,
such modifications of a commercial item are exempt from the requirement for
submission of certified cost or pricing data.
(B) For acquisitions funded by DoD, NASA, or Coast Guard, such modifications of a
commercial item are exempt from the requirement for submission of certified cost or
pricing data provided the total price of all such modifications under a particular
contract action does not exceed the greater of the threshold for obtaining certified cost
and pricing data ($750K) or 5 percent of the total price of the contract at the time of
contract award.
(C) For acquisitions funded by DoD, NASA, or Coast Guard such modifications of a
commercial item are not exempt from the requirement for submission of certified
cost or pricing data on the basis of the exemption provided for at FAR 15.403-l(c)(3)
if the total price of all such modifications under a particular contract a~tion exceeds
the greater of the threshold for obtaining certified cost or pricing data in 15.403-4 or 5
percent of the total price of the contract at the time of contract award.
rin.,.,' ""
n .. ; , J fp,.wm J
. Negotwt/011S

Act - Awe
I 27
0
-Truth m
.
To assist with your research and
After reading these references, review the following scenario .. h ti es the process for
understanding, also review the flowchart at Attachment 2, whic ou in
decisions with modifications to commercial items.

FAR 2.101; 15.403-1(c)(3)(iii); Lesson 2 Atch 2
Read the following scenario:
Your team is planning to award a contract for approx_im~tely
$104M for a camera system. Your market r~s~arch indicates
the system meets the definition of commercial item, except
for a modification to meet military requirements ( Nith respect
to ruggedization and resolution). Your market research
indicates this modification is approximately $4M of the
$104M total. Though the modification is not com~ercially
available, it does not significantly alter the essential physical
characteristics or function of the system.
1
Let's answer some questions about this ...

FAR 2.101; 15.403-1(c)(3)(iii); Lesson 2 Atch 2
The contractor asserts you can still treat the $104M contract
as. a commercial acquisi!ion with respect to TINA. Can you?

(Hint use the flowchart ,n Lesson 2, Atch 2)
Start w/FAR 2.101(3)-is modification available in the
commercial marketplace
Does the mod change essential elements?
Is mod value less than the greater value of the TINA

threshold (S 750K) or 5% of the original contract v I
($5MJ?
.
a ue
'
CONJ lO, Unit I Lesson 2 - T h .
.
. . .
rut m Negohations Act p
-.
- age / 28 ,.. '
The contractor asserts

with respect to TINA? ~: can still treat the $ 104
n you?
M contract as a commercial acquisition
Sta~ wlFAR 2. IOI , Co

. .
modification a -1
mmerc1al Item (3)(")
vat able in the comm . 1 ' ao d use the flowchart at Attachment 2-is
erc1a1 marketplace?
Does the mod h
c ange essential elements?
Is the mod value less th

an th e greater val O f h
ori 0oinal c t
on ract value ($5M)?
ue t e TINA threshold ($750K) or 5% of the
Therefore, does them d"fi .

.
?
o t tcation to co
. .
act10n.
mmercial Item exception to TINA apply to this
~ !'~~QLl'sibmli, j.t<',,..,
FAR 2 1 1; 15.403-1 {c)(3)(iii); Lesson 2 Atch 2
(conti~ued from previous example)

What If the modification was worth $6F\1?
Use the same process (flowchart at Attachment 2)
. .. ,T~e $6M ~vou'.d be gr~ater than the grea ter of the TINA
thre.shold ($750KJ or 5% of the basic contract value {$SM).

In that ca se , FAR 15. 403-1 (c)(3)(B)(ii1) would require the
cont~~cto: to submrt certified cost or pricing data on the
rnodrhcaflon portlon only.
This is consistent with tl1e TINA langung'e, (b){3)(C)(ii)
The next example is similar to the previous one, but illustrates a scenario where a commercial
contract is already in-place. In the last scenario, the contract had not yet been awarded. In this
case, a modification is to be awarded to an existing commercial contract. The solution is within
the same FAR references as the previous example, and the Attachment 2 flowchart can also be
used.
-= .,;"''" ~I rt - Pm!.e I 29
''f"M''""""'',)11"\,:. N',_
ctfv the contract for a .
1 ng to mo '
,
g officer
. Your team is P annh1_ h the prev1 ous contractin rent military
camera system w ic
. Now, to me~t cur_
.determined _to be commerc,~I. a $ 4M mod1ficatt0n, not
requirements, y~u ar~ planning . lace. Howeve_r, the .
customarily available m_ th~ mar~e~lter the essential physical
modification does not ?rgmficant Y
. The contract~r
.
characteristics or f~nct1on o_f th e 5Y5tem. erciaf acquisition with
asserts you can st1 II treat th1 s as a comm
respect to TINA. Can you?
..
le -only
Same defense appli~Sas p,d-er!?US
cornrnercia/
dJference here ,s were rno 1,ymg ar ,
contract rath er than planning to atva rd 3 ne~r one.
e;;;:zjtJg
. What if the modification was worth $6M?

Sarne defense as previous example: cedifieci ciata only
on the morlificAhnn portion

FAR 2.101 ; 15.403-1 (c)(3)(iii); Lesson 2 Atch 2
. Finally, what if a noncommerciar modification is proposed

which will change your item from a commercial to a
noncommerciaf item?
. Can you execute such a change?

Not as a modification. Such a ch ange woufcf likely tJe
beyonct the general scope of the original contract. ~Voutd
likely need a rwlv contract via FAR 15) with a Justification
and Authorizat,on approved pursuant to FAR Pa tt 6 before
atvarcfiog a sole-source action If none of th e TINA
exceptions applied, we would require certifreci cost or
pricing data.
. Most likely, a change this significaot would drive a revisec!
acquisition strategi and a new competitive contract
action.
CONf 70, Unit I lesson 2 - Truth in Negotiati01 1
,{
'')
Jn conclusion, remember that

d
. d
re gar less of the t
to reqmre ata and then not use 1t t
yPe of data requested, avoid a common tendency
o eva 1uate th
proposa,I stnve to understand the
e proposal. When evaluating an offeror's
.
.
fill .
proposal well
h
.
mformat10n to 1 m any gaps in th
. enoug to ask the contractor for specific
.
C
. e cost or pnce
I .
FAR reqmres ontracting Officers t0 "
ana ~sis. Remember, the bottom line is that the
at fair and reasonable prices" with t pukr~hase supplies and services from responsible sources
. .
,
ou as mg for m
th
In Nego!1at10ns Act language and the FAR i
ore . an necessary. Unde~sta?ding the Truth
mplementation of that language 1s vital to one's
success m the contracting career fi1e Id .
Lesson Summary--"TINA Takeaways"
TINA is a "surrogate" to norm 1

k
to be fair and reasonable.
a mar et forces, to help the Government determine prices
TIN~ ~~quires contracting officers to obtain certified cost or pricing data, unless a
proh1b1tton or exception applies.
TINA requir~s. ~ontracting officers to request data other than certified cost or pricing data
when a proh1b1t10n or exception applies IF available data are inadequate to determine
"fair and reasonable."
The contracting officer should only request additional data from offerors when necessary,
after first reviewing data from internal government or other sources is inadequate to
determine a fair and reasonable price.
Even when the contracting officer is allowed to request data other than certified cost or
pricing data, he must first seek information from Government sources and sources other
than the offeror-this is the focus of "true" market research
When we must request data other than certified cost or pricing data, it should be of a form
routinely managed by the offeror.
To reinforce the process for contracting officers to determine what typ_e_of co~t or pric_ing <lat~
should be requested (if any), review the following flowchart. For additional mformatlon, review
the explanations provided in the CPRG, Volume 1, Chapter 3.
-~
What type of cost or pricing data is required?
Do M t r~Quke
comra(:tor to submit
Start
L
nY
d.-t
NO
\
\\
Is
/'--.,
,./
~..
,/ ,./ Exceptiiori
0 cesan ..
''!'PPIYV
" (.
Yes
data other t han
certified cost o r
p l l(Ul ~ cJ .;_itJ
o r~ to
fu:<es-sJ
de termine price
reasonabl ene ss
or cost realism ?
' "'-
/ ' ~.
., ./
/'
.,,,""
"-.. ._
, '''-.
Ye_ "_/ /.,I, data ,vailable fro m
m arke t research,
"-.__
competltloo > w,th.O
/'
"'- ttie (i,:) 1en1 nH;'F t :, / /
.
'-,
NOJ
N:i----
l No ~ / /'
/.
J-
. . ,. . . .
'--.
/41
"',,.
'
~- -.___,
.
s action over,,.)>--.:_.....
No -~,- / . ' IS. .;ii: tk 1r'I> ' '", ,. Yes / Has H( A
':--._; )
.
//
",ove, -SAT? / .,>---+,.,_autho
r,l'ed ?
"'-PS0,000?
.,
<
'/
. L.
Yes
'-.
"-.. .///
,
'
NO
,. - -//y
"-. /
R1q11ire cootr11'ttor submit

c~rti~ed to~ ~ pricil"IC data ~ - - '
Yes.
ft4q1,1lr 1nrr.ac;t0r ~ bmlt data oth~ dlan ctitied

cost ot ptictnc dMa--but
only thM ~ h Is
1.2 Describe the Truth in Negotiations Act, including its purpose in mitigating government cost risk
1.201 Explain appropriate conditions for requiring Certified Cost or Pricing Data
1.202 Recognize the prohibitions and exceptions to requiring Certified Cost or Pricing Data
1.203 Identify the requirements for applying the commercial item exception for new
contracts
1.204 Identify the requirements for applying the commercial item exception for
modifications to commercial items
1.205 Explain the requirements for waiving the TINA
1.206 Identify the due diligence requirements for obtaining other information when certified
cost and pricing data are not required
1.207 Explain the limitations to obtaining no cost or pricing data, and data other than
certified cost or pricing data
1.208 Given a contract scenario, determine the requirement for certified cost or pricing data
Unit 1 Lesson 2 Attachment 1

S'
10 U.S.C. 2306A. COST OR PRICING DATA: TRUTH \N

NEGOTION
CURRENT AS OF JAN 7, 2011
(a) Required Cost or Pricing Data and Certification.ontractors to make
(1) The head of an agency shall require offerors, contractors, and subc
cost
or pricing data available as follows

d t
d
(A) An offeror for a prime c~ntract under this chapter to be ente.r~ in using proce ures
other than sealed-bid procedures shall be required to submit cost or pricing data before th e
award of a contract if.
(i) in the case of a prime contract entered into after December 5, 1990, the pnce
of the contract to the United States is expected to exceed $500,000; and
(ii) in the case of a prime contract entered into on or before December 5, 1990,
the price of the contract to the United States is expected to exceed $100,000.
(B) The contractor for a prime contract under this chapter shall be require? to submit
cost or pricing data before the pricing of a change or modification to the contract 1f(i) in the case of a change or modification made to a prime contract referred to in
subparagraph (A)(i), the price adjustment is expected to exceed $500,000;
(ii) in the case of a change or modification made after December 5, 1991, to a
prime contract that was entered into on or before December 5, 1990, and that has been
modified pursuant to paragraph (6), the price adjustment is expected to exceed $500,000; and
(iii) in the case of a change or modification not covered by clause (i) or (ii), the
price adjustment is expected to exceed $100,000.
(C) An offerer for a subcontract (at any tier) of a contract under this chapter shall be
required to submit cos.tor pri_cing data before the award of the subcontract if the prime
contractor and each h1gher-t1er subcontractor have been required to make available cost or
pricing data under this section and(i) i~ the ca~e of a subcontract under a prime contract referred to in
subparagraph (~)(~), the pnce of the subcontract is expected to exceed $500,000
(11) in the case of a subcontract entered into after Oecemb 5 1991
'
prime contract that was entered into on or before December 5 1990
de;h '
, under a
modified pursuant to paragraph (6), the price of the subcontra~t . ' an
at has been
18 expected to exceed
$500,000; and
(iii) in the case of a subcontract not covered b

.
..
subcontract is expected to exceed $100,000.
Y clause (1) or (11), the price of the
(D) The subcontractor for a subcontract covered b
to submit cost or pricing data before the pricing of a ch Y subpara~.raph (C) shall be required
if. .
ange or mod1f1cation to the subcontract
(1) m the case of a change or modif t'
subparagraph (C)(i) or (C)(ii), the price adjustmen~~a ion to a subcontract referred to in
s expected to exceed $500 000
,
,and
CON17o
Tr
, umt 1 Lesson 2 -Truth .

. .
in Negotiations Act - Page \ 34
(ii) in the case of a change or modificat'

t
subparagraph (C)(iii), the price adjustment is expectediotn a subcontract referred to in
o exceed $100,000.
(2) A person required, as an offeror, contractor, or subcontr

.
under paragraph (1) (or required by the head of the a enc actor, to submit cos~ or pricing data
under subsection (c)) shall be required to certify that ~ th Y ~oncerned to submit such data
0
belief, the cost or pricing data submitted are accurate'
e eS t of the person's knowledge and
I
, compete,
and current.
(3) Cost or pricing data required to be submitted under
.
and a certification required to be submitted under ara ~aragraph ( 1) (or under_subsect1on (c)),
(A) in the case of a submission by
. P g aph (2), shall be submitteda pnme contractor (or an offerer fo
t
)
to the contracting officer for the contract (or to a designated
.
r a pnme con ract ,
officer); or
representative of the contracting
. (8) in the case of a submission by a subcontractor (or an offerer for a subcontract) to

the prime contractor.
,
(4) Except as provided under subsection (b ), this section applies to contracts entered into by the
head of an agency on behalf of a foreign government.
(5) A w~iver of requi~ements for submission of certified cost or pricing data that is granted under
subsection (b)(1 )(C) tn the case ~f ~contractor subcontract does not waive the requirement
under paragraph (1 )(C) for subm1ss1on of cost or pricing data in the case of subcontracts under
that contract or subcontract unless the head of the procuring activity granting the waiver
determines that the requirement under that paragraph should be waived in the case of such
subcontracts and justifies in writing the reasons for the determination.
(6) Upon the request of a contractor that was required to submit cost or pricing data under
paragraph (1) in connection with a prime contract entered into on or before December 5, 1990,
the head of the agency that entered into such contract shall modify the contract to reflect
subparagraphs (B)(ii) and (C)(ii) of paragraph (1 ). All such modifications shall be made without
requiring consideration.
(7) Effective on October 1 of each year that is divisible by 5, each amount set forth in paragraph
(1) shall be adjusted to the amount that is equal to the fiscal year 1994 constant dollar value of
the amount set forth. Any amount, as so adjusted, that is not evenly divisible by $50,000 shall
be rounded to the nearest multiple of $50,000. In the case of an amount that is evenly divi.sible
by $25,000 but not evenly divisible by $50,000, the amount shall be rounded to the next higher
multiple of $50,000.
(b) Exceptions..
(1) In general.- Submission of certified cost or pricing data s~~II ~ot be required under
subsection (a) in the case of a contract, a subcontract, or mod1f1cat1on of a contract or
subcontract(A) for which the price agreed up?~ is based on(i) adequate price compet1t1on;_ or
(ii) prices set by law or regulation;
(8) for the acquisition of a commercial item; or
. Ne otiations Act - Page I 35

CONJ 70, Unit 1 Lesson 2 -Truth m g
ng activity, without delegation

d f the procu rl
t
'
(C) in an exceptional case when the ~ea : be waived and just1f1es in wn ing the
determines that the requirements of this section
my
reasons for such determination.
ercial items.- In the case of a
(2) Modifications of contracts and subcontracts for
~r~:rn
that is not covered by the

modification of a contract or subco~~ract for a co~~er~!ta in paragraph (1 )(A~ or (1 )(_B),
exception to the submission of cert1f1ed cost or pncing
. ed under subsection (a) ifsubmission of certified cost or pricing data shall n?.t b~ req~intract or subcontract for which
(A) the contract or subcontract being modified is a . ed by reason of paragraph ( 1)(A) or
submission of certified cost or pricing data may not be requ,r
(1 )(B); and
5 ubcontract as the case may be
(B) the modification would not change the contract or . 1 1t m to 'a contract or
'
from a contract or subcontract for the acquisition of a commerci~ e
subcontract for the acquisition of an item other than a commercial item.
(3) Noncommercial modifications of commercial items.. .
(A) The exception in paragraph (1 )(B) does not apply to cost or pricing_ data on
noncommercial modifications of a commercial item that are expected to cost, in the aggregate,
more than the amount specified in subsection (a)(1 )(A)(i), as adjusted from time to time under
subsection (a)(7), or 5 percent of the total price of the contract (at the time of contract award),
whichever is greater.
(~) I~ this paragraph, the term "noncommercial modification", with respect to a

com!11erc1al item, means a modification of such item that is not a modification described in
section 4(12)(C)(i) [11 of the Office of Federal Procurement Policy Act (41 U.S.C. 403 (12)(C)(i)).
(C) Nothing in subparagraph (A) shall be construed(i) to limit th_e_applicability of the exception in subparagraph (A) or (C) 0 f
r
f
. .
paragraph (1) t~_cost or pncmg data on a noncommercial modf
1
(11) to require the submission of cost or . .
,ca ion
a commercial item; or
acquisition of a commercial item other than the
t pnc,~~ data on any aspect of an
of such item.
cos a nd pricing of noncommercial modifications
(c) Cost or Pricing Data on Below-Threshol

(1) Authority to require submission - S b' d Contracts.data are not required to be submitted
u Ject_ to paragraph (2) when ce ..
modification of a contract or subcontra!i sub~ect1on (a) for a cont(act sub rt1~1ed cost or pricing
submitted by the head of the procurin , s_u? data may nevertheles '
con ~act, or
determines that such data are necess~ act,v,ty, but only ~f the head of th
be requir~d to be
reasonableness of the price of the cont( for the evaluation by the a
e procuring activity
subcontract. In any case in which th h act, subcontract or modT gency of the
submitted under this subsection th eh ead of the procu;ing a r i_ ,cation of a contract
reason for such requirement. , e ead of the procuring acct,v,ty
,~1tyshall
requires
.
. such
. d a t aorto be
Justify in w t
(2) Exception.- The head of th
.
n mg the
to be submitted under this paragerap
prhocunng
activity
ma
for a
Y not re
con t ract or subcontract, covered b
ny contract
quire certif d
(b)(1).
Y the exceptions in ~r ;ubcontract, or ~e d.c_ost or pricing d t
u Paragraph (
o 1f1cation of
aa
A) or (B) of sub
(3) Delegation of authorit r . .

functions under this paragr!pph ohabited.- The h
ead of a Procur'
ing activity
,.
- -- ------ -
!~
- ~,:,,.
a_
section
rn
ay not delegate
'
CONJ70
T r
' vnu J l esson 2 _.. ,. __
(d) Submission of O~her lnfor_ma_tion.(1) Authority to require subm1ss1on.-When certified cost or pricin
d t
.
e
submitted
under
this
section
for
a
contract,
subcontract
or
mod'if'icgat
a
a
fare
not
required
to
b
ff'
'
ion o a contract or
..
subcontract, the contracting o 1cer shall require submission of data othe th
.
r an cert1f1ed cost or
he exten t necessary to d etermme
ricing
data
to
t
the
reasonableness
of
th
.
f
P
f
t
f
h
e
pnce
o
the
t
t
d
contract, su bcon rac , or mo 11ca 10n o t e contract or subcontract Exce t th
m
e
case
of a
.
.
P
t
.
.
contract or su bcon trac t covere d by t he exceptions in subsection (b)(1 )(A) th
th
t
th
d
t
b
tt
d
I
d
'
e
con
ractmg
officer
shall require a e a a su m1 e me u e, at a minimum, appropriate info
t
. h th
t
-
rma 10n on the
prices ~t w h1c
e same I em or s1m1 1ar_ items have previously been sold that is ade uate for
evaluating the reasonableness of the pnce for the procurement.
q
(2) Limitations on authority.- The Federal Acquisition Regulation shall include th f II
. .
d. th t
f. f
.
e o owing
prov1s1ons regar mg e ypes o m ormat1on that contracting officers may require under
paragraph (1 ):
(A) Reaso~able limitations on re~uests for sales data relating to commercial items.
(B) A requiremen! that a ~ontract1~g officer limit, to the maximum extent practicable, the
~cope o~ any re~u~st for information relat1~g t~ commercial items from an offeror to only that
information that 1s in the form re~ularly m.amtame~ by the offeror in commercial operations.
(C) A statement that any information received relating to commercial items that is
exempt from disclosure under section 552 (b) of title 5 shall not be disclosed by the Federal
Government.
(e) Price Reductions for Defective Cost or Pricing Data.(1)
(A) A prime contract (or change or modification to a prime contract) under which a
certificate under subsection (a)(2) is required shall contain a provision that the price of the
contract to the United States, including profit or fee, shall be adjusted to exclude any significant
amount by which it may be determined by the head of the agency that such price was increased
because the contractor (or any subcontractor required to make available such a certificate)
submitted defective cost or pricing data.
(8) For the purposes of this section, defective cost or pricing data are cost or pricing
data which, as of the date of agreement on the price of the contract (or another date agreed
upon between the parties), were inaccurate, incomplete, or noncurrent. If for purposes of the .
preceding sentence the parties agree upon a date other than the date of agreement on the pnce
of the contract, the date agreed upon by the parties shall be as close to the date of agreement
on the price of the contract as is practicable.
(2) In determining for purposes of a contract price adjustment under a contract provision
required by paragraph (1) whether, and to what extent, a contrac_t price was_ increased because
the contractor (or a subcontractor) submitted defective cost o~ pncmg data, it shall be a defense
that the United States did not rely on the defective data submitted by the contractor or
subcontractor.
(3) It is not a defense to an adjustment of the price of a contract under a contract provision
T d
if accurate complete,
required by paragraph (1) that(A) the price of the contract would not have been modi ie ~ven subcontra'ctor because
and current cost or pricing data had been submitted by the contrac or or
the contractor or subcontractor.
procured or
(i) was the sole source of the property or service 5
'
. N, , otiationsA ct-Page j 37
CON/70, Unit} lesson 2 - Truth m t g
. . position with respect to the property or

.
erior bargaining
(ii) otherwise was ,n a sup
services procured;
h t the cost and pricing data in issue

.
fficer should have known t ator took no affirmative action to bring
(B) the contractmg o
ractor or subcontra~
. .
were defective even though the cont .
f the contracting officer,
the character of the data to the attention o
tractor and the United
reement between the con
(C) the contract was based on an agnd there was no agreement about the cost of each
States about the total cost of the contract a
item procured under such contract; or
.
. .
r did not submit a certification of cost and pncmg
(D) the prime contractor or s~bcontracto ubsection (a)(2).
data relating to the contract as required under s
ount against the amount of a contract
h ( 1) ifprice adjustment under a contract pr_~vision required b{ paratfi~: (or to a designated
O
(i) the contractor cert1f1es to the contrac mg
ntractor's knowledge and
representative of the contracting officer) that, to the best of the co
belief, the contractor is entitled to the offset; and
. . d t
available before the
.
.
(ii) the contractor proves that the cost or pncmg a a were
d'f'
t
)
r
,f
applicable
date of agreement on the price of the contract (or pnce of the mo 1 ,ca ,on
~
consistent with paragraph (1)(B), another date agreed upon between the parties, and that the
data were not submitted as specified in subsection (a)(3) before such date.
(4)
(A) A contractor shall be allowed to offset_ an am
(B) A contractor shall not be allowed to offset an amount otherwise authorized to be

offset under subparagraph (A) if(i) the certification under subsection (a)(2) with respect to the cost or pricing data
involved was known to be false when signed; or
(ii) the United States proves that, had the cost or pricing data referred to in
subparagraph (A)(ii) been submitted to the United States before the date of agreement on the
price of the contract (or price of the modification) o~, if applicable_consistent with paragraph
(1 )(B), another date agreed upon between the parties, the submission of such cost or pricing
data would not have resulted in an increase in that price in the amount to be offset.
(f) Interest and Penalties for Certain Overpayments.(1) If the United States makes an overpayment to a contractor under a contra t
b"
section and the overpayment was due to the submission by the contractor of ~ su ~ect to th,s
pricing data, the contractor shall be liable to the United Statesefectlve cost or
(A) for interest on th~ amou~t ~f such overpayment, to be computed(i) for the penod beginning on the date the overpayment w
contractor and ending on the date the contractor repays the amount of su~~ made to the
United States; and
overpayment to the
(ii) at the current rate prescribed by the Secretary of the T
6621 of the Internal Revenue Code of 1986; and
reasury under section
(B) if the submission of such defective data was a knowing submission

amount equal to the amount of the overpayment.
'for an additional
CONJ 70, Unit 1 Lesson 2 -Truth in Ne

-
gotiatin .. " .
1
liability under this sub~ection of a con!ractor that ~ubmits cost or pricing data b
(2) Any t the certification required by subsection (a)(2) with respect to the cost or .. ut refuses
to submti be affected by the refusal to submit such certification.
pricing data
shall no
Right of United States To Examine Contractor R~~ords.- For the purpose of evaluatin
and currency of cost or pric~ng dat~ required to be submitted by g
this section, the head of an agency shall have the authority provided by section 2313 (a)( 2) of
!~~ accuracy, completeness,
this title.
h) Definitions.- In this section:

..
. .
,,
(1) Cost or pricing ~ata.-The term cost or pricing data means ~I~ fa~ts that, as of the date of
~greement on the price.of a contract (or the price of a contract mod1f1cat1on), or, if applicable
onsistent with subsection (e)(1 )(8), another date a~reed upon between the parties, a prudent
~uyer or seller w~uld rea~onably ~xpect to affect price ne~otiations significa~tly. Sue~ term
does not include informat1~n that 1s Judgmental, but does include the factual information from
which a judgment was derived.
(2) Subcontract.--. The tem:1."subcontract" includes a transfer of commercial items between
divisions, subsid1anes, or affiliates of a contractor or a subcontractor.
(3) Commercial item.- The term "commercial item" has the meaning provided such term in
section 103 of title 41 .
. . Act-Page I 39
Negotwtwns
.
. L
2-Truth m
rnll.n 1n l/nzt I esson
Unit 1 Lesson 2 Attachment 2
Modifications to commercial Items

Start with original comme rcial item
(FAR 12 Clauses)
Modification
Commercially available in marketplace?
-Yes
FAR 2.1013 (i)
ot a Minor Mod
is not
Dollar Value TEST:

Is Mod less than the
greater of TINA
threshold {$750K) or
5% of the original K
value? {esp.)
FAR 15.403-1 {c)(3)
No
Proceed with FAR
12, but must get
CCPD for Mod
portion of buy
FAR 15.403-1
(c)(3){iii}(C)
This purchase can

not be treated as
a commercial
Use FAR 15.
Verify scope
determination.
Yes
Proceed with FAR
12, no certified cost
or pricing data
FAR 15.403-1
(c)(3)(iii)(B)
Proceed with FAR 12

Commercial
Acquisition. No
certified cost or
pricing data.
STUDENT GUIDE
CON 170
Unit 1, Lesson 3
Cost Accounting Standards

October 2016
Estimating and Accumulation Example
Direct
Estimating
Indirect
Total
Accumulating/
Reporting
Direct
300
500
5500
3000
Indirect
100
Total
3100
5000
200
1000
11000
2000
10000
100
1000
2100
11000
Cost Accounting Standards Board
Administratively located in the Office of Federal

Procurement Policy
Consists of five members
- Chair, OFPP Administrator
- One DoD Representative (currently DCAA)
- One from Federat Government
- One from industry
- One from accounting profession
For additional details, internet search "CAS ,,
.
https:llwww.whitehouse.gov/omb/
B, or hnk to
procurement_casb/
CONJ 70, Unit IL
esson
_ ,._
- ----- ---......
Definition and purpose
Set of 19 cost accountin
Cost Accounting Stand gdstandards promulgated by
ar s Board
Standards designed t
O
.
.
consistency in cost
achi~ve uniformity and
accounting p t
measurement ass
rac ices governing
,
ignment and all
r
contracts with United St t ,
oca ion of costs to
a es Government
Cost Accounting Standards

: CAS 401 - Cons!stency ~n Estimating, Accumulating, and Reporting Costs
CAS 402 - Consistency in Allocating Costs Incurred for the Same Purpose
CAS 403 - Allocation of Home Office Expenses to Segments
CAS 404 - Capitalization of Tangible Assets
* CAS 405 -Accounting for Unallowable Costs
* CAS 406 - Cost Accounting Period
CAS 407 - Use of Standard Costs for Direct Material and Direct Labor
CAS 408 -Accounting for Compensated Personal Absence
CAS 409 - Depreciation of Tangible Capital Assets
CAS 41 O - Allocation of Business Unit General and Administrative Expenses to Final Cost
Objectives
CAS 411 -Accounting for Acquisition Costs of Material
CAS 412 - Composition and Measurement of Pension Cost
CAS 413 - Adjustment and Allocation of Pension Cost
CAS 414 - Cost of Money as an Element of the Cost of Facilities Capital
CAS 415 -Accounting for the Cost of Deferred Compensation
CAS 416 -Accounting for Insurance Costs.
CAS 417 - Cost of Money as an Element of the Cost of Capital Assets Under Construction
CAS 418 -Allocation of Direct and Indirect Costs
CAS 419 - [Reserved]
CAS 420 -Accounting for Independent Research and Development Costs and Bid and Proposal
Costs
*Included for modified coverage
A -, , > nting Stundards - Page I 5
CONJ 70, Unit 1 Lesson 3 - Cost ,.c<
,.
- ~
..:-
Cost Accountino Standards (CAS) consist of nineteen stao<lard shnumdbered ~O ! to 420 (CAs 419
0
.
.
t
of costs sue as epreciation pensio
is reserved) (see above slide). They cover a vane Y
ri .
d '
. n Plans
ersonal
compensation
indirect
costs,
etc.
They
ensure.
um
oiyidity
and
llconSistency
1n'
P
'
t
peno
)
an
a
measurement (how much), assignment (to which cost accoun mg

'
ocatton (Which
contract gets charged).
CAS is promulgated by the Cost Accounting Standards Board (CASB), which undergoes a
process similar to (but not the same as) the rulemaking process for th_e Federal Acquisition
Regulation System. Also note that the FAR and CAS are congruent m that 48 CFR 9903 .3,
covers the same infonnation in FAR 30.3 . Thus, much ofF AR Part 30 incorporates 48 CFR
Chapter 99 in whole or part; those portions are statutory as opposed to regulatory in nature.
The following slides discuss the responsibility of the contracting officer to determine if CAS
may a~P!Y t? a contract. If so, the contracting officer must place the appropriate provisions in
the sohc1tatio~. The contracting officer shall not award a contract that is CAS covered until he
0
~ she determmes that the Cognizant Federal Agency Official (CFAO) has made a determination
0
adequacy of the Contractor's Disclosure Statement. See FAR 30.202-6.
Provisions and Clauses

If CAS m~~pjy, insert in solicitation:
- 52.2?0-1: Cost Accounting Standards Notices and
Ccrt1ficat1on &
- 52.23.0-7, Proposal Disclosure-Cost Account'
Practice Changes
ing
If CAS docs apply, insert in contracts:
- 52 .230-2, Cost Accounting Sta d
.
require full ~AS coverage, or n ards tn contracts that
- 52.230-3, Disclosure and Consist
Accounting Practices in cont t enhcy of Cost
.fi
,
rac st at req .
mo d1 1ed CAS coverage; &
u1re
- 52.230~6, Administration of Cos
.
Standards in all CAS cover d t Accounting
e contracts
CONJ 70, Unit J L

esson 3 _ C
0StA
ccountin
g Siandar(/ .
.s. Page \ 6
---------.--,-.--- ----~---_:_:::.... :."'.-- ~ ~
..
-~-- - ~
1.
Responsibilities
The Contract~ng Offi
- rv1ust d
icer:
ctcrmine when a
CAS coverage
proposed contract may require
- fv1ust includ e appropriat
.
- Sh.all not award a CAS-~ notice tn the solicitation
has made a written det ov_ere~ contract until the CFAO
Statement is ade
ermmat,on that the Disclosure
quate
The Cognizant Federal A

- Is responsible f .
~ency Official (CFAO)
or issuing determ t
and compliance of th o
ma tons of adequacy
e isclosure Statement
Head of Agen cy may waive

. CAS
- Must comply with FAR 30.201-~overage
- Non-delegable
CAS Applicability & Coverage

unles:Pfx~~Jf
CAS r
1~tJ~io~f~d9~g1t:J8\~ 1(gr subcontracts
A C?nt~act ~r subcontract not exempted from CAS is

subJect to either:
- Full CAS coverage-all of the standards or
- Modified CAS coverage-only standard~ 401 402

405, and 406
'
,
Determining CAS applicability and coverage is a two-step process. The first step is to detennine
whether CAS does or does not apply to the contract being negotiated I awarded. If CAS does not
apply, there is no CAS coverage and the second step of the process is irrelevant If CAS does
apply, it must be detennined whether the contract is subject to full CAS coverage (all nineteen
standards), or modified CAS coverage (CAS 401,402,405 and 406) or only CAS 401 and 402
(when dealing with foreign concerns subject
to CAS).
CONJ 70, Unit J Lesson 3 - Cost Accounting Standards - Page I 7
. DCAA Contract Audit r-.r1anual

provides flowchart t~ b'lity
determine CAS ~pphca '
(see Atch 3 of this lesson)
Some CAS exemptions are
similar to TlNA exceptions but they are not the same
_ Dollar threshold is the
same as TlNA threshold for
requiring certified cost and
pricing data
- fs Small Busines.s status a

CAS Exemption? A TINA
Exception?
(Note: see Attachment 3 for a full size copy)
Once it is determined that a contract is covered by CAS, and whether it is full or modified
coverage, you will need to determine which business units must submit a Disclosure Statement.
A Disclosure Statement is simply a written document that explains a contra t ,

.
practices. An adequacy determination by the CF AO does not necessaril c or s cost accoun~1ng
are compliant with CAS. If full coverage is required, the business unit Y.;:i:an tha! the practices
a Disclosure Statement. They may be required to submit a Disclo w, S e required to submit
coverage is required.
sure tatement if modified
If your responsibilities i clude awarding or administering a contract that may be covered by

cAS, th~re are other
nd rd courses !hat will be helpful to you (such as CON 252, Fundam:ntal_s_of Cost
Accounting Sta a s).

t In this_course, ~ou will learn more about CAS history, apphca?hty,
types of coverage, coS accountmg practice changes, cost accounting periods, and cost impacts.
Disclosure Statement
Discl.osure Statement (OS) is a written description of a
contractor's cost accounting practices and procedures
A contractor may_ be required to submit a disclosure
statement
- CFAO determines adequacy
- A determination that the OS is adequate only means
that it describes the contractor's practices; it does not
mean that those practices are compliant
Example of Disclosure Statement
. " ... .. Iii
OIi$
c.i:M'IIAL wstJUXTI
, . , . , , . , ,
U ,,., C(l'J'll'ICAflOc'I . .. ' .
. ..
CQit'tllVlln,._
.
, ...rl'f I
,JI ,., .. ....
r,..,n
a-,1111.a~--~
- I C.,.1& ' ' ' '
,,,.... .
. . . . .' .
-. .uC'> 1

,.,
.... ,, , . , .. ,.
~ I ... 1,~t" '41 ' '
rAlfT
I,.
. . .... . .
, . . . . . ,
'
,JIit, "'
,~rv
0,,.,,.,,,,,r:..,,. -
,;.,rr..,
Of.'* C.,.,:t ..,J pw:i!I ' ~ - ( lll l
Cltcfll'H ~
,t.T ii
...,
' , .
,,, ,
1V, \
. ...
e.,il"""ltl<,,<
c,1
,.,..!)<....: ..,. Vl- I

,
VI -I
~ ~ II\
' \'1.11,I
S). t
.
.
Statement
(D.
.
,l
..
t
cash/cash_ds-1.pdl
le Disclosu1e
, . ts/procuremcn L------Vicw a samp. lt/filcs/omh/llS>C
Standards-Page
h t housc.~o,/"tcs/ddau
~
. I Lesson 3 - CvsrAccountmg
,.aRT Vfll
.....-.._ _,,__ - -
https://wnw.w c
- - - - - CON/70, Unit
19
Exercise: CAS Administration and Program Requirements -Knowledge Review

LearningtheObjective
. .
. and CAS program requirements.
.
Identify
general rules pertaining to CAS adm1n1strat10n
Introduction
This
lesson introduced the history and purpose of CAS, the responsibilities of the contracting
officer and CFAO, how to detennine whether CAS apphes to a particular contract, and the
reqmrements of a disclosure statement. Complete the following questions based on the CAS
lecture and slides.
Assessment
Student
Instructions:
to'the onlme
. FAR at fs1te.h1ll.af.mil.
_l .
lesson and
in the FAR toGo
help
Use the information in th.
complete this exercise

you answer the following questions. You have 20 m1 nu~~
t
IS
1._ Where in the FAR does it re ui
with CAS, disclose practices in !r~~n:a::;::!:i~;e::i;c;o,~s and subcontractors comply

~>O o ow those practices?
101(4)
2. Where are CAS found?

FAR Reference:
FAR 36.aoo
App~J;~
CONJ 70' Unit 1 L esson 3 - Cost Account.

mg Standards ~ p
........~.~
k.,:.C -~1.;;.;;:..:,:.,,. Ju.:Wi:1:: ....-: ; ~-. I..
'
"ge I Jo
th h
.
h the following clause or provisio
.
n Wt t e appropriate prescription using
J. l\1f atc
ation found m
FAR 30.201-3 and FAR
30 20 _
inforJtl
1 4
A. FAR 52.230-1 Cost Accounting Standards Notices and Certification

. B. FAR 52.230-2 Cost Accounting Standards
c. FAR 52.230-3 D~sclosure and Consistency of Cost Accounting Practices
D. FAR 52.230-4 Disclosure and Consistency of Cost Accounting Practices for
. E.
_F.
G.
H.
Contracts Awarded to Foreign Concerns

FAR 52.230-5 Cost Accounting Standards - Educational Institutions
FAR 52.230-6 Administration of Cost Accounting Standards
FAR 52.230-7 Proposal Disclosure - Cost Accounting Practice Changes
FAR 52.230-1 Alternate I
~A 6'---- - Inserted in a solicitation when CAS may apply to a resulting contract

~~ Inserted in contracts that require modified CAS coverage
~ S~ Inserted in all contracts that require full CAS coverage,

~
#-
. . .
_____ Inserted in all contracts with educat10na1 mst1tut10ns
un Ies s exempt from CAS or an
FFRDC
D~
~
. 11 CAS covered contracts with foreign concerns

Inserted ma
. CAS overed contract will be

I--( ~ Inserted in all solicitations wh_en t?e ~esu1tJ~g
F~RDC
~
~ awarded to an educational mst1tut10n un ess an
:r
3 - Cost Accountm&
CON/70, um 1 Lesson
r'
Standards - Page I J l
4. Who has the authority to waave

. b'l"ty
for a particular contract?
. CAS apphca
t
FAR Reference:
..!.~::S:e_.~Q.fO~f-_ (J---:).;:.R:_:...~_:-S:)7---
J 0.l()t_S( &-\)
5. Under what conditions may CAS be waived
.
i or a particular contract?
FAR Reference: ______________ _
6, Match the following CAS program responsibilities to the responsible office or person.
FAR Reference:
--------------
A. Procuring Contracting Officer
B. Cognizant Federal Agency Official
C. Cognizant Auditor
D. Contractor
-A_ Detennines whether or not a contract may require CAS coverage
A_theMay
not awardofficial
a contract until a written adequacy determination has been made by
responsible
--C__ Responsible for reviewing the Disclosure Statement
~ --- Detennines the adequacy of the Disclosure Statement
A__ Ensures the contractor has made the required disclosure

_()__ Responsible for complying with CAS
CON 170 . it 1 Le"~"" 3

CONJ 70, Unit l Lesson 3 - Cost Accountin t S
g lcindCJrds ~ p
uge j 12
Exercise: CAS Applicability Exercise 1

Learning Objective
Identify the policies and procedures D

.
Jes and regulations to negotiated c or app 1ymg the Cost Accounti~g Standards Board (CASB)
ru
.
b
on tracts and subcontracts Identify when a contract or
subcontract 1s su ~ect to CAS.
Introduction
This lesson introduced the history a d

. ...
.
d CFAO h
. n purpose ofCAS, the respons1b1ht1es of the contractmg
officer an
' . ow to detennme whether CAS applies to a particular contract and the
requirements ~fa disclosure statement. Now, you will have to determine whether CAS applies to
1 1hes of the responsible officials.

a given scenano and the roles and respons1b1
Assessment
Student Instructions: Based on the given scenarios, answer the accompanying questions. Be
prepared to brief your results to the class. You have 20 minutes to complete this exercise.
Scenario 1
You have a requirement to purchase commercial cameras that can detect Improvised Explosive
Devices (IEDs) from an altitude of 15,000 feet. These cameras will be hung on military aircraft
and transmit data back to battlefield commanders to assist their infantry patrols in locating and
destroying the IEDs. The total dollar value of these cameras is $7M. Through market research,
you know there are three sources who can supply these cameras. You are also aware that they
sell these to commercial firms for agricultural, traffic and other purposes. You anticipate that all
three sources will provide a proposal for these cameras and that you will award a FFP contract.
Would CAS apply? Why or why not?
CONJ 70, Unit J lesson 3 - Cost Accounting Standards - Page I 13
.
y. The contract was awarded
Scenario 2
. fior Ft Boone, Kd b the Kentucky Public
late
Y
1 t c service
a re uirement to procure e ec n hose rates are regu. d by applying ~he fixed rate
Jue was dctermmeh rs to be delivered. Is the
You have pq wer and Light, a company w
to Bluegrass o
$12 500 000 contract va
f kilowatt- ou
Utilities Company. T~e . ,) t ~he estimated number o
per kilowatt-hour (unit pnce o
contract subject to CAS?
Scenario 3
.
for $550 000 Does CAS apply.
you award a sole source contract for A&AS services
'
.
Scenario 4
You have a requirement to procure circuit cards for the F- 72 aircraft. A significant component of
this circuit card is copper. Copper has been fluctuating on the open market. The contract you are
awarding has a long lead-time and manufacture and delivery are expected to occur over a 24month period. This item is procured not onl_y by the USAF, but also by the USN and commercial
aircraft manufacturers. When you first receive the contractor's proposal th
t .
d .
d
,
e
um
pnce
per
car
significantly above both the In ependent Government Estimate and previous .
.
. 1s
pnce~ paid for this
item. When you conduct fact-finding, the contractor informs you th t d
and the long lead-time involved in manufacturing this Firm p d pa_ ue to the pnce of copper
cover any potential contingencies in price that may arise y ixe
nee contract, they have to
.
d
P
.
.
.
ou
amend
the so 11c1tation
. . and change
the contract type to a Fixe nee with the EPA, based on th p
. app 11es,
would this contract b e roducer
p nee
. I ndex for copper
Assuming no other exception
b"
N() Ff f
esu ~ecttoCAS?
\
CON170, Unit 1 l
es.son 3 - C
Ost A,-,,._ .
scenario 5
you antici;~te ;~~\~~ w{11d~e required on your contract. The total anticipated dollar value of
the con~rac is d CA. S ' m~ u mg options. Assuming the contractor does not claim any
applies ' what clause (s) w111 you mclude
the resultmg
contract?
exe mptions an
m
- d-,
C~t
A~nti7.
0\1Lndc1.xJs
Scenario 6
(,~
You have determined that CAS will apply on your contract, which is being awarded to a
successful large business. The contractor submitted their Disclosure Statement to the CF AO as
required, but the CFAO has notified the contractor and you, that the Disclosure Statement is not
adequate. Under what conditions may you award the contract in the face of an inadequate
disclosure statement?
~o. o.
Atf" c O Ji e,;., l
Le,,_""
wu-, vc. 1t
~~ ~Jo;~
s+""~
CON170, Unit 1 Lesson
l ds - Page I l 5
3 Cost Accounting Stam ar
. . C' ,4 S Ap,plicability Exercise 2

Exercise. .11
. ObJective
. th Cost Accounting Standards Board (CASB)
Learmng
. .
d rocedures for applying e
Identify the poh~ies an P lf le award contracts.
rules and regulat10ns to mu ip
f CAS the responsibilities of the contracting

In troduction
and purpose o
,
t
h
This lesson introduced the is ory.
h CAS applies to a particular contract, and the
officer and CF AO, how to determine whet er
requirements of a disclosure statement.
Assessment
Student Instructions: You will be given 20 minutes to discuss with your group and answer all
questions. Be prepared to discuss your result~. Cite your references. You may need to research
the FAR and CAS appendix to locate all pertment references.
You are a contract specialist assigned to a newly created Center of Excellence for security
related requirements. As a result, you have been tasked as part of a team to provide acquisition
and contracting support to 11 major DoD and Federal organizations. This entails consolidating
these separate security requirements into one multiple-award IDIQ contract. Your market
research and acquisition planning have resulted in a Request for Proposal for a basic award (1 st
year) of $SOM plus four $50M option years. This solicitation contains Firm Fixed Price, Fixed
Price In~~ntive Fee and Cost Reimbursement contract line items. You are using Full and Open
Co~pehtton P:ocedures and expect .to receive proposals from qualified small and large
busmesses. Given the above scenano, answer the following questions and include your pertinent
references.
.
Define "CAS covered contract".
Sahje,dn,,
7,\(')
J
,,0
:>
+o
C/'.1Sr~0vl~
~01-
\ . q,.ti)-]Dl G.)
f P~,t\c,\}
$When dete1TI1ining if CAS applies to this particular ac ui . .

.
contract, the ID/IQ contract or each task Id 1
q . s1tion, what ts considered a
(Hint: see Attachment 1, and the highl. hte ~very order issued under the ID/IQ contract?
....,ig e _area of Attachment 2)
Jv--Jk or ~ :_
Col'-\:'~
CONJ 70, Unit l lesson 3 - Co,;;

.
. t Accountmg Standards - Page I 16
What contract amount would be considered when determining whether or not CAS
applies
above? to an ID/IQ contract? What is the contract value that is used in the scenario
'
Au 't
<21;. r )
o~~ \
e_,c, ..
4. When makint multiple awards under a selicitation fer an I/IQ contract, is it possible
some contracts would be covered by CAS and others would not be? (Note this is a
general question and not specifically applicable to the above scenario).
~
~~
~V't\.; \
o~ ow A .JYYLrv~
5. Given yeur answers te the alieve ~uestiens, what is yeur tlecisien re!arding CAS
applicability to this particular acquisition? Justify your position using the appropriate
CAS references.
CfJ-- ~
o--
ff k; 77- 5D v1'1
6. What Jntvisitns would you include in your solicitation?
Sz-2$~- ~
S 2- l ] o- ::}7. What clause(s) would yeu include in the resulting contract?
SL . L
-:rd - 2
,..-~
J]j After proposals are received, you receive notification from the CFAO that the disclosure
1'
statement submitted by contractor ABC is inadequate. Can you make an award?
tvoT ut\JTJL DETf~{~ft.JP P.V[Q tJ tt-r t

L OL--b (b)
tJo
CON170, Unit 1 lesson 3 - Cost Accounting Standards - Page 117
l .3 Identify th e po11c1es
and procedures for applying the Cost Accountmg
Stan dards Board
(CAS
DFARBS) rules and regulations to negotiated contracts and subcontracts. (FAR Part 30 and
Part 230)
1.301 .Identify
Standards (CAS)
adi
. the general rules pertaining to Cost Accounting
nm1stratton. (FAR Subpart 30.1)
l .302 Identify tlle cAS program requirements. (FAR Subpart 30.2 and DFARS Subpart
230.2)
1.303
48
CFRIdentify )when a contract or subcontract is subject to CAS. (FAR Subpart 30.3 and
99033
CONJ70. Unit IL
esson 3 _ C
ost Account
ing Stand
Urd~ ,
----~=~; ;:.,
-w
--
,,
- .;:;:;;
_::;,;;;;.;..:;;;.;;;~~---;.:..--.--..:.---'--.i,
_ ........
.. ,.....# ____ - - "--"-
Poge I 18
.s. cF;,R 9903.~0l-l (b)
rr==========~,~;;;--;;:=
-- ==S=:E=. - . on.s
n
..
c.A~ xe1np
p.,
..
cootract.'Slbf"t7'::.-: ~,, "or~0;,
-gov~rrr1ert:s. t'lefr .3J~T.s. oi

;retru..--re-,ta t es. EJ:-Tptl""< oo~
not ext~d to corr.rselie JtiCOr lrac.
1
oontractiMit-"n~ ~
li t., ro;e gn ,~ :ir,:~ wrw1~
ooe Cf 1ne !tsted CAS exenp1ors7
sea1ee1 ri1:1 oont:3CI
Wtjed to C.\S ~D 1!-402.
Arm-fl~,-p1ce romracL si.mcootract

av,a.roeo on it\e tias~ af a~uat.~
1
CMtracl or aut>contract
la uempt rrom CAS.
r;uro:,otr~ 1.; rto,ei 'il't@ t'!f..\ TO PrlM

:Sh{! ~ ogram !o t4? ~.;,.1'i:}rIT ~
oot&JllE' cl th? 1 nttej ::...:ate6 b)' a
::f1~ ,XtfT'1;~ett,on w.1u-,:.tt ~tlYnlssl~n
or oer;'!'l ed ~t or pnc;1g ,:tJta
~ eutTa'Vi ~
.e. '41t1~n or
me~. <If !fi the- b1J:;E~ness Ll'lr!

Ollltenti:, oerrorn,i~ a c.i1..e...
COYered CCfii faCI Of !>Utieort.ract
i:aH.P?d
toref9f, co~
=:rm-ni~ JX1ce.11xeo-pnce fN~n E:>..il!.

f@lllCEpt r.Jf a~U&trr~n, c,asea en
t7 .s rrrll!Of'I or !N.lfe?
ai~Ja costs 1. T& "A arid 1-30!:tr I\CIIJ~

1X!flt~i~ r .ract !Cf the ~ 9tJC<I at COf1'"iffiefC-.ia rterni
COO-'U3~f!t~ tess n1n
CCl'ltract'sutioon~ract ~1CJ? !S set oy
S7.5 ~Wtf\ prn..-~Ed tti..? oomracl e< ls ro.t ~.JTEJlt!y pet'Dr"!"!~ ar)'
CA.S-OO~ered oo,-
~suticornroe-s of .S7.,5 mmoo
o.r reoJiator.
,3't'
or m~e
ccn:-act1s:.mroi1ract 'A'tn a orr.a;1
t?JS! f'E.'SS
ls ?he curren1 -aY#arcl 553
YN
n1u~n or m:lfe?
Did the Ot.6lr,ess
...
--
r,,
wit recet,-e 550 rrilloo or rr.n
net Cli..S-covered
Conuaclj~bcomrac-z Wbfecz m moas-
a.waros. l. n tne- '1fet:e:Bng ca;t
aooountJng ~ r.o~
tl91 Ca\iiarage (CAS -Un 402, 405,
or eoozracr.:saocoltrr-a-cr wim R>,!Wnn
No
1f'No
c ~ sabfeCI ro CAS 11 and
. - - - - - - - - - - - - - - - - - - / L
Hi.If> :he
~nes.s. unit re::elved a ss~e CASoover~ ~ "t1tracti:Sut~t~ or SSC ;~ 1,00 a

me aur1ng t re ~ cos! ao::ourn1ng ~~H10d?
cootracltaut>contrad kl
CO&fag& (d U)
~
,UJt
Dtdl !le oomoany toge.the! 'A1tn tts. ~

mems reo:t\i!e SEO mlllm in net CASC0-1.lEfed :iWai.;lS W1r.~ t!l: ;:>rileedlBg
coat 3COOf.ln8ng pen001
w~Jad to NII CAS

StafldarGB.
BU81M88 Unit i0i8d081Jr& 11:atem&n:t r&qlJlra<f.
408,
Ye-s
-,,i
tiOffl6J omce aJJoc,atlng coats. to ooe 0ir mora
c1SCI0$1fl9 segments
moat alee submit Part v 11.
Disclosure Statement is oot required
DC AA Contract Audit ,-l-..JtnDU.a

.c
I
'!I.
CON170, Unit
r ,,,,~ - - "
O oaP /
22
STUDENT GUIDE
CON 170
Unit 1, Lesson 4
Contract Cost Principles and ProcedurE

October 2016
Rel\Uired Student ~;~;~:~: 23 l

.
31
Read FAR Part ~ T' Required: 90 minutes d . class discussions, and formally
Planned Academic ~~ be informally evaluated unng
Student performance w1
evaluated on Ex:a:m~l~==========~:::::::===1
. al Learning Objective
Termin
. les and procedures
1.4 Identify the contract cost pnnc1p
(FAR Part 31)

.
1.401 Identify the applicabi\ity of the cost principles and

procedures to various types of contracts and
subcontracts (FAR Subpart 31.1)
1.402 Identify the cost principles and procedures

pertaining to contracts with commercial organizations
(FAR Subpart 31.2)
1.403 Determine when a cost is a\\owable, unal\owab\e
or allowable with restrictions (FAR Part 31 .205)
CON170, Unit I Lesson 4 Contract Cost Principles & Procedur,
J)
es - age I ."
r - - - - - - . __ Applicability of FAR Part 31

Cost principles and P
- C t
. rocedures in FAR
os Analysis is pert
Part 31 apply when
.
Cost analysis is rorm~d (FAR 31 .000)
required (FAR equ1red when certfi d
I ie cost or pricing data are
C t
. 15.404-1 (a}(3))
os analysis
cost r I"
may be used to d t
dete e~ ism When a fair and re e ermine cost reasonableness or

rmined through pr,
asonable price cannot be
commerc
.
ia I items (FARce15analysis al one f or commercial or non4
Required by a contract I
. 04-1 (a)(4))
FAR 52 .216-7 Allowc ause (FAR 31.000); e.g.,
FAR 52 216-16 I
a~le Cost and Payment
.
ncent1ve Price R . .
.
A fi
ixed-price contract I
. ev1s1on - Firm Target
negotiation of costs (F~~u;~ ~e1u,_res the _determ!nation or
Note: The final
0 ), e.g., Fixed-Price Redeterminable
price accepted by th
.
on IY on the total price
e parties reflects agreement
Applicability of FAR Part 31
Cost pnnciples and procedures in FAR Part 31 apply whon:
- 0-etermming reimbmsabie costs under

Cost.reimbursement COrltracts and cost,reirnbursement
subcontracts under these contracts p.erformed by commercial
organizations; and
The cost-reimbursement portmn of time-and-matenals. contracts
except when matena! 1s priced oo a basis other than at cost
(FAR 31.103(b}(1 ));

-
Negotiating indirect cost rates (see FAR 31.103{b)(2) and FAR
subpart 42 7);
- Proposing. negotiating. or determining costs under terminated
contracts (see FAR 31 .103 (b)(3), FAR49.103, and FAR49.113);
Pricing changes and other contract modifications (FAR

31.103{b)(6))
-I Contract Cost Principles & Procedures - Page I J

,Y)M J 70
l !nit 1 Lesson
Contracts with Comme rcial

Organizations
This category includes all contracts and contract modifications
for supplies, services, or experimental, developmental, or
research work negotiated with organizations other than:
- Educational institutions (see FAR 31.104),
- Construction and architect-engineer contracts (see FAR
31.105),
- State and local governments (see FAR 31.107) and
- Nonprofit organizations (see FAR 31.108) on the basis
of cost
Composition of Tota\ Cost

Total Cost is the sum of the direct and . .
allocable to the contract, incurred or tomd,~ect costs
any allocable cost of money, less an ~e incurred, plus
(FAR 31.201-1(a))
Ya ocab\e credits
While the total cost of a contract includ
properly allocable to the contract th es all costs
, e allowab\
. .
e costs to
th e Government are l1m1ted to thos \\
which are allowable pursuant to Pa~;~cable costs
d
agency supplements (FAR 31.201- 1(b)) ao app\icab\e
coNJ 70 . .T. Tnit 1 Lesson

4 - Con tract r, _
~
Determining All
owability (FAR 31.201-2)
Reasonable
Allocable
Compliant with CAS ' if app11c abl e, and GAAP
Terms of the Contract
Selected Costs in FAR 3 1 _205
Allowability (FAR 31.201-2)
Ce~ain cost principles in_ fAR Subpart 31.2 incorporate the measurement,
assignment, and allocab1llty rules of selected CAS
-
May limit the allowability of costs to the amounts determined using the
criteria in those selected standards.
Only those CAS or portions of standards specifically made applicable by

the cost principles in this subpart are mandatory unless the contract is
GAS-covered (see FAR Part 30).
- If incorporated only for purpose of determining allowability of costs on
Government contracts does not subject the business unit to any other
CAS rules and regulations
Costs in excess of those incurred using accounting practices compliant with
FAR Subpart 31.2 are unallowable.
A contractor is responsible for accounting for costs appropriately and for
maintaining records, including supporting d~cumentat1on, adequate to
demonstrate that costs claimed have been incurred, are allocable to the
contract, and comply with applicable cos~ principles. in this subpart and
agency supplements. The contracting officer may disallow all or part of a
claimed cost that is inadequately supported.
measurement, assignment, and

. . l . orporate the
d,
.
it
of
costs
to
the
amounts
ctermined
Per FAR 31.20 l -2(b) "Certain cost pnncip es me
'
d 1 t the allowabi 1 Y
f t d d
CAS or portions O s an M s
allocability rules of selected CAS an 1m1
using the criteria in those selected standards. Only ~hos~
bpart are mandatory unless the
. . l s m tlus su
.
b.
h
specifically made applicable by the cost pnncip e
not otherwise su ~cct tot ese
.
t that are
contract is CAS-covered (see Part 30): Business uni s d standards only for the purpose of
standards under a CAS clause are subject to the selecte
I eluding the selected standards in
determining allowability of costs on Government c?ntracts. ~h r CAS rules and regulations."
O
the cost principles does not subject the business unit t~ any
~ain cost accounting standards for
What this means is that while a contractor may be. subJeCt to c; strative remedies provided by
purposes of determining allowability, it is not subject to the a mint
the CAS for non-compliance, etc.
Reasonable (FAR 31.201-3)

Generally recognized as ordinary and necessary for the
conduct of the business or contract performance;
Generally accepted sound business practices, arm's
length bargaining and Federal and State laws and
regulations;
Contractor's responsibilities to the Government, other
customers, the owners of the business and the pub!' .
and
IC,
Contractor's established practices
coNJ70,
Ch \
/ - '. .
1.
ii
___.
\..
~n
c,,
Allocability (FAR 31 20
, -- -- - 1-4)
A cost is allocable if it.
- ._ _ _ _ _ _ _ _ __l
or more cost objective~ assignable or chargeable to

on th e basis of relative benef~~e
received. . . .
- Incurred specifically for the
contract"
- Benefits both the contr

distributed to them in act and other work, and can be
received; or
reasonable proportion to benefit
- Is necessary to the overall o

.
although a direct relation h' ration of t~e business,
O
objective cannot be sho:n ip any particular cost
Pf
Direct Costs (FAR 31.202)
D!rect Cos~ - me~ns any cost that is identified specifically

with a particular final cost objective.
- Direct costs of the contract shall be charged directly
to the contract.
- No final cost objective shall have allocated to it as a
direct cost any cost, if other costs incurred for the
same purpose in like circumstances have been
included in any indirect cost pool to be allocated to
that or any other final cost objective
-~ '"' -- .~ ..,1.,.,,w \ -
Pa.t!e
Direct Cost of a Minor Dollar Amount

For reasons of practicality, the contractor may treat
any direct cost of a minor dollar amount as an indirect
cost if the accounting treatment- (1) Is consistently applied to all final cost
objectives; and
- (2) _Produces substantially the same results as

treating the cost as a direct cost.
Indirect Costs (FAR 2.101)
!~direct cost means any cost ,
single final cost objectiVe but~ directly identified with

final cost objectives or with ' ent1fied with two o
a
obJective
at least one intermect,.ate
r more
cost
Prarnary P oo l
.-----1------- -----Contrac t 1
- cOnJract C
l
' .
ost Pr
tncipfp .. ,.,
Indirect Cost (FAR 31.203)

Accumulate indirect costs
by logical cost groupings
"Y~c.,11 ...... ... t ......

Acrr:i. 2ti en,P.Jrttu::an()
lrbcns:dlr~ OfUII~
lrdmctla!)or
0
~~
::w~
apmaet (._I 4 ownune i:nmnrm, ffi41lo,tt 11ft1,,
Rtttl"ol!.r~ ,w-.diti:s:pectlon
Permit use of an allocation

base common to all cost
objectives
:r,:u:::::~~~~~"''"-
tJ,-,,.ic,,,o,.,.,.,.u r+ c
!JP,UHIDIOI)
N\iitrn~ b"ir.t11na J111 ~

VmdofC,.W11j'4:i:~
Saa:p::Ue; cn"1s
lBll:dGryadJuruuu..
lrd.irtttL!btlf.tnd r -ll!T71::ZOft
P~ sl'able toatma rpncnan!/ lfltl'.lilll\Jctwtng CVfflltad)
0
;::_~
cxperur1 (1bft & o-,1enme pnmans, erqiloye~wtcs.
:::::ted
~:~~:;~:.:,1::~i::~::.:=,~
:~m;;:::~~o~ns;;.g ~oo r~.- ~)
Ff,
"'~" ,11t.ad.,.1~tn11M
U11t'IU,
001)
.-bcrl
C, men!&~o..111t: :if! : e
Sllff':ervu:.e: (l~
. ~ I , JM)licffl.mom. fl.nma.al)
Sdl1r~.tnd:rurlz1.1rt,
C,xpcn1.~ Ol'"hl!rr.c o mce
ltlleperld.m.rntlttr.h J:rd ~opmeu. (1114.D)
PudandpropriS:U (B.1:P)
Oti.u IJ'll k dlitiUJUJ: ittl~Uf: 1 ~1*d 10 OYer.il bwu:t op'flkon
CPRG Vol 3, Ch 9.1.1
You should review FAR 31.205, "Selected Costs," and become familiar with the many different
cost categories which are addressed therein. This FAR Section is an important reference for
Contracting Officers when determining cost allowability in contractors' proposals and invoices.
The exercise at the end of this lesson will provide an opportunity to explore this section of the
FAR, and practice making determinations of allowability .
Selected Costs (FAR 31.205)

Determining Allowability of Costs
Costs are allowable to the extent they are reasonable~
allocable, and determined to be allowable under 31-201 ,
31.202, 31.203, and 31-205

- Failure to include any item of cost does not impty that
it is either artowable or unaltowabfe
- The detennination of allov'labihty shaU be based on
the guidance contained in the subsection that mos~
specifically deafs wrth or best captures the essential
nature of , the cost at issue_
1
,-.,n-,..r,
7/l
r.,,;,
r pr;;_r.:nn 4 - Contract Cost
p nciples & Procedures - Page I 9
Unallowable CoSiS
(FAR 31.201-6)
Expressly unallowable
Mutually agreed to be unallowable
Designated as unallowable
Directly associated cost- any cost that is generated
solely as a result of incurring another cost, and that
would not have been incurred had the other cost not
been incurred. When an unallowable cost is incurred, its
directly associated costs are also unallowable
~AS 4o5, Accounting for Unallowable Costs,
incorporated by refere nee
exercise: Contract Cost Principles - K
now/edge Review
Learning Objective
V derstand the vocabulary and identify th
:nciples and _rrocedu~es. Identify the co:t ge~er~l concepts pertainin to
Pith commercial organizations.
principles and procedures g c?~tract cost
w
pertaining to contracts
Jntroductio.n
.
This lesson introduced the important tenn s an d concept I .
rocedures. Comp Iete the following question b
s re ative to contract co t . .
P
s ased on the classroom I
s pnnc1ples and
ecture and slides
Assessment
Student Instructions: Using the FAR, complete the followin t

that follow based on the class lecture and slides B
g able. Then, answer the questions
e
sure
you
understa
d th c
of your mstructors if you do not rather th .
n
e miormation and ask
questions
.
'
an Just copy the fi
.
You will have 20 mmutes to complete this exercise.
m ormation from the FAR.
In CON090, you learned that definitions have a specific meani d

d"
.
h h
I c
.
ng epen mg on the context m
wh1c t ey are wntten. n1ormatton regardmg cost principles ma b .c. d
..
Y e ioun m FAR 2.101 and
FAR Part 31. Complete the defimttons of the below terms:
Cost Principle
Term
Allocate
Allocable cost
FAR
Reference
Definition
Allocate means to assign an item of cost, or a group of items of costs, to
one or more C:.Q~~
This term includes both
d r'Y'~c...--r
asszgnment of cost and the reassignment of a share from
,-n d ,f'P~ --t cost pool.
an
ubiec.-h~S.
A cost is allocable if it is assignable or chargeable t() one or more cost

objectives on the basis ofrelative bevl'\e,~3::: .S ~,ue-0, or other
equitable relationship. A cost is allocable to a Government contract if it(a) Is incurred specifically for the contract
(b) Benefits both the contract and other work, and can be distributed to
them in reasonable proportion to the benefits received; or
.
(c) Is necessary to the overall operation of the business, although a dzrect
FAR 31.001
FAR
31 .201-4
----;---:----~r~elf!:_a~tz~o~n~sh~1~fp~t~o~a'!!_n!,1W:J,P~ia'!}_r"J.:h~c~U!!;la1_!._r~c~o~s!_t~Obg)./~e~ct~iv~e~c~a~n~n~o~tb~e~s~h~o~w~n::.~,,:::::.-::;;-r-;~~I
Allowable Cost
A cost is allowable only when the cost complies with all of th e following
2
3
requirements:
{fi _
(1) .. .. . 'l.e.4.~1J~b1~0J
(2) Ai/;,,r /. kA,~,
_ .P.
Pwuedures - Page I 11
ff"\)\'1!i
f --rl).-. . ;?i~-t ~S boKC.-t otV''-"~
(J) _ _5tt-."'Cq,<i_J
--- ractices aippropriate to the
generally accepted accounting pn 1c1p1es an P
,t
circumstances;
(4) _f.~ of the contract
~L.~2..'t
(5) Any limitations set forth in FAR Subpart Un allowable
Cost
''Unallowable cost" means any cost that, under the provisions of any
pertinent law, regulation, or contract,
C(.,...I\V\ot be.., CJ1c ~&A,- kD
~o ~,r .S
to which it is allocable.
FARiJoi-
Reasonable Cost
A cost is reasonable if, in its nature and amount, it does not exceed that
which would be incurred by a ..i::,,rv ~
-~
--- in the conduct ~f
competitive business. Reasona$/eness ofspecific costs must be exam med
with particular care in connection with firms or their separate divisions
that may not be subject to effective competitive restraints. No presumption
of reasonableness shall be attached to the incurrence of costs by a
contractor. If an initial review of the facts results in a challenge of a
specific cost by the contracting officer or the contracting officer's
representative, the burden ofproof shall be upon the contractor to
establish that such cost is reasonable.
FAR--31.201-3
Estimating
Costs
What is reasonable depends upon a variety of considerations and

circumstances, including(1) Whether it is the type of cost generally recognized as ordinary and
necessary for the conduct of the contractor's business or the contract
performance;
(2) Generally accepted sound business practices, arm's-length
bargaining, and Federal and State laws and regulations;
(3) The contractor's responsibilities to the Government, other customers,
the owners of the business, employees, and the public at large; and
(4) Any significant deviations from the contractor's established practices.
"Estimating costs " means the process offorecasting a future result in
terms of cost, based upon information available at the time.
FAR 31.001
Actual Costs
"Actual costs" means (except for Subpart 31.6) amounts determined on

the basis of costs incurred, as distinguished from forecasted costs. Actual
costs include standard costs properly adjusted for applicable variances.
Cost Input
"Cost input" means the cost, ex~ept general a~d administrative (G&A)
expenses, which for contract cost mg purposes 1s allocable to the
production ofgoods and services during a cost accounting period.
Cost Objective
"Cost objective" means (except for Subpart 3 I. 6) a function,

organizational subdivision, ~ontract: ~r o~her work unit/or which cost
data are desired and for which proVlswn 1s made to accumulate and
measure the cost ofprocesses, products, jobs, capitalized projects, etc.
Final Cost
Objective
"Final cost objective" means (except for Subpa~ts ~1.3 and 31.6) a co~s;::1-t-:~----J
. t and m d ,rect costs and, in the
FAR 31. 001
objective that has allocated to it both d irec
contractor's accumulation system, is one of the final accumulation points.
FAR 31.001
FAR 31.001
FAR 31.001
---
CONJ 70,
r 'n11
u1
1 Lesson 4
Contract Cost Princinf.,\ & Pro~re\ p - - l"
.. -
{/On I
'...,
"Depreciation"
means a ch arge to c
J
.
cost OJ a tangible capital asset c>
u~rent operations that d' .
estimated useful life or th
. , l~ss es It mated residual v l istnbutes the FAR 2.101
d
.
'.I
e asset m a syst
.
a ue, over th
oes not rnvolve a process of 1 .
emat1c and logical
e
prospective period of econo ~a uatwn. Useful life refers to mthanner. It
.
m1c usefulness .
e
operatwns
.
ma. particular
cont ractor ,s
das distinguishedfiro m P hys1cal
Ii"
.
or est11nate retirement and rep lacement practice

'Je, it zsor
evidenced
by th e actual
th
'.I
e contractor.
t. from FAR 31.000, complete the phrase below.
FAR Part 31 contains cost principles and procedures for_

(a) The pricing
of contracts,
.
r
l subcontracts , and mo d'fi
1cations
to c t
whenever '- o St- c"y'~ ~ s/~
.is perfi1ormed
on racts and subcontracts
(see l 5.404- l ); and
(b) The determination,
negotiation ' or allowan ce o f costs when
\ \...
- CY\, Lv" f"'t:..d.- o ~ r;.... GO V\frN.J L~l) 5t,, .
, per FAR 31.102, FAR

. contracts
"fi Part
t 31 shall be used in the pricing of flixe d pnce
2
d
subcontracts an d mo 1 1ca ions to contracts and subcontract whenever:
'
a. _ c,o st ~ ,.._... (~ ~ r ) r r - , , . , ~ov

b. O'-- f-- "~-=-~
L o - A ~ ~ ~ :tl<i.-~~0v~
~r
r.,a,,:,'.)~<,,.tW'f\ 0 .f c...Of+-
J, From FAR 31.102, fill in the blanks in the phase below.
When pricing a fixed price contract using the cost principles and procedures at FAR Part
31, the final price accepted by the parties reflects agreement only on the
t~-f>..I
f?r
1~
4. Per FAR 31.103, the cost principles and procedures in FAR Subpart 31.2 shall be
incorporated by reference in contracts as the basis for:
a. Determining reimbursable costs under (i) cost-reimbursement contracts and costreimbursement subcontracts under these contracts performed by commercial organizations;
and (ii) the cost-reimbursement portion of time-and-materials contracts except when material
is priced on a basis other than at cost (see FAR 16.60l(c)(3))
b. Negotiating , \.u:!"'-c.. t- c_o.r+~
(See FAR Subpart 42.7)
~~~R~ffij~-~ '1.b~-~L-- under terminated contracts (see FAR 49. I03

p . pies & Procedures - Page 113
tra ct Cost rm
CON I 70, Unit 1 Lesson 4 - Con
-- &
ttilliiiaillail ., .
204 and FAR I 6.403)

FAR 16.
ts (see
~r
. . centive contrac
~l,0..,J
(sec FAR
.
ffi d-pnce tn
"-- rw-t,C/
~d Price revision o ixe
.
~.fl/--.
f
~ ~ -- ~
e Price redetermination o
16.20s and FAR 16.206)
---P- ~
f'N)~
l organizations" includes all

11t
commerc1a
5. From FAR 31.103, the category "contracts WI
:r.
fior
contracts and contract mod1.,,catwns
k e otiated with
mental or research wor n
f. Pricing changes and
o-\, 19--~ ~~
Su lies services or ex erimental develo

organizations other than:
a.
"e,_, d., lA,.. ~ ~ ~L
\I
"'--5 t-v.\:-v...-t0V'- ~
I kct
C ~~
b.
Csy'\~t~~
C.
S ,l-.__---t-<:.., ~A.cl.. l O ~ l
Y'Qj,'\r--.ro
.f+
(.,/.1''0,.~
C;p,ftJ
2"~~1-\v'~
6. From FAR 31.103, the cost principles and procedures in FAR Subpart 31.2 and agency
supplements shall be used in pricing negotiated supply, service, experimental,
developmental, and research contracts and contract modifications whenever what is
performed?
Co.s-4:
a.,~{')'" Js..)
f'
s a cost allowable?
Wben I
~ l LOL - ?::c:6-.')
Reference:
ff\~
A cost is allowable only when the cost complies
(a)
---all of the foll .
'2.u,So Y\~ble.~S
(1)
(2) o. 11 o C.t:AJ~\
(4J 4-e ~
/1
owing requ
zrernents:
tpro~,?~i
(3) Jf~V\d.o.r~s'
(5)
.h
Wlt
r '-IL,,
o(
b::, +4..,, (,Jt J bo-JAr!
c.6 Y\, t-r-0. ~
(ii.'>'";)- lv"-*""1:-'~ 1e..-r ( vtL-.
1 L-i
ti,. 1 's f v.,b ~
JO. From FAR 31.201-2, fill in the blank in the phrase below.
When contract~r acc~unting pra~tice~ are inconsistent .with S _ , ~ ~ ' costs
.
resulting from
! mcons1stent
. ,_l practices m excess of practices that ;(}uld have been consistent
.-vl?A-JtLa
are
~~'0---~- -----
11 . What do you consider when determining if a cost is reasonable?

FAR Reference: _ _)_/_. _L_O_l_-_;
___________
(b) What is reasonable depends upon a variety of considerations and circumstances,
including-
(])
(2)
lJ ~~
!\--\
"
~ -t-lcL
f-~
Cj e.. I"- ,a_, ll ~

V/;.
(3)
(4) -[.
Pagel 15
. , __ "'' Procedures -
J2. When is a cost alloca
bJe?
.
_, ~
'> \. ,lJJ \
e cost objectives on the

ble to one or mh~r Subject to the foregoing, a
. .
. able or charge~
relations zp.
A cost is allocable if it zs asst~:d or other equitable
basis ofrelative benefits recezv t contract if itcost is allocable to a Governmen
FAR Reference: - - -
(a)
(b)
(c)
13. From FAR 31.202, fill in the blanks in th e phase below.

Costs may be charged as
,
M
~t -~
c..v~f_
only or --
only.
14. When may a direct cost be treated as an indirect cost?

(b) For reasons ofpracticality, the contractor may treat any direct cost of a _~
dollar amount as an indirect cost if the accounting treatment-
(])
l,oY) ~_~ 1._- - - - - -_
__; and
15. What is the definition of an indirect cost?
rv-.J
co 5-\- () bf Gtks
(vj't- olJ--~
CONJ 70, Unit 1 Les5.r"
.r '\
_/\
r;ontrr
./
\ \\,_ ..
r.,~nttoct Co 5 l
principles
es ~ page \ l 7
& proced11t
Exercise: Cost Allowability

L rning Objective
ble with restrictions/limitations.
ea
able or allowa
. Ilowable unallow
Detennine when a cost is a
'
.
are aIIowable, unaJlowable, or
.
t to determine if costs
This exercise will reqmre th e studen
allowable with restrictions.
Introduction
Assessment
considered "allowable," it must

. . Of h.1 I son for a cost to be
As we learned at the begmm~g t ~ es ' er FAR 31.201-2:
comply with all of the followrng reqmrements, P
(1) Reasonableness
(2) Allocability
d if . licab/e' otherwise, generally accepted
(3) Standards promulgated by the CAS Boar, , 1 app .
accounting principles and practices appropriate to the czrcum5 lances,
(4) Terms ofthe contract
(5) Any limitations set forth in FAR Subpart 31.2
1..
This exercise provides insight regarding the fifth requirement, "any limitations set forth in FAR
Subpart 31."
Student Instructions: Research FAR Subpart 31.205, Contract Cost Principles for the costs or
categories of cost listed below and detennine if each of the costs is allowable, allowable with
restrictions, or una11owab1e. Cite the FAR reference where you found your answer and explain, if
a cost is A WR, what cond.itions must ~e met for the c,ost to be allowable. The following costs or
categories of c.osts are. typically found 1? a contractor s accounting system. You have 20 minutes
to complete this exercise. Be ready to discuss your answers with the class.
FAR
31.205
Ref.
Cost Category
Cost of souvenirs, models,
imprinted clothing, buttons,
Al
AWR/
UA
i F(
U- ~
t 'J (_
Aw R.
Circumstances under which

the cost is allowable
and other mementos

provided to customers or the
public
Sponsorship of employees
participation in a company
sponsored sports team
.
CONJ 70, Unit I Lesson 4 - Contract Cost Prin c1p
1es & p
/
roceclt,1,,.es
~Page I JR
Circumstances under which

Pension costs
federal income and excess
profits taxes
Goodwill
Overtime compensation for
training and education
Defense against Federal
Government claims or
appeals or the prosecution of
claims or appeals against the
Federal Government
--------
uA
4 'J--f:1
- - -- ,. ., A -
ron/rac/ Cost Principles & Procedures - Page I /9
Cost Category
Contributions or donations,
including cash, property,
and services
FAR
31.205
Ref.
-----Al
AWRI
UA
U"
Participation in the
Community Blood Drive
1f3
Chamber of Commerce
Membership
1F'f VA
Cost for long lead time

material - advanced
agreement signed between
government and contractor
11
Cost of removing
Government property and
the restoration or
rehabilitation costs caused
by such removal
1\
Circumstances under Which

~
-----
--
AwK
-
-A
,11sY1>+1it~n,1n1t.. .
,_:
1.4 Identify the contract cost principles and procedures. (FAR Part 31 and DF ARS Part 231)
1.40 I Identify the applicability of the cost principles and procedures to various types of
contracts and subcontracts. (FAR Subpart 31.1 and OF ARS Subpart 231. l)
1.402 Identify the cost principles and procedures pertaining to contracts with commercial
organizations. (FAR Subpart 31.2 and DFARS Subpart 231.2)
l AOJ Detennine when a cost is allowable, unallowable or allowable with restrictions
(FAR 31.205)
---
STUDENT GUIDE
CON 170
Unit 1, Lesson 5
Market Research
October 2016
What is Market Research?

(FAR 10, DFARS 210, DSP SD-5)
Continuous Process:
-Collect
-Organize
l
- Maintain
-Analyze
- Document
(
I
Phases:
- Market Surveillance
- Market Investigation
Before dedicating time to the task, Government team members must understand the purpose of
market research. Picture yourself in an acquisition team meeting hosted by your contracting and
customer leaders. Together, the team is evaluating the acquisition schedule for the follow-on
contract for IT Services. The schedule calls for 3 weeks of Market Research. The Program
Manager notices the timespan on the schedule, and asks, "Why does it take that much time?
What is it we do in 3 weeks that's worth the time invested? We need to get that RFP out the
door and get that money obligated!" ... Do you have a convincing response? Or, should the
leaders simply delete those 3 weeks from the acquisition schedule? To build a compelling
response, we must understand the purpose of market research, beginning with our regulations.
.,.
CON170, Unit 1 Lesson 5 - Market Research - Page \ 4
_____.......,,
Market Research Fundamentals

(FAR Part 10)
FAR 10.001-Policy:
- Aaencies must conduct market research c,..-pproprw!.(..
-1'0 -tl..Q_ G,Y"c..v-"""J-i-1\,~
- Before developing new t'<l-'f,u~~"l\U')r> r>ol,l),.t~-t,,,.:<r

- Before soliciting offers for acquisitions 7 >Ai"'
- ~efore soliciting offers 5At w ~ c,..~\AJ~~ ~"'{o
<
1
C..V\J., v~\A.."\'\.$Q-V\W J~;rf-.p ,-r)(..~Jt
- Before soliciting offers that could lead to ,,.,., biJc-d kllo'"\Ot
p._l..)()l. ~<.,
to'1 ~"\'
- Take advantage of commercial research methods.

particula~ly watching for new Small Business~s and. new
entrants into Federal contracting, that are available ,n
th~_f!lt!.r~~tpl~c,~_f~_!.!leeting _t~e_!eq~ire_l!l~nts of
_
f!d"S~;
G ol-\-t
. -~ ~} e ....~c."\
l)'O(_r(f.."<',~UC:,\/'.'V"i
~
u ;:' - A_f-~'o..c.,1,,
-. Olr-0.
,-~
- -- _____
as ~. I
as
~
/t,4_
:L___J_
----
i..A...,vh..\.JCc,__
ev- i-d
{.
~+
First, market research is important because FAR Part IO requires it for all acquisitions,
commensurate with the level of complexity of the acquisition. As stated in FAR 10.001 Policy,
"agencies must conduct market research appropriate to the circumstances" and "The extent of
market research will vary, depending on such factors as urgency, estimated dollar value,
complexity, and past experience" as stated at FAR I0.002(b)(I).
Second, market research drives Government acquisition teams to consider commercial methods
before pursuing a Government unique solution. The FAR also emphasizes conducting market
research "before" several significant acquisition events, which allows time to refine requirements
to allow for commercial solutions. In addition, in today's threat environments, be aware of
FAR's emphasis on pursuing new sources in the mission area of contingency operations, nuclear,
chem/bio and radiological attack recovery, and disaster relief.
CON J70, Unit 1 Lesson 5 -Alarket Research - Page j 5
r
I

(F~~~
--
--
~01;,[,~fl"~~.q~u~~o:~
"l.l,~-,.o;o~- t:_
V ::;:::::::::::::::::::::::;::::::::::::::
- :::::::-: : ; : : : : : : : ~ - - - -
It of market
FAR 10.001 (a)(3), use the resu s
research to:
- Determine if s ov rw
CiA-p,J:,l- o f ~ ( ,._~
. 1 t ms even if at
~~
- Pursue commercial, nondevelopmenta
e.xn tI
'
component level:
6;; is
r!
Q.Qi(i eq
.
)
Could meet the agency's needs ~;f ~i.vi~.N.,,,-'c-
~ ""~\
- Determine practices of firms engaged in p~oduci~g,

distributing supporting commercial items, rnclu~ing --- '("f ~ ot L O ~ \ W ~ 1 \oJ'1f/' t " ~
1
...,,_,,_~~~) P"-v~WJ~ e.,,rc..

Next, note FAR's stated purpose for market research results: to determine if sources exist to meet
agency needs, with care dedicated to pursue solutions which are available commercially, or
commercially with some type of modification-even if that means Government acquisition
teams modify our requirements to align with existing commercial capabilities. This can be
counter-intuitive and difficult for DoD leaders to embrace. However, with the potential of
significant savings in time and money, we must consider how we can modify our own
requirements in order to incorporate existing commercial and nondevelopmental solutions.
Now it is time to explore FAR's stated policy and procedures for market research.
CON/70
u. .
, . mt 1 Le~:son;;--5:,-:-x;~~~--:---~
- Market Research - p age I 6
,/
./!
o.,.nse,,qu s.tt:illh,~ , ~,
FAR 10
~ a _ rt 10, FAR P a,1 12. DFARS Part 210)
.001-Policy
- Only re-q uest M...M~l'Y\

- Seek inputs f .
.
,"'-t.) ,f-0.....~
regard ing Pot~~~;;1fe SbBA ~ro c v-r'{,..me.,v'(, lt',~.v ~~ especially
c
or Ut1dl1ng (See DFARS 210)
FAR 1
_ Acqu1s1tions
~-? 02-Procedures
b ..
.
_
eg,n with a _ck-sc..r,pc--11 "' _.9L -b~_C:o~N./\t,i ~
- Focus is to find
. .. . .
lo meet Gover com~nerc1al items or nondevelopmentat items
. r
nmont s needs
- nc ude FAR 12 10 1
..
market
research . (a -c)Po11cy, A\gencies shall -- conduct
'
11
cl..iLJt(....y-~A..e.1.t-
o .- no"" ~ l.op~vrri /t~q

~
co~l
L.lY\- ~ ff\.U\}t'
;
As we .search
1c-ormat10n
FAR the marketplace nor m

regarding
our reqmrement
consider
the pohcy
10.001 s1m 11 ar to our process for~requestmg
stated m
'
cost or pncmg data, Government
team members should only
re
t
th
necessary from
.
ques e mm1mum amount ofmformat10n
contractors and ~o~mercial sources to accomplish market research. In addition, FAR 10.001
encourages acqms1t1on teams to pursue inputs from the Small Business Administration's
Procurement Center Representatives. These representatives maintain robust records of small
business capabilities, and can be instrumental in evaluating the small business competitve
environment, and latest technical innovations.
Per FAR 10.002, acquisitions begin with a clear description of the Governmenfs needs.
Contracting members typically review the requirements documents to determine if the
description is clear and understandable. Per FAR 11.002, contracting members evaluate if the
requirement appears to be written in an open manner, to allow maximum competition, or if the
language appears to be overly restrictive-written so only one or a few sources can compete.
Contracting officers must also verify if the requirement has been vetted by any other parties,
includino Government subject matter experts or other independent contractors. A well-written
requirer:ent is critical, to make sure our market research targets the right goods, services, and
capabilities.
With an understanding of the regulations and the purpose of market research, we must also know
the procedures to accomplish market research.
CONJ 70, Unit J Lesson 5-lvfarkel Research - Page i 7
_..
:,, : ', .<
.
.~:.. " .:
'
I
~ ' :ti
~p~ .
0111111r Ocqutil.-;!1 ~ 11"1'-I
Marke t
Research Fundamentals
(FAR Part 10) -==::::::.:::::::::::::::::-:::=-_::.----_ -
---:::--=-~~
es cont'd)
(
ducted within ,.i .t'\.o~.
FAR 10.002 - Procedur
t search con
. d
- cos may use marke re -_ . .
tt e itorn boing acquire can
.
. f specific to
- Involves obtaining in o
~
~f~e commercial markotplace
of a type of item ! C..v-3 ~~~\Jfrtme cornmerc,al
"'n be of a tvoe of ,teiri c.,oV'f\
--
C"'
J<\--V\,..,D~) or
marl<etplace \.U
cl v-t p.;1)05U'
met by an item used exctuslvelyffor . t) nary pfoctices regarding
be:
_ Should include assessment O c ~

t.v,)\\)4 ,m ''N0: ~6'J
, and associated costs
.
.
~..JA in warranty buyer financing, discounts,
- Customary ~
'
.
t n
.
contract type. nature and risk of the requirernen

commercial environment
With a well-written description of the requirement in-hand, FAR 10.002 re-emphasizes our
vision to optimize use of commercial solutions, but recognizes we may have to acquire items
used exclusively for Government purposes. FAR 10.002 indicates we may begin by reviewing
market research accomplished by other teams, as long as the research is current within 18
months. This does not necessarily mean we must avoid considering data points which are over
18 months old; rather, if we are reviewing market research reports written more than 18 months
ago, we must accomplish our own analysis and write new market research documentation.
While we tend to focus our research on finding historical pricing infi
f
FAR
requires us to explore additional elements, including warranties ti o~a ion,
10 002_
and general conditions of the historical contracting environm t' mancrng, contract type, nsks,
en.
CONJ70
Tr
vnu J [,esson 5
'
_./
:~i-"'
- Market R.
esearch p
- age
l !j
The slide below illustrates h

- the arrows on the I f1
market research "shapes" or "refines" our requirements:
requirement and 1e t side reflect how, through market research, we begin with the DoD
as we comp~re ou eam ~bout commercial capabilities;
evaluatino how r requ,rem:nt to commercial capabilities, we begin a cycle of
commercial ca wb:l~~uld revise our requirements to take advantage of existing
pa t ities
the outcome is repr
' db
evaluations "sha el'~ent~ Y the arrow on the right, which indicates how the tradeoff
p
or refined" our requirements
th e c:i eedb ac k arrow
on th l
.
. .
'
nght indicates how our customers are engaged to ensure
th e tra d eo ff:s are evalu t ed ower
d
b1
a e an implemented without compromising mission capa 1 1ty.

Tradeoff Process
FAR 10.091 (a)(3Hii}(C. ), and OSP SD-2, "DoD Acquisitions-Buying

Commercial and Nondevelopmental Items"
Marke~ .r esearch shapes requirements- DoD assesses commercial
c~pab1l_1t1es, then evaluates potential trac.teoffs in ,ts requirement to
ahgn with commercial capabilities
02 Sept 2016 OPAP issued "Guidance on Commercial Item
Determinations and lhe Determination o,f Price Reasonableness for
Commercial Items"
'"'
- -
I {)
e of market research is to equip
As reflected in the next slide, we have leaT?,ed that th: 6~J~:quiremen! and comm~rcial
"infonned buyers about th

. 0. 00 supphes and services. This
be
ovemmen
earns
o
ch
to
acqui
:::,
.
t
t
t
G
capabilities , to determine the most. suitable
h' stap~roa
cal contract prices ' but
. also doves
us
to
) pursue
k
requires more than simply searchmg for ' on.
. stn II business part1cipatton , ns s,
1 1 (including a
d
t t
information regarding past competition eve s
d
environment, an con rac type .
1
.
schedu e an
specific cost-drivers such as warranty, de1ivery
. hrase "caveat emptor?" To illustrate
td
Have you heard the term "buyer beware," from th e Latm p

be in negotiating a car ( or
0
!he "buyer beware" concept, consider how ~uccessful Y t:~~e car dealership ( or jewel er, or real
Jewelry, real estate, artwork, etc.) ~urchase ~f you heade h beforehand? The less preparation,
estate agent, or fine arts gallery) without domg any researc

typically the less favorable the negotiation outcome.
h
d ts we're buying as well as the

s
buyers,
we
have
a
respons1b1hty
to
know
about
t
e
pro
uc .
'
A
environment in which we are buying. For that car purchase (or Jewelry, hou~e, or artwork),
what if you had done some comparisons regarding price? Even better, what 1fyou prepared for
several hours in advance by researching the car market, compared prices with performance
capabilities, and established areas where you could tradeoff features and performance
parameters to save money. Before visiting the lot, you explored the range of warranty
provisions: re?ates, financing arrangements, and overall life cycle costs? You may final! y even
reach a pomt m your research where it appears you know as much or even more than the
salesperson. Before heading into a negotiation, our goal is to be prepared ... even better prepared
than our contractor counterparts.

(FAR 10, DFARS 210, CPRG Vol 1 Ch S ect10n 1)
Purpose
- Become an informed buyer
- Find sources capable of satisf .
ymg the agency's
requirements
- Determine the most suitable
supplies and services
approach to acquire
Reasonable price
Maximum competition With

'
small bu
Manage risks
siness Parti cipat1on
.
.
Expected delivery schedule
Recommended contract ty
.
pe, incentives
CONJ7o
Unit J
lesson .,' -Al

arket u,.,..
As stated previously and i

,
.
.
of historical prices I h n FAR Pdrt I 0, there 1s more to market research than find mg a range
conducting market. n t e next phase of the lesson, we will examine a few techniques for
'
research Market research 1s
more than simply
.
a Sources Soug ht
Synopsis.
postmg

(FAR Part 10, DFARS Part 210)
FAR 10.002(b)(2)--Techniques
-
Contact knowledgeable individuals

Review recent market research results
Catalogs, product literature
Publish formal Requests for Information (RFls)
Query Government databases
(contractdirectory.gov/contract directory, plus FPDSNG, FedBizOpps archives, CCR.gov)
- Interaction with industry and other agencies
- Interchange meetings with industry
If no commercial or nondevelopmental item is available, agencies shall
consider restating the need determine if commercial or NOi solution exists
The internet is a great tool (imagine trying to conduct market research without it). for conducting
market research. But be sure to exercise caution to verify credibility of internet sources. In
addition, complement internet research with personal, even face-to-face conversations, to enable
open exchange of information, and networking among Government and contractor personnel.
Knowledgeable people, and subject matter experts are particularly important when the
acquisition team has a minimal amount of historical sales data and other information available.
Ensure independence of the individuals, to ensure objectivity of positive and negative
information.
One of the best methods for beginning market research is to review market research reports,
documentation, and analyses from previous acquisitions. The Government databases listed in the
slide are excellent sources for finding other offices with recent experiences buying the same or
similar requirements. Through these sources, you can contact the contracting officer, review
their solicitation and contract, including special terms, conditions, and incentives. In addition,
you can review the competitive environment and the prices paid, and learn what is currently
going well, as well as learn the current problems and risks.
CONJ 70, Unit 1 lesson 5 - Market Research - Page 111
----on FedBizOpps is an
h SY1 wpses
. an d Sources Soug
. envJfonmen
.
t d
"
Publishing Requests for Infom1at10n
. h t mpetitive
an comractor
rcgardmg t cothey should be comp 1cmcn tcd wit h
excellent method for capturing infonnatwn
1
k
capabilities. While these are usefu1mar et research too s,
additional market research techniques.
.
h ,Id first accomplish research
oi
Th en, when we
Finally note the sequence oftechmques
on the slide.d Wes
th r marketing
literature.
'
1
urces
an
o e
d
through the Government sources, on- me so . '

11 be even more pro uctive.
are prepared, conferences wit. h mem bers from mdustry wi
.
k .k a lot of work. Why do we have to do
? This loo s 11 e
Would we consider all of these teehmques
this again?
Why Do Market Research?

1) Because it is Mandated (FAR Part 1O)
2) To Help Define Markets and Strategies
- Product & Service Availability
- Terms & Conditions
_ Insert Advanced Technology
- Competition
- Minimize Cost
- Impact
- Minimize Cycle Time
- Supportability
- Product Adaption
- Sustainability
- Product Integration
As we understand the marketplace, we can better define our acquisition strategy, and gain
benefits in several areas. A cornerstone of acquisition reform is to use commercial and nondevelopmental items as much as possible, and reduce military-unique requirements that force
industry to develop unique processes, products, and support systems. The benefits are three-fold .
.> Reduced acquisition costs: By tapping a globally competitive, commercially responsive

national industrial base, acquisition programs can procure systems and equipment at
commercially competitive costs.
>
Reduced_ cycle ti1!1es: We will be able to deliver new systems to warfighters within
commercially available cycle times, which are much shorter than the average 12-to 18year development cycle for a major DoD weapon system.
CONJ 70, Unit I Lesson 5 - Markel Research - Page / 12
~ Access a~vanced technology: Military research and development no longer leads th e

commercial market in areas such as electronics. In the global marketplace, everyone has
access to th e same commercial technology base. The military advantage will remain wi th
forces th ~t capture superior technology in their weapon systems, field those systems fir st ,
and suS tam th0 se systems over their useful life.
In addition to learning the commercia
1capab1hties,
there are several other areas we mus t exp lore
and learn about through market research.
Cu sto~ary contract terms and conditions:, Including warranties, advance payments or

fin~ncmg arrangements, quantity discounts or free upgrades, expedited shipping or
delivery terms.
Lev~l of_ ~ompetition, number of qualified sources: Important in assessing the

apphcab1hty of FAR 8 required sources (AbilityOne, FPI, Federal Supply Schedules),
~evel of Small Business participation, requirement consolidation and bundling. These
issues must be documented in writing in the contract file-justified by what we find
during market research.
The Government's market impact: Is the Government's purchase at a level that is

significant across the marketplace? In addition to this single purchase, do other
Government teams buy the same product-can we leverage the Government's buying
power and pursue even more favorable terms and prices? What is the normal business
cycle for buying this requirement-if I make my purchase during a normal "downtime,"
will producers offer more favorable prices and terms?
How do contractors and other buying activities support and sustain their purchases:
What problems are they facing?
Assessing all of these areas requires different team members with different areas of expertise.
The contracting officer typically does not write the requirement or make tradeoff decisions.
Other Government acquisition team members, such as the Program Manager, the customer who
generated the requirement, or the technical team members are typically responsible for this task.
Market research is a team effort, with requirements team members doing much of the writing,
and contracting team reviewing and refining.
CON170, Unit 1 Lesson 5 - Market Research - Page I 13
'
-Who Should Be Involved?

CPRG Vol 1 Ch 1; OSP SD-5, pl-10
r The Market Research
Team
Technical
Customer
Logistic
Test & Evaluation

Cost Analysis
Legal
Contracting
I
'
The DoD agencies do not have a market research career specialty, and have limited resources
dedicated to market research. As can be seen from the range of decisions based on market
research, information and analysis is required from multiple functional areas. Therefore, people
from the technical, logistics, cost estimating, legal, test and user communities should assist in the
market research. The market research team should be tailored according to the driving elements
of the acquisition, in areas such as system performance, production, test, skill retention, and
sustainment efficiency.
Finally, the following slide highlights the key acquisition documents which are shaped and
refined through market research. As a result of employing the techniques stated in FAR
10.002(b), Government buying teams should be informed, should understand the competitive
environment of qualified sources, and should be able to establish a suitable approach to
procuring the requirement.
CON/ 70 U J
,
ml
Le.twm 5 - Market Research - Page i 1./
Why Do Market Research?

To Support Acquisition Documentation and Decisions
By understanding
We can shape:
-
Commercial capabilities
System Requirements
Risks, environment
Acquisition Strategy
Key "discriminators"
Evaluation Factors
Contracting history
Contractual Documents
Logistics
Support Plans
Development history
Test Plans
Acquisition history
Milestone Decisions,
Pricing strategy,
Need for cost/pricing data!
So, you may be wondering, when should we do Market Research? By definition, market
.
research is an on-going process which begins at the earliest points in the acquisition process. In
addition, the level of effort for market research is based upon such factors as the requirement's
urgency, estimated dollar value, complexity, and past experience. Overall, the purpose of the
following chart is to indicate market research starts early, continues even beyond contract award,
and requires judgment by the contracting officer and acquisition team members to determine
when analysis is adequate to move forward with solicitation, contract award, and contract
management.
Within these guidelines, evaluate the following chart, which represents general timing for market
research activities. A lot of market research, especially regarding the General Capabilities and
the Cost Drivers, and the Potential Suppliers (competitive environment) is accomplished before
the solicitation is even published. Terms and Conditions are common risk management tools
(such as Liquidated Damages, Award Fee Plan), and should be included in the solicitation. By
understanding risks, we can design an effective acquisition strategy. Support Capabilities and
Distribution Practices could be among risk drivers and key discriminators. By understanding
logistics issues, we can shape more effective support plans, test plans, and even acquisition
strategies and evaluation criteria. These are just a few of the elements that may be explored
during Market Research to help you make well informed decisions.
CONJ 70, Unit 1 Lesson 5 - Market Research - Page 115
t Research Done?
Wh en is Marke . . osP so-s, p2-1
Navy Acq Reform Office,
Market Research Issue
Requirements d
Development an_
Acquisition Planning
--==============
Solicitation
Contract
General capabilities
Cost Drivers
Pot~tial Suppliers
Industry Practices
Product Characteristics
Support Capabilities
Terms and Conditions
t>istribution Practices
Product Differentiation
With an understanding of market research fundamentals, imagin~ yourself i:v~rking through a

stack of Purchase Request (PR) packages at your office. How will you begm. The CPRG,
Volume 1, Chapter 1, Section 1.0 offers useful guidance.
As you review the package, examine the requirement documentation, which is usually a
Statement of Work, a Performance Work Statement, or a Statement of Objectives. Through
market research, the team should seek the requirements documents from previous acquisitions,
pursue feedback from Government subject matter experts as well as from industry to verify the
requirement is clear, and not overly restrictive.
A "best practice" in DoD is fo_r a buying activity to provide its customers with a Market
Research Report. The foundat10n for such reports can be found in the CPRG Volume I, Chapter
I. The
k
Th
h
t
trequestor prepares the reports and submits them as part of th PR
.
er.
,
I
.
e
pac
age.
en
t
con rac _mg ou1cer s roe 1s to review and recommend additional research f
' e
engage m the research personally.
1 needed, or even
CONJ70 U.
'
nu l Lesson 5
- Market Rt>,:,,,,,.....,
The next step in Market Research would be to explore Government sources (such as FPDS-NG,
FedBizOpps.gov GSAdvantage.gov, contractdirectory.gov) and public sources (catalogs, market
literature). If more information is needed, seek information from contractors, but only th e
minimum amount necessary to fill any "gaps" in your market research.
Market Research and the PR Package

CPRG Vol 1 Ch 1, Section 1.0
Market research should be an on-going effort for every

member of the acquisition team
Purchase request package should reflect results of market
research
Sources of information
Subject matter experts
Previous market research
Government sources/records
Catalogs, literature, commercial sources
Contractors
From our TINA lesson, how does the order of preference for
requesting data from contractors relate to market research?
I
I
J
CON170, Unit 1 Lesson 5 - Market Research - Page I J 7
. .
k t Research
Pricing m Marc~ 1 section 1.1
See CPRG Vol 1,
---:::::::::::::=======
Defense Acqulslion UniveM}
lated Market Researc

ment estimate
Reviewing the Purchase Reque st and re
Typically, PR package includes a-~~vern_ . exercise
Analyzing this estimate is like an initial pricing
We need to examine:
How was the estimate made? (1.1, 1)
)
What assumptions were mad~? ( 1 ,12 )
13
Examine requestor's information and analyses ( 1
Professional judgment
Reasoned analysis
Quantitative methods?
Where was the information obtained? ( 1.1.4)
Public sources
From a support contractor
Independent analysis
.
.
'd? (1 1 5)
How did previous estimates compare to previous pnces_pai
Reveals level of confidence in our estimating techniques
Another key element of the PR package is the Government's estimate of what the requirement
will cost. Market research plays an important role in building and validating cost estimates.
Review the CPRG, Volume 1, Chapter 1, Section 1.1 for useful guidance.
First, the requestor should be able to explain how the estimate was made. Did he build it himself
based on his own market research? Did a support contractor or other Government office prepare
the estimate? Be sure the author can explain how the estimate was built in a clear and
convincing ~anne~. Ho:ever, yo~ .may likely ?e reviewing a historical estimate simply
escalated by mflahon without additional analysis. In such cases, additional market research and
analysis may be needed.
Second, find out what assumptions were made in the Government estimate E
.
mvolves assumptions.
Kn owmg
an d un derstan d'mg those assumptions giv very
estimate
h .
reliability of the estimate. In many cases, the requestor may not be famil' e
t mto the
factors and market forces that affect contract pricing. As a result assui tat: wit relevant cost
. your customers typical\
'
npb ions
and es t1mates may
not be accurate. When you return to your umt,
.
Request package, with their estimate of how much the goods and serv_Y rm~ you a Purchase
rationale used to develop their cost estimate is not clear or does not ices will cost. If the
.
seem reas onabl e, ask
questions.
m~il
Third, ask the requestor what information and analysis were used to d
important to determine what the requester knows about the item O e~elop the estimate It .
r serv 1c b .
. 1s
what type of analysis was used in estimate development.
e eing requested and
. rnr..r I 70,
.. (~,
'
Unit 1 L
esson 5 M
- urket Researc.h p - - - age \ 18
Provid~ the req~estor the following questions:

th st
- D~d e e ~mator perform a detailed analysis of the Government requirements documents?
- Did the eShi:nator identi~ performance, quality, and/or acceptance criteria?
- Do notable differences exist between new requirement and the historical information
referenced in his estimate?
- Is the estimato.r familiar with the market for the item, including: last price paid, general
market and pnce changes, quantity price breaks, possible substitutes for the item or service?
As you rev~ew PR packages and cost estimates, be on the lookout for support based upon
"estimator Judgment and experience," compared to a reasoned analysis and quantitative
assessment. The CPRG (Vol 1, Ch 1, Section 1.1.3) describes both reasoned analysis and
quantitative techniques as follows:
Reasoned Analysis - A reasoned analysis is an analysis that sets forth the known information
and clearly explains how it was used in estimate development. This analysis may or may not be
supported by the use of quantitative techniques.
Quantitative Techniques - When appropriate, adjustments should be made using accepted
quantitative techniques. For example, index numbers can be used to quantify price changes and
adjust historical pricing data.
Fourth, verify the sources of the requestor's data, and encourage requestors to pursue
.
Government and open source information first, and then seek information from contractors if
needed.
Finally, assess the accuracy of the requestor's previous cost estimates compared t~ previous
prices paid. This will provide another indicator of the reliability of the current estimate.
CONJ70, Unit I lesson 5 - Market Research - Page I 19
writing a solicitation and a

htoward
S .
c-.
market researc
h CPRG Vol 1, Ch 1, ect1ons 1 2
.
h. ft focus 1rom
d gt e
When is the right time ~o s i "textbook" answer, stu yin

contract? While there ~s not a
.
and 1.3 offer useful guidance.
. . factors to Consider m Market
"Pncing
" 1
.
d. Section 1.2, un de~
'tion Data for Pncmg e ements.
Examine the questions present~ tin eview the "Histoncal Ac:ust xt phase-solicitation and
Research." Then, move forwar . or they may be ready fort e ne
If teams can answer these questions,
beyond.
Defense Acquis 11ion University
.
.
arket research" list
Study the "Pricing factors to consider in m_
?
1
2)-can
your
team
answer
those
questions.
. ..
(
.
d "Historical Acqu1s1t1on
can your team answer the questions un er
Data for Pricing" ( 1.2)
Evaluating your market research (1.3)
Confidence in your price estimate
State the key risk areas
Expected level of competition (small business participation?)
Expected delivery schedule
Recommended contract type
Any need for specific contract incentives to help mitigate risk?
When you can document the answers to these
questions, you are ready to solicit!
In addition, the team should also have used the market research d t t
.
risks with respect to cost, schedule and perfonnance. These fa t a a ~ u nd erstandmg the key
recommen?~tions for cont~actin~ strategy, including solicitatio: ~rs will shape the team's
of any add1t1onal contract 1ncent1ves to mitigate risk. At thi
. ype, contract type, and the use
0101 th
basis to proceed with a solicitation, and continue the joume s
, e team has a reasonable
Y o contract award.
CON/70
~.
u .
nu J Lesson 5
- Afn .. ,.
Finally, examine the questions at th

d f
. h
e en o CPRG VO l 1 Ch
.
,
l, _Sectton 1.3 . Your research and
analysis _s ould reveal the reliability of the G
. . overnment cost estimate, as well as set the
expectat10n regarding the level of c
ompetttton Bas d
h
.
the contracting officer is equipped to make th
. ~ on t ese_two as?ects of market research,
data other than certified cost or pricin d .t e decisw~ _to reqmre certified cost or pricing data,
Another helpful market research refer! a~' or no additional data.
th
This document is DoD' s latest publicat~i~ isr ~ 1?efense ~uppo~ Program Publication SD-5 .
P ov_idmg specific gmdance on market research. The
SD-5 restates the market research p
however, it provides more specific
consis~ent wi th the FAR, DFARS, and CPRG;
k
ce on t e process for market research. The following
slide is a variation of the SD 5
- mar et research pro
h. h
d
.
Market Investi oation These t
h
cess, w IC me1u es Market Surveillance and
o
wo p ases are part of th
et they focus on exploring d. er

t
e same, on-going market research process,
Y
Iueren aspects of the market.
~:J;:~
Specifics on the Market Research Process

(FAR Part 10, DFARS Part 210, OSP S0-5, p 13-31)
Market research is a process of

- Requirement identification
- Market Surveillance (Strategic Market Research)
- Market Investigation (Tactical Market Research)
,,_
M arnet
Surveillance
___,,,_-~
1. Summarize
the Market Market Sur~il/ance
~
-......;.;,,;,;;;.;..;..;;;.;
2. Formulate
7. Document
Requirements
Results
/
The Seven Steps Of
-\
Market Investigations
3. Identify
(SD-5)
6. Evaluate
Sources
Candidates
,,
4. Survey
Suppliers
_ .
-+'
5. Check /
References
Market surveillance focuses on learning about the general technologies, products and services
across several markets which are directly or indirectly related to our requirement. When we are
familiar with this strategic level of information, we shift our efforts to research the specific
producers and suppliers, and their specific processes and strategies for delivering our
requirement.
As an example, teams that acquire aircraft engines for the Navy's F/A-18 typically monitor the
activities of the global aircraft engine market, from transport aircraft jet engines, to propeller
driven trainer engines. However, some time before the Navy needs an FIA 18 engine upgrade,
the team will focus its efforts specifically toward the fighter engine arena, and even more
specifically to possible solutions for the FlA-18 engine upgrade.
CON J 70, Unit J Lesson 5 - Market Research - Page I 21
'
t surveillance?
-===========
What is Marke
This chart depicts the Market Surveillance phase's focus on re~earching the techn_ologies,
products and services related to the general market of our requtrement. Surrounding the
technologies, products and services are the sources for gaining information and understanding.
Then, during the Market Investigation phase, the acquisition team would identify how many
qualified sources are capable of accomplishing tasks related to each area. A sinole source, or
limited number of sources in any of these areas, particularly critical technolooy :reas will drive
0
'
addition risk in the acquisition strategy.
The next slide presents a side-by-side summary of Market

11
Investigation. Taken together, these slides indicate ho
~rve1 ance a~d Market
which requires deliberate effort to understand the ac ~ .n:iar et r~search is an on-going process,
.
.
.
qms1t1on environ
tc
.
an d determme a smtable contracting method Th
hb h
men 1or our requirement,
phases are critical to successful market rese~r h oug ot phases have unique roles both
C .
'
Market Surveillance or
Market Investigation
Surveillance (Strategic}
Pursuing a broad
understanding of several
markets
On-going process, not
focused on a single acquisition
Develop base of knowledge
for more in-depth study later
Investigation (Tactical)
Pursuing in-depth
understanding of a single,
specific market
Looking for specific
information on suppliers,
products, services to shape the
acquisition strategy
Builds on market surveillance
research
Finally, consistent with FAR, DF ARS, and the CPRG, the SD-5 includes useful references for
buying teams to review before starting the market research process.
More Useful References in SD-5
Appendix A: Types of Information on the Internet

Appendix 8: Web-based information sources
Appendix C: Examples of Tactical Info
General Information
Market Acceptance Criteria
References
Business Data
Pricing Factors
rnrJI 7n Unit I lesson 5 -
/Vii k ,, Research - Page I 23

l
.
otential contractors. The
.al
analysis
of
P
bility to ensure potential
h is finan Cl
respon 51
.
lore in market researc
for fulfilling our
t or the ability to obtain thern
Our last area to exp t fundamental concepts
form the contra~ ? while under contract
following slides present financial resources to pe~ financial condition
contractors have adqua \
monitor a contractor s
(FAR 9.104-l(a)), as we as
(FAR 42.302(a)(l 7)).
. n Market Research
Financial Analysis
Defense Acquisition University
tractor
f determining con
.
a1 capability analysis
FAR 9.104-1, as part o .
btt requires financ1
respons1 11 Y,
t dministration
FAR 42.302(a)(17_), Gov't contr:,~ f~ancial
function is to morn~or ccoontra~~on it appears to be in
condition, and advise
w
jeopardy.
fundamental
Thus, our goal is to develop at least ~ .
.
evaluation of the firm's financial cond1t1on .
Through several sources, we -~an gain ins1~ht m to
a contractor's financial capab1hty, and confidence
they will be a "going concern" through contract
performance.
Also indicates their need for contract financing
The principal question to be answered through an analysis of a contractor's or potential

contractor's financial health is: "Will the firm have sufficient financial resources to successfully
complete contract performance requirements during the life of the contract?"
.
. d
There are extensive sources of published historical data. Publicly traded
by the Securities and Exchange Commission to file reports, which are av~~~tmes are require
website, and can be searched by contractor name. The company's .
a e on the sec.gov
sheets are the foundation of our financial capability analysis. Th ~n~ome s!ate~ents and balance
1
~ m onnation 1s only the
beginning, however, since a thorough financial analysis requ
but also of the industry in which is resides.
ires ata not only of the company,
In assessing a contractor's financial health, a general rul .
1
financial analysis is the contractor's sales forecast Th e_ ~ th e most important dat
f
. .
is In1ormati .
a e 1ement o
contractor, but can be assesse d by reviewing signed c t
on 1s generated b h
on racts commt
Yt e
1 ments
'
' or sa1es orders.
CON I 70, Unit I lo,, _ -
<' '
There are also several indicators of a contractor's profitability:

a) Return on Assets (ROA) looks at the efficiency w'th h' h
.
,
1 w 1c management has used its
resources, th e company s assets, to generate incom Al
d
e.
so a common metnc to assess
I
commercia pro uct managers' and senior managers' per1ormance.
cb) R~tum on Sales (~OS) shows what perc.enta~e of dollars is left after the company has
paid
for all costs,
mterest,
and taxes It 1s an mdicator of profit
t 'b
.
.
.
1 margm, or con n ution
income, which we w11l leam about in Unit 2.
c) Re~m.on Equity (ROE) indicates the rate of return on the owners' investment--their
eqmty m the company.
Financial Analysis in Market Research

Most important data element-contractor's sales forecast

Other common financial health tests:
a.
Return on Assets (ROA): Ratio indicates profitability compared to

assets. Indicates efficiency in generating earnings.
ROA = Net Income
Total Assets
b. Return on Sales (ROS): Ratio indicates operating profit margin, or how
much profit earned per dollar of sales (contribution income)
ROS = Net Income
Total Sales
c. Return on Equity (ROE): Indicates profit relative to amount
shareholders have invested.
ROE =
Net Income
Shareholders' Equity
Examining trends in these metrics reveals if the company is becoming more or less profitable
?Ver time. In addition, comparing these indicators among contractors in the same or similar
mdustry will indicate the relative profitability within the industry, and indicate how a single firm
compares to its competitors. Together, these metrics can serve as the basis for a profitabil!ty
~orecast during performance of our requirement, and the level of risk compared to others m the
industry.
------------~~~~~~~~
CON 170, Unit I lesson 5 - Market Research - Page I 25
fn addition to assessing a contractor's profitability, we can also assess the contractor's ability to
manage cash and meet its short-tcnn obligations.
a. The most common liquidity metric is the "current ratio." As sho~n below, this ratio
indicates the company's ability to meet its current liability obhgatwns out of current
assets, without having to liquidate longer-tenn assets. A widely employed banker's mlc
of thumb is that the current ratio should be at least 2.
b. Another liquidity ratio is the Quick Ratio or Acid Test. As shown in the slide below, this
ratio does not include inventory in the numerator. Therefore, this is a more stringent test
of liquidity, for it only includes the most liquid assets-cash and marketable securities.

Liquidity ratios--indicators of a contractors' ability to meet
short-term d~bt, pay back debt-reflects need for financing
a. Current ~atro: most common financial ratio. Wide rule of thumb is to
have a ratio of at least 2:
Cash + mktble securities + accts rec + inventories
Current liabilities
b. Quick Ratio or Acid Test more stri
t d
.
due to its time to liquid~te:
ngen ' oes not include inventory
Cash + mktble securities + accts rec
Current liabilities
Compare over time, for example, quarter/

Compare to other businesses in th
Y_reports over the past year
e same rndustry
As with
profitability indicators ' we must review
. th
the
over time and
add'Itwn,
we must compare these ratios
am
e rat10s
to assess how one finn compares aga1 t tong other contractors in the
assess trends. In
.
. .
ns I s comp ft
same or 1
as1s for a hqmdity forecast during per1ormance
c.
ef I ors. Together, th ese rah. sum ar mdustry'
b
compared to others in the industry.
o our requirement' as well asosacan
serveof
asrisk
the
forecast

Sources of Financial Data
C!Qtmellcqu.sit= IJ 1o toii!-1
For publicly traded companies - primary so
d
urce,s
..
S ecunt1es an Exchange Commission website
Dun & Bradstreet, Jnc - dnb.com
Contractor's website
Standard and Poor's Corporation - standardandpoors.com
- Stock Reports
- Industry Surveys
Moody's Investment Service - v2.moodys.com
For publicly traded companies, in addition to the SEC and the contractor's own websites,
extensive financial data are also published in such sources as Moody's, Standard and Poor's
Register of Corporations, and Value Line, and additional sources listed in SD-5 Appendix A.
However, for privately held companies, it can be challenging to capture data from independent
sources. The slide below provides guidance for actions to take to obtain adequate financial data
to assess a contractor's financial condition.

For privately held companies, obtaining information can
be a challenge
- Pursuant to FAR 9.104-1, -2, and -3, Contracting Officer still
needs adequate data to determine contractor is responsible
- Request contractor's sales forecast
- Request copies of last year's quarterly income statements,
balance sheets
- Request the contractor's estimates of their own ROA and ROS;
with the above, estimate the contractor's ROA and ROS
- Request references of subcontractors or suppliers to verify timely
payments, organized accounting procedures
- Seek assistance from the Small Business Administration when
researching small businesses
- A~ A , Research - Pa'!e I 2?
CONJ 70, Unit 1 Lesson) - ar e
These indicators are particularly important if contract financing is anticipated. It is our

responsibility to determine if the contractor presents acccptablc_Icvcls ofrisk in making
payments to its employees, subcontractors and suppliers, and will not default due to poor
financial condition.

Based on review of the financial data during

market research:
- Is the contractor at risk as a "going concern"
- Is the Government at risk in providing financing?
Market Research Summary

Market research is the basis for
..
respect to an acquisition strate ke_v dec,_s,ons with
,tern determination th
. gy, including comme . I
data .
, e requ,rement for cost or pncmg
. . rc,a
-:o
align w/TINA requirements

include
, market
:,: data from Gov't sources
a d research must
e of ,eror
, n sources th
th
- In market research we
o er than
to the minimum data ne~:e required to limit our
- Market research enabl
ssary
requests
tradeoffs in its require es the Government t
.
capabilities
ments to align with o consider
- Market research doc
commercial
umentatio
government's cost estim
n ,s the found .
competition, contract te~: expected level !lion for the
-----. en a contracting requirement and market research tools, recognize the

.
I. 5 Giv ts of a market research report
essential
elcmen
1 501 Summarize the regulations and guidance regarding the purpose, policy and
<lures for market research
r "
t t fi d
l"fi d
proce
1.502 Identify so_urces o l~1orma ion o 1~ qua 1 ie sourc~s, historical pricing data,
commercial solutions, prev10us contracts, nsks, and the requirement for certified cost or
ricing data
. .
.
.
503 Identify sources of _financial mf?rmatlon for prospective contractors
504 Given publicly available financial statements, assess a company's need for
ii~ancing and cash flow
t .50 5 Recognize the key elements of a Market Research Report
-arch - Page 129

------------------------;::;;-wi~{};[iJl
CONJ 70, Unit 1 Lesson 5 - Market Rese
STUDENT GUIDE
CON 170
=undamentals of Cost & Price Analysis
Unit 2
Quantitative Methods
for Contract Pricing
October 2016
;~
Required Student Preparation

.
Students should have completed the Math Refresher exercises as pre-course work prior to co ming
. to
class.
Planned Academic Time Required: 8 hours
Student performance will be informally evaluated during class discussions and exercises and
formally evaluated on Exam 1

~~~~-',:"'..:.:"'~,., ------------:__-....:::-_-___________________ __ ----- -------- -----..
2.1 Demonstrate the ability to execute fundamental.

quantitative pricing skills.

At the eon.tlt.: s,on of ltu~ u1u'l, you. w, be able to:
Lenon 1 --
Compi.ite f1,md'amental qv~ntitative problems
Losson 2 (ELO 2.01)

.
fUs.e Pru::e Gnd~x,ng to make prlce ad,u:s~
, 'men ts 11e--ces.sary to
a,naI'f~ pr,,e@ and cO!it 111 'rmat,cn collected o:er a pericd or tirne .
Lenon 3 (ELO 2.02) Given a set of data, Ar:a~,ie Data Shape. Centttr s
.and Tr~nd cl'lara~t4!1rist1c~.
, pread
Lesson 4 - (ELO 2.03) Given

91 vl!<n data.
a set of oat.a, calc-ulate the
Net Pre-sent VaJu
..
e of the
Lenon 5 -- (ELO 2 04) Given Marl<et Re$-e3rch cf,ata, C.l~: ulate and icfemify
r~as.cnab!e Co~t E.~t,mat1.ng Re.!ation,sh1ps
Le~!ion 6 - ~EL~ 2.05) Throi..~h Cost-Volume An.a:~/s.is, re-cog:nize the nature of fil<'.ed
van.ab~e. $emi-van3ble and total CO$ t$, and develc,p a pn~e e 5 tima:e .
'
(El O 2.06) Through CostVc:lum41, Analys1$, determ1n,e a propo$ed price, to b

or irr.,1tiona.1with respect to a "buy-inr ,eller str.a,eg.y,
era iona.t
Lesson 7 (ELO 2.07) a-. Th.rough

analysis , re<::onm.z.e
th
d
,,
"" na ture
- CostVo.iumeProM
of ,profit revenue . contn ... i.i1,on income , an calcul.Jt~ the corrtracto.r'~ ' break even
point
Introduction
prices/costs.
wecomparison
have to co of th e apparent successful quote/proposal to other
price
AnalysisSometimes
involves the
changing value of the dollar over tim mpare the.quote/offer t? historical prices/costs. f{owever, the
co~phcate
compansons
analysis
cost information that has been coll ectee
edan
over
time You
can
and other
d
d. using
price
/ or
to compensate for inflation or defl ation and fac1htate
. . . compansons
1;1se pnce
exesanalysis.
to a 3ust pnces costs
andinother
Probably
the_ most
commonly
used quantitative measure used in contract pricing is the price index
Price
Index
Numbers
Defined
number. pr,ce mdex numbers measure relative changes in prices over time. Index numbers are
essentially a ratio of the price of goods today compared to their price in previous years
While index numbers can measure both prices and costs, discussions ofindex numbers in contract
pricing normally refer t o ~ indexes. In addition, indexing is commonly used in pricing to
measure
productivity.
Simple and
Aggregate price Jndex Numbers - ~rice in?ex numbers can indicate price changes for
one or several related items or services over a penod oftnne.
s l d
...-nbers calculate price changes for a single 1item over time. Index
f theY are constructed using actua pnces pa1 ,or a singe
1mP e 1n ex nu,..
.
1
d c
.
d t rate
se~,l ce rather than the more general aggregated mdex.
num ers are more accu
.
1
\ate price changes for a group of related
items over
b
commo d1ty, pro uc or l ..
~ggregate index ~umbers ':1c~ analysis of price changes for the group of related products.
time. Aggregated indexes P
. deX is the producer price JndeX (Bureau of Labor
An example of an aggre?ate pnc~ in the changes in the wholesale price of products sold in
Statistics) that provides 1nformat1~n on .

the United States over a given penod of time .
. ..,
,nlv/70, Unit,.. -
antitafive }.[ethodsJor Contract Pricing - Page \ 11

0
_LI
===
Definition
~
=================;::::::::::::::
Price index numbers:
r time
.
.
h nges ove
Measure relative pnce c a
ercentages or
and are usually expressed as P

decimals.
.
commodity
Simple Index: measures a single
item or unit
f
a group o
Aggregate Index: measures
Consumer
related items. Examples are th e
Price Index or Producer Price 1nd ex
(www.bls.gov)
Identifying Situations for Use
There are several possible situations where using price indexing may be app~opna!e. S~e e 1~wand
the slides that follow for a brief description of some situations and how to adjust htstoncaJ pnces
using 'indexing' .
Inflate/deflate prices or costs for direct comparison. Use price index numbers to
estimate/analyze a product's cost or price today using the cost or price of the same or a
similar product in the past.
Inflate/deflate prices or costs to facilitate trend analysis. Use index numbers to facilitate
trend or time series analysis of costs or prices by eliminating or reducing the effects of
inflation so that the analysis can be made in constant-year dollars (doHars free of cha 0
related to inflation/deflation).
r 0 es
Estimate/project prices or costs over the period of contract perfo .

.
costs of future performance are not certain. One effect that you mu trma~~e. ~nces and
changing value of the dollar. Use index numbers to estimate and s c~nst er 18 the
prices.
negotiate future costs and
Adjust contract price or cost to account for inflation, deflaf10

factors. When price changes are particularly volatile, you may
other market
price adjustment clause in the contract. Using index numbers nee to Include an economic
methods used to identify and define price changes for economl~ o~e of t~e most popular
Pnce adjustment.
"'t"~
,/'
CON170, Unit/
\i...
, A-fethod
Sforc
ontract p . .
ricing -
Pno ,.
, ..,,
Situations for Use

Use price ind
ex numbers to
Inflate/deflate .
.
pnces for direct comparison
Inflate/deflate
co 5t s to facilitate trend analysis
Estimate/pro t .
contract p _Jee pnces or costs over the
enod
Adjust
. or cost for inflation
d fl . . cont rac t pnce
e at1on and other market factors
Adjusting Historical Prices to

"Current Year Dollars'J
Use price index numbers to adjust historical

prices to estimate what the price would be in
more recent or current years.
This process (called "indexing") adjusts price

estimates to account for the effect of inflation
and other factors
Enables buyers to compare current and

historical prices in "current year" dollars.
, , _,,___ _J ,, I',, ..
r,,n,rnrt Pricine - Pm!e
I 13
,..
. the cos
. Allowance for many Governrn

t of Living
ent and
. deX IS
On 1n
f
comm
An example o a
contractor employees.
poin1
An Index Example
~ , ~ 1_t ;.t'\I.Y
Dt"'"'A(,-
11owance (COLA):
cost-of-Living A
on an OPM survey of the
OLA is based up t ms including goods and

r 300, e ,
.
C
prices of ove .
transportation, and .
services, housing, ses necessary to live.
. II eous expen
m1sce an
f h e 0 items increase and
. es o t es 30
As the pnc
f
COLA is adjusted to enable
decrease over ,mt:in a constant "utility level" or
consumers to sus
"standard of living."
LA is "indexed" in order to help keep
Thus, CO
. h t f 11 .
. ata "constant" level-wit
sa Ianes
.
.ou a mg
behind (or jumping ahead of) inflation.
Selecting a Price Index for Analysis
There are many sources of published indexes. You may not have the time or data required to
construct the price indexes that you need for price or cost analysis. Fortunately, there are many
sources of previously constructed price indexes that you can use to estimate price changes. These
sources include:
Published Indexes
Bureau of Labor Statistics: vvw v bis q v
Producer Price Index
.-
.-
- Most commonry us d t
.
- Does not extend inte thor material pricing
0 e future
Consumer Price Index
Employment, Hours and E .

Commercial Ind
arn1ngs Survey
- IHS Global lnsr exes
Industry
l)sep
price
speci:
const
1
deve
Qht (formerly ORI)

and Trade Publicat
ions
Whe
Usu:
the t
Ify1
will
alsc
thn
ele
pre
In
Tl
L~
G
th
-----points to Consider in I d
l)se published indexes care~\\ ex _Selection

price changes for the product Y, sin~e a published.
.
, tor or locationorbservice th at you aremdcx will
spec1.tiic cont rac
. usually not exactly fit the patt
f
't d d
, ut repr .
analyzing Th
.
crn o
construe e m ex numbers of~
esent nation 1
.
e data isn't usually from a
. .md ex numbers fr 1er ba prac tteal alternatc\ or regio na1 averages. Nevertheless predeveloping
.. om asic cost data. we to the cos tl Y and time-consuming
' task of
When youthusel published inde xes, choose th .
t
l)sua
y, e will
c oscr
chosen ilnd,~x scnes
. relates
e mdextoseries
tllat
. b eS fits your specific analysis effort.
the number
be the
in you
th
.
r ana ys1s.
e item that you are pricing, the more useful
\l
.you
. good
, m d exes
raw materials and purchased components
If
arenecessan
buying. aYfinished
w1\\
not
provide
an accurate
b repre
. c sentmg
fl
as1s
1or
p
, pnces
. because the finished good may
1
also e strong Y m uenccd by trends d'
roJectmg
.
.
l o f a weighted
throng
averagemind,reel labor
. ' cot
s O f capital,
etc. Accuracy can be improved
b the use
elements
of
price.
Many
contracting
or
ex,
w_hich
represents
changes
in both labor and material
h
gamzahons devel
h d
op we1g te average indexes for maJor

products or maJOT groups of products.
tndexes from fthe

Bureau
of Labor. Statistics
L b
. .
un so ata on pnces. The U.S. Department of
The Government
collects and publishes vast amo
agency ,or t e e era
.
. t f d - m mg
Labor, ureau o a or Statistics (BLS) 1s the princi' pal f:act ti d'
e:
h F d 1
B
Government
m the broad ~eld oflabor economics and statistics. (See http ://www .bls.gov/ ) four of
the best known sources of mdex numbers are published by the BLS:
Producer Price Index. Probably the best known and most frequently used source of price
index numbers for material pricing is the Producer Price Indexes (PP!) published monthly
by the BLS. These indexes report monthly price changes at the producer/wholesale \eve\ for
l 5 major commodity groups and over 30 services. The table below includes several of the
commodities and services addressed by the PPI, and can be found at
htt :i/bls. , ov/wcbi ii J ,itab\c06. df. A producer price index for an industry is a measure of
changes in prices received for the industry's output sold outs!de the industry (that is, its net
output). Producer p,~ce indexes measure the average change m_pnces received by domestic
roducers of commodities in all stages of processing. The PPl 1s an output pn~e m~ex:
p
- , changes received by manufacturers of a product. It 1s neither a

,, ': 1t mcasu1es
.
price
,t rice index, meaning it docs not measure the cost of prod ucmg
meanm"
II'
rices reported by establishments of all sizes
buye_r s index nor an mpt P
that item. PPl data are based on sew~~; the robability of selection proportionate to size.
selected by probab1htY samphng,
f,
these firms are also chosen by probability
Individual items a~d transacuon tc~~ r;pls are based on a monthly sample of about
proportionate to size sampling met 0 . s..
f over 10 ooo different indexes each month
100 000 quotations, resulting in pubhcatd1on o Pr1ce lnd, ex Escalation Guide for Contracting
,
.
h BLS' Pro ucer
'
(for more informauon, see t e
Parties, on the BLS website).
.
t
coNI70. Uni
. , .,,thods fi>r Contract Pricing - Page\ I 5
2 Q11,1nt1tattve
-
LVl e
---.=====:'.:--;:
--===-
PRICE INDEXES
PR0DocER TY GROUPS
coMMODl
Co0101od1ty or
Commodity Code
Fann
Service Descnphon
Products
t and Apparel
re~1ile Produc s h and Related Products
.
Skins Leat er,
Hides,
' d p oducts and Power
01
03
04
05
d Relate
06
07
08
09
10
11
12
13
14
30
32
38
45
80
Fuels ~n 1 d Allied Products

Chem1ca s an
Plastic Products
Rubberand
Wood Products
Lumber an d
Pulp, Paper, and Allied Products
Metals and Metal Products
Machinery and Equipment
Furniture and Household Durables
Nonmetallic Mineral Products
Transportation Equipment
Transportation Services
Warehousing Storage Services
Data Processing and Related Services
Professional Services (partial, including
business, legal, engineering, IT, logistics
consulting)
Construction (partial)
For a more specific look at information available under the PPI execute the following stepsm:
'
the www. bl s.gov website:
Example: Producer Price Index

for Ball and Roller Bearings
1. Go to \V'NW bis gov uppe I ft
..
us b. A
,
r e , hover on "Home
see
u Ject reas/ then click on !ti fi t
.
.
n a ion & Pncesr.
- Upper left, under 'Subject A
..
:,
.
Pnces," click on "Produc Preas, hover on Inflation &
.
er n ce lndexes
Jl
11
3. Upper left, under . Browse PP "
then click on "Get PPI Data" I, hover on . PPI Data,"

4. U~der "\.Pl Databasesr. table .
"
click on Top Picks" (blue fi 1' in the Industry Data" row
5. Scroll down to "Ball

ie d, gold star)
'
and click in the box and Roller Bearing Manufacturing,"
6. Then, scroll down and 1
7 R h
c I ck on :,R
. ,g t-hand column incl
.
etrieve Datan
use to adjust historical ~~i~!~~dex numbers, Which we
o current Year estimates

!
,Ji
CON J7o U .
nu2 - QUantit t'
a ive A1ethods fr r,mtrnrl Priclflg
p,l
, I.
At Step 7, you will find actual tables f. d

. . umque
.
Stat1st1cs,
to the category of ,o8 m ex numbe rs rec?rd ed b y the Bureau of Labor
11
this Ball and Roller Bearing category a and Roller Beanng Manufacturing'. In addition to
, you can explore many ot her categones
. within a short time
Consumer Price Index Detailed R

monthly in the Consumer Price Ind epDort. !he consumer price index (CPI) published
.
fi
. of goods sele ex
.' consumer
or a fiixe d mix
t d .6etazled Report, reports on changes m
pnces
food
c e rom the following categories:
clothing
shelter and fuels
transportation
medical services
.
You should normally not use the CPI to d. t
rather than wholesale price changes H a ~US m:tenal prices because the CPI reflects retail

.
owever t e CPI can b O f l
when labor rate increases are linked to ch
'. h
e va ue m pncmg services
anges m t e CPI.
Monthly Labor Review. The Monthly Labor R d'

Labor Statistics, and includes analysis of the lab evzewtis e ited and post:d. by the Bureau of
c.
.
.
or cos s, output, productivity,
unemp 1oyment
1or
different
skills
and
population
demographics . Th e Review
aIso me
1udes
~
t
d
d
1
se ec e ata 1rom a number of Government indexes, including:
Employment Cost Index
Consumer Price Index
Producer Price Indexes
Export Price Indexes
Import Price Indexes

That data and other information presented in the publication can prove useful in conducting
market research and for analyzing the price of contracts, such as service contracts where
'
direct labor is a significant part of contract price.
Employment, Hours, and Earnings Survey. The Employment, Hours, and Earnings
Survey presents information on the hours worked and an earnings index for various classes
of labor. Like the Monthly Labor Review, the survey can be very useful in market research
and for pricing contracts in which direct labor is a significant part of the contract price.
~nd exes from Other Government Agencies
. .
Tuta on contract prices are also available from agencies other than the Burea~ of Labo~ Statistics.
emost notable are the Federal Reserve System and the Bureau of Economic Analysis.
Th B d of Governors publishes the Federal Reserve Bulletin,
e oar
.
.
t
Which includes economic indexes and data on business, commodity pnc~s, co~s~ruc io~,
labor, manufactures and wholesale trade. Each bank in the syst~m.pub(hSshcs m ormatton
ea h
'
F d ral Reserve D1stnct. ee

c month with special reference to its o~n e e
http://www.fedcralreserve.gov/pubs/bulletm/defaul t.h tm)
Feder I R
eserve ystem.
CON/70, Umt 2- uan
t 1 itive Methods for Contract Pricing - Page

Jt
I 17
. .
Th Bureau of Economic Analysis,
Bureau of Economic Analysis Pubhcahons.
e
.
d th B .

ifC rent Busmess an
e usmess
Department of Commerce, publishes the Survey o ur .
.
.
Conditions Digest The Survey of Current Business provides general mfo:1ahon on trends
. .
.
fu h
nomic indexes on business
m industry and the business outlook. It mis es eco
..
. '
construction, manufactures, and wholesale trade. The Business ~ondllwns D,!!eSl presents
almost 500 economic indicators in a fonn convenient for analysis, as well as di_ffcren!
approaches to the study of current business conditions and business prospects, mcludmg
leading economic indicators. (See http: //www.hca.doc.gov/)
Indexes from Government Contracting Organizations
Ma~y Government contracting organizations have teams of analy~ts ~ho develop 1_ndexes that are
particularly applicable to the organizations' specific contracting situations. These mde~es may be
?eve loped from raw price data, or they may be developed as weighted averages of published
mdexes.
Indexes from Commercial Forecasting Firms

Numerous commercial indexes are available for use in contract price analysis. While most
Government indexes only report historical price changes, many commercial indexes also forecast
future price movement. In situations where forecasts are necessary, commercial indexes may prove
particularly useful. A major source for this information is Global Insight (formerly ORI). Before
using such indexes, examine their development and consult with auditors, technical personnel, and
other contracting professionals to assure that they are applicable in your analysis situation.
. ~)~
CONJ 70, Unit 2 - Quantitative Methods for Contract Pricing - Pog;,\
exes from Indu~t,r

[ndst and trade pubhcat10ns frequently provide en 1
m.d1.1 Znges anticipated in the industry. To identii :~~ horeca~ts ?f economic condi_ti~ns and
pnce c to a particular product, ask Government techni c publicatwns have _economic information
reJeva~Jentification of appropriate publications Howe::' pbersonnel. C~mpa~ies can also assist you
it1 the 1
f
.
r, e sure to venfy wrth Government
el the appropnateness o sources of information recom
d db
personn
men e y responders.
Indexes from Newspape~

Publications, su_ch ~s local: national~and fin~ncial newspapers, provide valuable forecasts of price
changes in specific tn~ustnes. ~he mformati_on reported is nonnally data provided by the
Government, economic forecasting firms, or industry groups.
Adjusting Prices ~or Analy~is
There are two calculatwns we are interested m relative to indexing. First, we will learn to calculate
the relative price change between two periods. Next, we will use index numbers to estimate current
Qfices. Making these calculations requires the use of the following symbols.
NI:
OI:
NP:
OP:
New Index
Old Index
New Price
Old Price
(for the time we are calculating an estimate)

(from the time of the historical data element)
(what we are trying to calculate an estimate for)
(the historical price paid)
First, in calculating the relative price change of over a period of time, we may use either index
numbers, or historical prices we may have gathered from our market research.
Percentage Change
Between Two Periods
Use indexing to calculate the ercentc1ge change in prices:
You have index numbers for a certain commodity from 2008 through
2013 Your boss asks you to estimate the percentage change in the
price ,n the commodity from 2008 to 2013 . Use the followmg formula
NI in 2013
{ 01 from 2008
l . 100
J
100
= the Percentage Change
, Or you have h1stoncal onces of a certain commodity from 2oz~nt~~~ugh

2013 YolJr boss asks you to estimate the percentage chang I .
price ~f the commodity from 2008 to 2013. Use a s1m1/ar formu a
New Price in 2013
X 100} - 100 = the Percentage Change
{ Old Pnce from 2008
, . ,
COJ'ol/ 70, l m1 -
11trat'1 !
. , . e I/t!f/1()dsfar . o
_ ()vant1rai1 1
.
'.)rf{'f/7(!
. -
j '>,7o t' I
' ...
j fl
ange") between two periods, we

.
. h
(or "percentag e Ch
In order to calculate the relative pnce c ange '
n use index numbers from market
will look at a couple of examples. In these examples, we_wi ces relative to the base year. Using
1
research. Index numbers indicate the percentag~ change ~~c~~ tage change in a product's price
the table of index numbers below, we can calculate the P
between certain years.
YEAR
PRODUCT INDEX
2008
2009
2010
2011
2012
2013
100.0
105.3
112.0
116.5
119.3
123.2
To adjust prices for inflation or deflation, you must be able to do more than determine how prices
have changed relative to a base year. You must also be able to determine how prices changed
between any two time periods. This formula will help us do that.
[ (NI / 01) x 100 ] - 100 = Percentage Change

Where:
NI = New Index
OI = Old Index
(Chronological Indexes)
Example: Looking at the ta?le above, what was the perc~ntage change between 2010 and 0
2 137
To calculate the percentage pnce change between any two time periods, you must follow th
~rocedure that you would follow if you had actual price data, but you'' be using the index n~~a:;s
instead.
( (NI / 01) x 100 ] - 100
[ (123.2 / 112.0)
= Percent Change
100 ] - 100 - 10% increase
Based on the price index and this calculation, a buyer could estimate that product prices in
were 1.10 times the prices in 2010, or 10% percent more than the prices in 20 I 0. The prod 2013
t.
numbers enable a buyer to estimate_ a general .P~ce increase_ in thi_s product of about 10% du~ t~ nd ex
inflation as well as other factors umque to bmldmg and selling this product.
CON/70, Unit 2 - Quantitative Methods for Contract Pricin(

\
Je: you are cond_ucting market research to purchase high-powered microscopes for your .
t8rll P 00In 20 I O, the m1 croscope pnce was $ I 5,000. In 2013, the price for the same m1croscope_1s
16
Jab0rato~
_ What is the percentage change since 20 IO? Notice, in this example, we do not have mdex
00
w$ but we have histoncal pnces. Therefore, we calculate as follows:

numbers,
[ (NP / OP) x 100 ] - 100 == Percentage Change

Where:
NP= New Price
OP = Old Price
(Chronological Indexes)
[ ($16,500 / $15,000)
[ 1.l x 100 ] _ 100
100 ] - 100
= 10%
increase
Now it's your t:u:_rn------------------------1
Try it!
I . provided,
. .d
mbers prev1ous.y
Using the ,n ex nu
hanqe based on the
t the percentage c
calcula e
and
11 :
20
indexes between 2009
DlhnSI\ Acq1.uitim U i. tnil'/
[ {NI / 0 ,1)
100 ] - 100 -
Contra,.1 priclllg
. ,._,i.,11!~ for
_page J 21
......,,1
--- - - -- ~
.
f1mate prices in a current or future

1he second ca\cu\ation we will \earn about
w~ cdan es bers We will also use index numbers
d
5
penod based on prices from a previous peno u rn gm ex .num throuoh market research we
15 ho~
.
.
.
bt histonca1 pnces
t o est1mate
pnces m current years. When we o am
'
.
.
f th .tern in the current year.
can use mdex numbers to estimate the pnce o e 1
Price Change
Between Two Periods
A\so use indexing to calculate the estimated rice in a current
period based on the price from a previous period:
You 11ave index numbers and hist91i9.9\ rices of a certain commodity
hom 2008 through 2013. BJsed on this data , your boss asks you to
estimate the price of the item in 2013 . Note: t11is is different than t_tle
(Hc<mt-1 c chan e calculation . To estimotc a tice , use the following
formula :
( Nl / OI ) x OP
= NP
Where-.
NI = New Index number for the more current year.

0\ = Old Index number from a previous/historical year.
OP ; Old Price, which is the historical price paid.
NP = New Price, which is the estimated price for the
more current ear.
Example:
Given the table of index numbers, what would you estimate the price of a product to be
in 2013 if the price in 2010 was $1,000? (Note: this is similar, but not the same as the percentage
change calculation.) To estimate a price, use the price adjustment formula:
(NI / 01) x OP
(123.2 / 112)
NP
$1,000
$1,100
YEAR
PRODUCT INDEX
2008
2009
2010
2011
2012
2013
100.0
105.3
112 .0
116.5
119.3
123.2
Based on the price index numbers and a hi_storical pr~ce, this calculation indicates a buyer would
expect to pay approximately $1,100 for this produ~t m 2013 .. T?is increase in price from 2010 can
be attributed to inflation as well as other factors unique to bu1ldmg and selling this product.
'\
CONJ 70, Unit 2 - Quantitative Methods for Contract Pricing - Page I 2 2 _\

\
'
~-
t's your wrn-
re
nurnbers
NOWl
Try it!
1, We
Estimate the price for a product in 2011 based on

a historical price of $12,000 paid in 2009, using
the index numbers data from the previous
example:
(NI / 01 ) x OP = NP
Try Another One -
Try Another One!

t to be
tage
DEX
0.IHIH ~tq1.n111cn l.b, t1"tf.'f
Using the same table of index numbers, estimate

the price for a product in 2013 based on the
historical price of $10.400 in 2010:
(NI/ 01) x OP = NP
I ({ , cJo. 00
C/
_d
can
ge i 22
- I'
, C irnc t Pricing - Pae:e I 2 3

CONl 70, Un it 2 - Quantitative Metho{ I.s.1or -on
'-
. I
.. . i
n price reasonableness must 1101 be ba
. h d termination o
.
.
. 1 d.
This example reveals that making t e e
t' e contracting s1tuat10n, inc u mg:
.
.
der the en 1r
indexing analysis alone. We must con~,.
. eluding the areas of technology, levels of
Recent changes in market cond1 tions, in
competition, overall demand for a product
.
irements
Differences in order quantity, delivery and packaging requ
Geographic location of manufacturing, delivery
. ..
Quality, perfomrnnce parameters, warranty
Other contract terms, such as warranty, labor agreements, acquts1t1on strategy
Age of the historical data from market research.
Adjusting for such differences will be covered in more detail in CON 270.
Analysis of Indexing
;'; :':1ition to i~dexing, price analysis must a/so
c u e analysis of price variation due to:
- Market conditions, technolo
- Quantity/size of order d r gy changes, competition
- Geographic location , e ivery speed, packaging
- Quality-, performance pa
- Other contract ter .
rametersJ warranty
- A ..
ms, labor ag

cqws1tion strate
reements
- Age of the marke(Y
research h.
, istoricaf data
With all this in mind

pro~ess to determine' ~e must realize tha .
use mdex numb
p~ce reasonabl
t using ind .
ers, review the follo:~ess. Now thatexing as Part of
ing steps th
You are
our anal . .
at Will hel aware of som ys1s is only part of the
P You t 0 rnake su
e ofth
h e common ways to
c a detennination:
sect 0
Analysis of Indexing
Indexing is ke
determining p~ part of the pro. cess for

nee reasonableness:
1.
Collect availabfe price, cost data
2.
Select price ind
3.
Index {adiust)
.
.
'..I
prices for mflat,on/deflation and other
mark et f actors
4-
Use adjuS!ed prices as basis for price evaluation
exes for adJusting price data
(Units 4 and 5 provide additional instruction

on the process for determining a price to be
fair and reasonable)
Example: Considering the following scenario, use price indexing to analyze price-reasonableness.
Abuyer is analyzing a contractor's proposed price of $23,000 for a turret lathe to be delivered in
2013.
Step 1. Collect Available Price/Cost Data. Market research reveals a historical purchase
of the same machine tool in 2010 at a price of $18,500. Determine whether the 2013
proposed price of $23,000 is reasonable.
Step 2. Select an Index Series For Adjusting Price/Cost Data. Select or construct an
appropriate index series. During market research, search for the common indexes used by
Government and industry when conducting business in this area. In this case, you might
search the BLS, or another commercial index which relates to metal working machinery or
manufacturing, under the NAICS code of 333515. In this example, we have established a
Machinery and Equipment Index in the table below to help us assess price movement for
turret lathes over the past several years.
YEAR
MACHINERY AND
EQUIPMENT INDEX
2008
2009
2010
2011
2012
2013
100.0
103.3
106.0
110.8
115.0
121.9
Step 3. Adjust Prices/Costs for Inflation/Deflation. After you have selected an index, you
c~n adjust prices to a common doilar value level. In this case, you ~ould normally adjust the
historical 2010 price 10 the 2013 dollar value level. To make the adjustment, you simply use
one of the equations already demonstrated.
CON/70, Unit 2 - Quantitative .Afethodsfor Contract Pricing - Page I 25
(NI / 01) x OP = NP
(121.9 / 106.0)
$18 ' 500 == $21,275
b er can estimate the new pnce m 2013 to

unique to manufacturing
By using index numbers and a historical ~nflce, .a uyd other factors

. accoun ts for m ation an
be $21,275. This new pnce
this item.
.
.
luation. Once you have made the
Step 4. Use adjusted prices ~s basis for price eva the offered and historical prices in
adjustment for inflation/deflatw~, you c~n co;g;~e but the adjusted historical price/cost is
2
constant dollars. The offered pnce~co st is ~ '
ercent higher than what you
1
8
725
'o~ .. p
What would ou do
only $21,275. Thus, the offered pnce/cost is$~,
would expect, given the historical data and available pnce mdexes.
Y
next?
Remember, in addition to indexing you must explore and consi~er the othe.r factors unique to
each contracting situation. Your objective in reviewing these umque areas 1~ to understand
significant variance between the indexed price estimate and the proposed pn~e,. make the
determination of fair and reasonable price, and decide whether to enter negotlat10ns or make
award.
Conclusion
In Closing, Remember the Issues and Limitations with Indexing. As you perform price/cost
analysis, consider the issues and concerns identified in this section, whenever your analysis is based
on data collected over time.
Were prices/costs collected over time adjusted for inflation/deflation? Inflation/deflation
can mask underlying price changes. Price indexes should be used to compensate for the
effect of these general price changes.
Is it reasonable to use the price index series selected? The price index series selected for
making the price/cost adjustment should be as closely related to the item being considered as
possible. For exampl_e, you ~hould not ~se th~ Consumer Price Index to adjust for changes in
the price of complex mdustnal electromc eqmpment.
Are adjustments calculated correctly? Anyone can make a mistake in calculation. Make
sure that all adjustments are made correctly. This is particularly important when the
adjustment is part of a contractor's offer or part of an analysis performed by other
Government personnel.
Is the time period for the ~djustmen_t reason~ble? When adjusting historical prices for
inflation, take care in selectmg the penod of adjustment. There are two basic methods that
are used in adjusting co~ts/prices, period ?~t:ween acq~1isition dates and the period between
delivery dates. The penod between ac~ms1t1~n dates 1s most commonly used because
purchase dates are typically more readily available. However, be careful if delivery
schedules are substantially different.
Is more than one adjustment made for the same inflation/deflation? For example, it is
CON/ 70, Unit 2 - Quantitative Methods for Contract Pricing - Page I 2{
mon for offerors to adjust supplier quotes t

. .
corn
b . d d h
o consider mflatio lb t
h
.n e we~n. t e time when
1he quote was o tame an t e date that the product will
Jess the supplier already considered the inflati n/d fl
r~qwre~. This 1s acceptable
un
e atton m making the quote.
Ilow far into the future should you forecast? The fi rth . h .c
the greater thens
u er mto t e 1uture that you forecast ,
k.
?e
t
Did we consid~r adjuS ing our price estimate based on unique factors, which may not be
captured in an mdex, su~h as:
Recent changes m market conditions, including area of technology levels of

competition, overall demand for a product
'
Differences in order quantity, delivery and packaging requirements;
Geographic location of manufacturing, delivery
Quality, performance parameters, warranty
Other contract terms, such as warranty, labor agreements, acquisition strategy
Age of the historical data from market research.
In Conclusion ...
,. _ _
Some Limitations
with Indexing_
--
O,.tuut .4rqw!!ib:-nU:-Jtnf:i _ _ _ _ _ _
Were prices already adjusted for inflation/
deflation?
Is the index selected reasonable?
Is the time period reasonable?
How far can you forecast?
. sted-based on
Have prices been a dJU
unique factors?
,.,.fl
r !nit 2 -
. Contract Pricmg ~
. \fethods/or
Quantitatwe "
Pae.e I 27
-
Price Indexing - In Class Exercises

Instructions: Complete the In Class Exercise below and answer the questions that follow.
In 2013, you are evaluating an offer of $22,500 each for five precision presses. Through market
research, you discovered the ~~Machinery and Equipment Index" used by Government and industry
analysts when purchasing these presses. In addition, your customer provided several historica]
prices paid (see table on next page - Column D), all the way back to 2008. Each of these purchases
was for five presses, with similar performance and contract tenns. Given this infonnation, use price
indexing to analyze if the proposed price of $22,500 appears to be reasonable.
Step 1. Collect Available Price/Cost Data. The organization has purchased five similar
presses each year since 2008. The historical unit prices are shown in Column D of the table
bel~w: While purchase q~anti~y changes are not present in this situation, unit prices are used
to hm1~ the effec_t of quantit_y d1fferenc~s ?n trend analysis. In this case, the only apparent
cost/pnce trend m the unadjusted data 1s mcreasing prices.
Step 2. Select Price

Indexes. for Adjusting Price/Cost
Data In this examp Ie, we w111 us e
.
.
the same Machmery and Eqmpment Index we used m the previous Example.
YEAR
MACHINERY AND
EQUIPMENT INDEX
2008
2009
2010
2011
2012
2013
100.0
103.3
106.0
110.8
115.0
121.9
Step 3. Adjust Prices for inflation/deflation and other market factors. U .
and D calculate the adjusted price equivalent for the precision press in 20 13 ~Inlg Co~umns C
'
o lars in
Column E.
I. fi r Contract Pricing{ _ ,,..

CON/70, Unit 2- Quantitative Met hocs o
.
Machinery and
Equipment
Index
Index
Adjustment
Calculation
Historical
Prices
Historical
Prices
Adjusted to
2013
~A-+------ir----t----:-t-:=-:-:1
.-Year
NP
OP
(NI/ Ol)
$17,391
~, l \ ~i
r,
f b ...
l B.o \
$17,796
l \ lb6-3 \
15
$18,087
zo
110.8
$18,724
?..o 59 9. ~
2012
l 15.0
$19,245
Z6 J11'/ 7
2013
121.9
2008
100.0
2009
103.3
2010
106.0
2011
80dc.S
')
I
;
I
Step 4. Make Price Comparisons. What trends do you observe?
\
What concerns wi\l you address with additional market research?
, -r. .,:t"f:.
(;,,c,,11,,..,,
.
CONI 70. Untt 2 -
. Hct/J''L
Q11a11titat1~e .
.,pn11~
' I/
-
.ded at the end of the lesson
Price Indexino Practice Problems answers rovi
t over the past several years, based on the

You have been asked to analyze changes inyrices and co~ s th followina Widget Producer Price
0
Producer Price Index for a certain commodity category. se e
Index factors to answer the questions below:
-
Year
2008
2009
2010
2011
2012
2013
Wideet
PPI
100.0
105.0
98.0
106.5
112.9
122.0
1.
By what percentage did the indexes change between 2009 and 2013?
2.
If an item was priced at $5,000 in 2009, estimate the price of the item in 2013.
3. An item was priced at $3,000 per unit in 2009. What would you estimate that th
.
in 2010?
e pnce was
4. It is 2013 and you have just received a proposal from Brown Industries for
.
1
a price of $850 each. You remember that once before you purchased widget' 000
y Widgets at
contract file and see that the price of $650 each for 1,500 widgets was determs: dou pull the
. 2011. Based on the Producer Price
. Index, what would your est"ne fair an d
reasonable m
.
.
unate be tior
the price m 2013?
Therefore, does the proposed price appear to be fair and reasonable? Defend your
determination.
CON170, Unit 2 - Quantitative Methods for Contract Pricing :
ndexing Practice Problem Sol t9
I
~
U IOD___:
BY what percentage did the indexes h

[.'v1 I Of
I ()(} I - I 00
c ange between 2009 and 2013?
1,
{( ]]] / /{)j )
/(}(}
J - /{)(}
c:::::
]6.]%
If an item was priced at $5,000 in 200 9
2,
t
' es imate the price of the item in 2013.
I 22 I I 05 x S5,()0(} = $5,809.50
An item was priced at $3,000 per unit in 200 9 Wh

3, .
10?
at would you estimate that the price

wastn 20
[(98 / f (}5}
$3.{)Q{Jj
c:..:.
$],(<{){)
Notice. in :his caSf!, :lze pric<: act~wl(y drop ... . . It is possible th({/ overul/ i1~fluLion was still positi ve,
hut other }actors ~1~1u7tte to th e H-:1dget ,-n_arket (such as decreas ed d<?tnand or mon? competition) still
co11sed thC7 pr(!:!m/mg ma~'k.et pt~tces ~o.fall. Be cnvure that indf!xing with a specUic index cmz rejlfft
ff/ ( )l,,l ah<Jt-t l />l'IC CS I fzan sunplv 111/lat 1011 or dt:/lat ion
L
,.
It is 2013 and you have just received a proposal from Brown Industries for 1,000
4,
widgets at a price of $850 each. You remember that once before you purchased widgets. You
pull the contract file and see that the price of $650 each for 1,500 widgets was determined fair
and reasonable in 2011. Based on the Producer Price Index, what would your estimate be for
the price in 2013?
(!22 I 106.5) x $650 = $744.60
Therefore, does the proposed price appear to be fa.ir and rea_son~~le? Def~n-~-yo~r . . ,~ ,, _
determination.
Ba,.,,ed on our percentage-chang? Jorm11!a, tins p, I C(! 1.\ opptox11natdJ 14 . o lu)1 u
_} .
1lw11 the index data indicate the price should be.

Calculate the percent changt!:
l (NP I OP) X 1()()] - 1OO
[ (850 I 744.60) _X !00] - JOO = 14 2%
.. t 1 Jhw 1mr,11e an
Ul(
.::
.
H)th such varhmce, H'e should coll l ll(
(,I _. . t
ofJ'Jrin: reasonublencss. hto
..
.
.
.
.
., I J ) iake the l ete; mma WI 1 ,
,
. ,
Jf"ice to
e.-1planu1um for the vorwnce, 0,1"' t zuz n
. t .. ff,) enah!e us to dcl et mme a/
- .,
. .
.
. . . ..,. 1,, ~inuc/oesnotauton1t11cu _,.
. . . .
"comllWn
s1,ec1/1c l<!anww J'Jomts: a} pifl e tn( ( ,.X ~
.
,.
. , ,- . o- and ~xJ>laznmg "m tcmu. '.
,..
..
o
.. . ..
l n<?cd for ana,J.:. lll,'? .
,
,
t 111
. CO.V l : 0.
be.finr and n.:asunable: b) rhe ( one cpt mic.
l ..
md in even more deta ,
. . I .,, w lditionul market resear(; I1 or ../oc :
111
;11 the next c.,.,.wn,

;
contract pricing, is <!lllphasce( agcun
Data Shape, Center, Spread

Lesson 3 -- ELO 2.02 Given a set of data, analyze
and Trend char~a=ct=e~r~is~ti~c-s.____________~_ _
Enabling Learning Obje~t'.ve

1).;h nn t.,q~~l11;1 !J1~,,._,
- -
- - - -- - . d ta shape center,
2.02 Given a set of data, an~IY.ze a
,
spread and trend charactenst1cs.
Introduction
This lesson presents fundamental concepts of how to graphically display and analyze data .. In
addition, the lesson presents how to recognize data patterns for predictive purposes. There 1s an old
saying amongst statisticians that if you torture numbers long enough you can get them to confess to
anything. The purpose of the lesson, however, is to identify several simple ways of portraying and
analyzing a set of numbers to draw conclusions and make predictions about the future.
You may have heard obvious examples of poorly analyzed data - for example, "the average
American family has 2.13 children". This observation doesn't help plan for the next family to move
into your neighborhood because it's certain the new family will not have 2.13 children. What is
more helpful is to find a way to describe the typical family and the level of certainty of expectation
that the next family will be typical. In modern language, average has become to mean typical rather
than a s?ecific _numerical <:alculation. We _will _use mean, median, and mode as three different ways
to descnbe typical. We w1!l also lo?k at h1ston~al patterns to determine is _it more or less likely that
the next data occurrence will be ~yp1cal - or, as m our example, how certain can you be that the next
family will have close to the typical number of children.
l
CON 170, Unit 2 - Quantitative Methods for Contract Pricing Pnee I 3! \
__.......-~-- . . ... - ---
Fundamental
. . Measures of Cent ra ity
1
One c harac~enst1c of a set of numbers is the midd

.
couple of different ways:
le pomt of th c data. This can be calculated in a
The Mean is calculated by adding all the n
b
d . . .
um crs an d1v1dmg by the number of values.
The Median is the middle value of the numbers 1 t d

k
. .
ts e m ran order If th
ere Is an even number

o f va 1ues, the median 1s the mean of the middle two numbers.
The Mode is the most frequent value in a set of data.
Shape of the Data Set

Plotting data that we have may give insight into a characteristic of the data known as shape.
Data with a Normal shape will have the same mean and median. In the normal case, data will be
balanced around the middle.
Data might be Skewed either to the right (positive, with the low "tail" pointing to the right) or
left (negative, with the low "tail" pointing to the left). In skewed data, a small number of
extremely high or low values caused the mean to be either higher or lower than the median.
When graphed, this produces a tail of data to the right or left.
Data distribution may be Bi-Modal or Multi-Modal. These means that there is more than one
cluster of occurrences of data values along the continuum that when graphed appears as multiple
peaks of data. When analyzing shape, a "bi-modal" or "multi-modal" shape does not necessarily
mean the data set includes exactly two (or more) "modes;" but rather, that the shape of the data
appears to have two (or more) "humps," which indicates data elements are clustered near two (or
more) general values. When referring to the shape or distribution of data, bi-modal or multimodal does not mean there are repeats of the same numbers in the data set, but rather there are
more than one "clusters" of data points.
Spread of the data is generally concerned with the range from low to high value and can give
indication to the expected extent of the values possible.
Data Trends can also be determined. Trends result when a separate influence or variable is
determined to influence data. Once the relationship between this separate variable and the data
set of interest is established, knowing the value of the separate variable will help determine
characteristics of the data set.
A a contracting professional, you should become familiar with the types of scenarios that will be
w~rked in class, as each one describes a unique aspect of data analysis in terms of Center, Shape,
Spread, and Trend.
('
CON 170, Unit 2 - Quantitative Methods for Conlract Pricing - Page I 33
Center, Shape, Spread and Trend

Average:
.
- a single yalue (as a mean..:: nhiode,
~J
d.1 n) that
~;g ~ificance of a set
summarizes or represents t e _gene .

of unequal values i '! 1.iebsters ~In-l11ist
- A number that typifies aset of numbers (The Free
Dictionary)
Arithmetic rv1ean:
- Sum of the values in a set of numbers divided by the
number of values (observations) in that set
Median:
- The middle value in a set of numbers
For an even number of observations -the sum of the middle
two values di,,ided by t~vo (2)
- 50% of the observations are above the median and 50%

are below the median
- VVhen ~qual to the arithmetic mean, the distribution is often
called unormaP; (aka - the bell shaped curve)

Genter
- Mean (arithmetic average), and
- Median {middle vafue}
/ ~\
Shape
- Normal (mean = median), or 1_ _/

\,._
- Skew (mean"# median).
.::
Right Skew (tail to the right, mean> median) __ _,. f'.:_::::_ Left Skew (tail to the left, mean < median}, or ~ :::::.- /\
- Bi-modal (more than one peak)
- - .-/
\
Spread
...
....
- Minimum (Min); smallest value in data set

- Pi,faximum (Max); largest value in the data set
- Range; Max minus (-} Min
Trend
- V':illan ind~pendent variable help explain variation (spread)
- Size. Quality, Performance
....
CONJ70, Unit 2- Quantitative A,fethnrl.. r, ... ,-,,
,.:
'':!,.,
Scenario #1 : Historical prices paid for radios has been collected from
market ~esearch ~nd properly normalized (i.e. adjusted for content
economics . quantity, etc.) asfollolNs : $166, $154, $176, $164. $155, $162,
and $171 _
- C~lculate the mean by totaling the values and db,iding by the number of
prices .
- Rank order the data, highest to 10\Nest, and:
Find the maximum value .
Find the minimum value .
Find the median (middle) value .
Calculate the range (subtract minimum from maximum).
Develop a histogram by shading in a square for each observed price you
find in the bin annotated on the graph paper_
Draw a vertical line through the bin that would contain the mean and the
median and label it appropriately.
Rank Ordered
Scenario #1
166
154
176
164
155
162
ill
- Mean:/,q
l Medlan:/J't
-1
'Min lmurn: /f//
!Maximum: / 76
I Ran 9_:,:_~ Z
cin~
,. - Page
. AJethods fior...._rrvnlract Prt

t , _ OuantitaJJW
[
/,
111
C0i'l J70,
~
-i
/ 35
- --------
researcn and prop-0r1y normalizeO (i.e. adjusted for content. economics. quantit_.; ,
and $194.
- Calculate the mean, median, and rango while also identifying the minimum
and maximum values.
- Develop a histogram by shading in a square for each obser,ed price .
- Dr.iw. a vertical line through the bin that would contain the mean and the
median and label ,t appropriately.
Answer the fo llowing for each:

Typical Pri ce?
Used mean or median?
In which (# 1 or #2) are you more
confident?
Range?
Rank Ordered
'163
17 1
148
, 158
... 165
131
182
194
Mean:
rl.(
---,
Median: / {;ll
\r,1inimum: l""'J t
i~.1aximum: (9 4-
. ...
Scenario #2. H,stoncal pnces pa,d ro, rad,os, liilS tJ.eM conected fro,n market .
etc .) as foHows : $163, $171, $ 148, $158. $ 165, $ 131 , $182
_j
Ra_12~e:~3
Scenario #1
Scenario #2
"''"'"'"'""''u-;,.,.._, -=
- = = =:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::=============::..:...:
1
Scenario #3_ H , loricaf prico; ,Paid for ril<!1os has been collectod_from market ,roso~rch.~nt 49,
properly normaii,:ed l-- adJusteQ for conter t. economics, quantity, etc_) as foi!ows, $ J
$209 . S 133, s141 , $132 . S2 Hl: S131, $132 , S199, S1a9, $13 1, and S1'.>1, ,
1 ximtim
1
va lues
. the rnean, median, and range While also identifyin~ the minimum and ma
_ Ca
lculate
_ oe,elop a histc?rom by $hading in a square for each ob'>etved price.

_ . . and label ,t
apprc,priately
. one through the bin that would contain the m.,an and the mod,an
_ Draw
a sert1ca1
Base<! on the appearance of yo,u r hi;to9ram, wouio you Y that your dfstributi0<1 ,o1 Left skewed Ctail to the left), or
., Normal. or
d:;R,ght sk@wM (tail to thl!! right}. or
4 . S 1rnodal'7
,~ your ......
"'"'a,,.n- ,;;"'
""iMuifl lo greater than. or le-!.s. than your m~d,an?
Wh,ch averag- if arue ,
':;;;.~I;"',;, mect,an, best typ,fisyou, sample?
I,
I
Rank Ordered
131
149
Scenario #3
209
133
141
:132
)1'}
Bl
132
199
189
Bl
131
MeanJS6
Medlan.l 7J
Mini num '. IJ,I.

t-.
axrmum.l, J9
Range :86___J
----,._r,---~
"
..,
. - J>aae
\3
6
~r0 , Con tract Priem~
l
.
>..fet/10(
Sp
o,wnt11at1ve J~
-~ Center, Shape, Spread and Trend

Scenario#4 Historical prices paid for radios has been collected from market
research and properly normalized (i.e. adiusted for content, econormcs.
guant1ty, etc.) as follows:. $203. $122. $202. $192. $201, $131 , $202. $201.
$191. $112. $141. s20 1. and $202.
- Calculate the mean, median, and range while also identifying the
mm1mum and max1murn values .
- Develop a histogram by shading in a square for each observed pnce
- Draw a vertical lme through the bin that would contain the mean and the
median and label it appropnately .
distnbution
Based on the
is:appear
ance Of your h.istogram, would you say that your

1 Left skewed (tail to the left), or
2 Normal, or
3 Right skewed (tail to the right) or
4 81,modal?
Is your mean equal

.. to. greater than. or less than your median?
Which..
your sample?
average value, mean or meel'aan,. .best typifies
.
Rank Ordered
203,
1n
.202
192
Scenario #4
2(11
131
.202
201
191
112
141
201
202
Mean : l(,S
Median: I~'\.
!Minimum:
VS l
Maxirnum: ttC,
/
Ran~Je : Q,~_J
CON 170, Unit 2 - Ounntit,..,: .. - ,
- ...... , , ,.:n 1ape, Spread and Trend

Scenario #S 1--tiSl orical prices Paid ,for radios has been collected from ma~et
Q
resea!ch
and properly n?rmahzed (i. e. adjusted for content, econom.ics.
, etc.)
as $162.
follows. $149. $1B8 ' $1:;4 $187 $144 ' $196 ' $143, $179.
182, $131
$ uantity
, and
_ Calculate
lhe mean,
median,
and range While also identifying the
mm1mum ana
maxunum
values.
_ Develop a histogram by shading 1n a square for each observed pnce.
_ median
Draw a vertical
hne
ttie bin that would contain the mean and the
and label
1t througt,
appropriately,
Based
onont~e
distnbut1
1s:appearance of your histogram, would you say that your
1 ,Left ske,.ved (tail to the left), or
2.Normal, or
3 -Right skewed (tail to the ri-ght), or
4,81modal?
Which "average.. value. mean or median. best typifies your sample?
Rank Ord ernd

149
l38
15 4
187
144
196
143
179
182
131
ill
I- Mean: - 1
l
1
Median ~
;r,, 1nimum:
I
I
Max1mum.
: Range :
1
--
...
--- -
Scenario #5
Is there a Trend?
Scenario #5 Revisited;
Recall what we said about a trend

- Will an independent variable help explain variation (spread)
- Size, Performance
Wo u Id cons1'd enng
whether a trend 1s
. at play per haps help with Scenario #5? .
can you think
of some size, quantity, or performance attn'b ut es of radios that might
help explain variations in price?
nd
But, weren't those considerations already incorporated when we collected a
normalized the data?
- What was the data normalized (adjusted} for anyway?
Usi~g whatever you came up with as a possible size, quantity, or perfor~ance
attribute you came up with - what relationship do you think it has to price?
- As your attribute increases, would you expect the price to increase or
decrease?
Using the graph below where Price has already been labeled as your vertical axis,
label the horizontal axis with the size, quantity, or performance attribute you
selected and draw the relationship freehand on the graph.
Ran k Ordered
lvfax: 195
149
18S
ms
154
187
187
182
144
156
143
179
Median:1s.2
154
179
149
lS2
131
1E 2
Sum (r}fJ.815
144
1 43
Min: 131
+ Number: 11
= Mean: 165
Range; 1,fax (15'6} -Min (1 31) == 5
f
Mean:
Median:
-16-5.---)
162
Mini_mum: 13;
Max1mum: 19 u
,/ Range: . 65
1
______
Range
Center Sh
.
'
ape
--------=..::::::::--__
S ---:lJ tn rna
__ ' Pre~d anct Trend
Calculation of Key Values
~hat D1ct 'Ne Learn
- Mean : Sum of the Obse _ .

.
.. . .
"'at1ons <livid
.
- Rank 0 ,dered. Listing the Ob ,
. e.d by the number or observ- t
.
.
- Median .. The fnlddle
Value orseivati 0 ,1s. rrorn highest
to lowest. a ions.
th e average of th
of observahons aft
.
highest
er rank
th e 0 bseivat1ons.
e_rnidd!e two 1! an even number
- Maximum
: The
Val Ofderuig
. .
. .
.
- M1n1mum:
The lo,Nest valueue. inttthe rank Ordered observataons.
- .
- Range: The subtraction f thn ,e
_. rar1k ordered observat1ons.
. Key Distribution
.
e M1n11riurn
frorn the Maxirnurn
Understanding
Concepts
- Center? There are three (3.) C
0
med1an eand mode
.
_. .
.
mmon measures of central tendency: mean.
I
- Shape? There are four (4) cornrnon disllibution shapes: normal, right skew (tail
to the right), leij skew (tail to the left), or multi-rnOdal.
- Spread? The range using rna~irnum and minimum is a basic measure.
_ Trend? Even with data properly norrnali2ed ro, content, quantity, and
economics; certain size and/or performance attributes may also help explain
prices when faced with Wider spreads (high range) and/or multi-modal.
Analysis Concepts Learned

When the meao
d' ~ -b f
.
~d Median are dos.@ togtltttr, thi$ could be a i:gn the distr,bu~1on is n.ormal q1,
unless it i$ a multimodal 'is,n u io.
. .
l/tfitn Sl'Y'~II d-at~ sets

- _th:.r~ mayo
" r may. not be an o.u:
.. 1c1a.1
. " 4mode thus gr:iphic al ana1,$1s is h~pful m
ldill'IU!ying cttStllbuhon 1,pes_
.
'b t,ons (larger ranges ) w1ll leav@
rnl!d
.
.
.
.
.
.
,
s
undttr
no~ma~
distribufons.
wrdl!r
distn
u
, Equal meaM. a!ld
ia.;i riQ;; 1vs. #2)
.
yo11 less con ,1oen1 (See a
b th oormal ai-.d ~ modal u, r (eg

d
.beare
ti-.,,.e<M!erent
Sv
. me
' ... o.rtLn
very
e dstnbuhon
co~
.~ be :skewed one way or the o :e
.
~ e may
Mea_
ns an,d fr:~ .i,~~hen
tfae.:,
, close under
::J
.
d,st11!M10ns. btJl "' l
.
\uoe~ in the tadlo the
fleeted by tile extreme va
Scenarios #3 and #4,.
. - tr~an is mote a
- ,
skewl!<l
lM
' Will! distr,bt1oos

thanright,
the meoian
... me ,alues in the taa1o the left
right .ind will be larger
.
re affected by tte e,tre
.
. . he me~n is mo
.'
.
ke-,Ne,:f
1ei.tan.
t.
\Vrth
distribut10,,ti:n
lhtt med
., , the data, but this .fS Lrue. ,,hen the da,a are
and will
be less
. typ1,y
10
s Ue. best "'a,,-10ra9e
The mean _Is. 0. flonduseu a-
t h,pi~ tt-e da~a.

,e best a~erage to l'Se O '' ,. . ,,
normally d1stnou1e ,. n mai bet
. . . es ~-anab1h.) l
.
.
tr~
me,u1a
d
(~>Jh
rarg ,
dh .,.wed
data,
.
,... ~., '1//u
~,....
d ta 'ha"h arge
', ..I sprea
VVhen lfea,"':, .
1 data, or a,, normat:ll!u
. . ted ar-<l properly
.J .
skr:
e-d
multi!fl;Ja
b ' IY areto aIOgi::il
wesl~/ atfeel prate 10
When_findhg
,f IIorhas.
irWM ' ti,een proper\,
tr greator_var ~e~1lCd
in,,,1>stigat1on to
.. t . or dala v,, ~ay be ypo
''l1--rt1cdal d:l~clerfor nfln~O
~l\u ~.111g~ ~orsdere,
After skewe-:l_dj\f
1 O
aa~
riorma i1.2ed.
a trer.d fl%
co, s~:;ie-r whetr.... r
f d ta calcu Iat
O
Lesson 4 -- ELO 2.03 Given a set
a
given data.
e the Net Present Value of th
. ObJ. ective
Enabling Learning
0tt111t l;.t;;~~~ ,Jt',,(r\rlltt
the Net Present Value of

2.03 Given a set of data, calculate
the given data .
Introduction
In this lesson you will analyze a set of cash flow data, and calculate the Net Present Value. First,
you will learn about the foundational concept of the time value of money. Then, the lesson presents
the process for calculating present value, and concludes with calculating Net Present Value.
Time Value of Money

Consider ... _
- $1 paid (or received) in the future does not have the
same purchasing power $1 paid (or received) today
- $1 today is worth more than $1 next year because $1
can be invested now and earn interest
- If you borrow $1 today, you pay back more than $1 next
year due to the cost of borrowing (also called interest)
- In addition, generally, $1 today is worth more than $1
next year due to inflation
fift1C Value of ~oney

fo introdu~e the Time Value ofM
ear, at an interest rate of 5%. Ho oney concept i
.
y r?
w Would We ' lllag1ne Puttin $ .
yea .
calculate the
1 tn a savings account for one
re value of the $1 at the end of the
fu;
rirne Value
.
Time value of rno
of Money
earning and b . n~y calculates th

C r I
~rrowing), inflation e effects _of interest (both
. a cu ate the time value
and deflation over time.
rnterest rate (t) of 5%, an~fa~~ney a~ follows, assuming an
- Future Value ::: (P
me Period (t) of 1 year
resent Valu } X
- Present Value = (F t
e
(1 + i)t
u ure Value) / (1 . t
0
r, more commonly P
.
+ r)
. resent Value - F t
Examples:
u ure Value X ( 11 (1 + i )t)
V,/hat is the FV of $1 invested t d

Future value = '$1 '(1
o ay for 1 year at 5% interest rate
l i + .05) y~ar
= $ 1.05
VVhat is the PV of $1 05 to b
e received next year 1f the interest rate is 5%?

Present value = ($1.05) / (1 + .05) ,.-:'ar
==
$1
Example:
With the same process and fonnulas provided on the slide above, you can see how you
would calculate the future value of$150 after 3 years at 5% interest. (Notice: the PY is $150, i = .05,
and t == 3).
From Time Value of Money to

Present Value (Example)
Calculate the future value with the following data
What is the future value of $150 after 3 years at 5%
interest?
= Present Value X (1 + i)'

(t + i) t
FV = PV x
5 3 yrs
lue
Future Va
= $150 x
FV = $1 73.64
FV
(1 + .o
f 50A the future value of $150
n interest rate o
Thus. at a . ~ 173.64.
after 3 years ,s ~
o,
l for Contract Pricing - Page \ -13

.
Quantitative Methot s
,,., n. ~ o 1n. Um t 2 - -
..,.._.--
V Iue Analysis
From Time Value of Money to Present
: can compare the present value of future cash
f money concept, w
. The example that follows 1s also
nt value analysis.
Next, based on the time va1ue O
flows. This is accomplished through prese G des Vol 2, Chapter 9
Reference lll '
included in the Contract Pncmg
cash, or offers "free financing" for
000
Consider a car dealer that offers to sell you a c~r forJ;r;, Certainly, you'd prefer to pay the $21,0oo
$21,000 due in I year. Which is a more attract1vedo m .interest.
later, so you could invest the money for 1 year an ea
,, h ffi s to sell you the car for $20,000 cash on
Then, to persuade you to "drive a car home today, e? er unt 1 year from now, with his special
.
.
$ 000 1r
pay the entire amo
dehvery (now), or sell 1t for 21,
you
late and compare the present value of
5% financing. Which deal is best? To find out, we muS t ca1cu
each alternative.
V) f $20 000 since it will be paid

The offer to pay $20,000 now has a present va Iue (P O
,
'
"now."
The other offer has a future value of $21,000. What is its PV?
To calculate the PV: use the same formula as we used in the earlier examples:
'
FV = PV x (1 + i)
In this example, we have the future value of $21,000, and we are trying to calculate the present
value (PV). Therefore, we manipulate the equation as follows:
PV = FV / (1 + i)
t which is the same as:
PV
FV
1 / (1 + i) t J
To calculate the present value, insert the values as follows

The "future value'' of the payment, FV, is $21,000
The "interest rate" at which we would borrow money, i, is 5%
The timeframe we would borrow the money, t, is I year.
Finally, insert the values in to the PV equation, and solve for py:
PV
PV
PV
$21,000 x [ 1 I (1 + .05) lyr]

$21,000 x [ 1 I 1.05]
$20,000
Therefore, by comparing the present values of each offer, we see these t

. .
essentially identical. They both have the same "present value" of $ 20,00;o pncmg arrangements are
Now, we will work an example of calculating the present value of a -1::utu
i1
re payment.
CON 170, Unit 2 - Quantitative Methods for rm,,.-n,.,
n .. , _.
,/
1---------Example: On the slide beI
.
If h
ow notice h
outflow.
t e mterest rate is 43/c
ow you would c I I
from today. (Rounded to the ne o, you could figure out t~ cu ate the present value of a future cash
arest dollar)
e present value of $300 to be .d 3
pa1
years
From Tim V I
e a ue of Money to
. Present Value (Example)
alculate the Qresent 1

outflow
va_y. of a sum of a future cash
If the interest rate is 40

.
$300 to be paid
Ya,
What rs the present value of
3
nearest dollar).
years from today? (Round to the
Present Value - F
-
uture Value x. (1 / (1 + i)f)

$300 (1 / (1 + .04)3)
PV =
PV = $300 ( 1 / 1. 1249)
PV == $300 (.8889)
P V = $267
Thus, at an interest rate of 4%: $300 to be gained in 3

years has a present value of S_26J__ .
Net Present Value Analysis

With an understanding of present value analysis, it is time to learn Net Present Value analysis, or
NPV
From Present Value to

Net Present Value
What is Net PresentValue?
The difference between the .present value of the
receipts (cash inflows) and the present value of
expenditures (cash outflows) is net present value
rement the alternative with the best net
fn proctu Jue 1-'5 the alternative with the smallest
presen va
t f
payment net present varue (the least amoun o
cash outflow)
_.
the terms PV and NPV are used
but key is to understand we must
Sometimes, bf
interchangea Yr t varues of both cash inflows
anafyze the presen
and outflows.
/ ./
. .
Contract Pncmg -
' NI 70, Unit 2 - Quantitative Alethods fi>r
co
Pa((e
L
/
I ./5t
il
\.
'
.i-
PV and NPV are sometimes used

al sis includes calculating the Py
As we learn Net Present ':a~u~ orta~t to recognize.~~ an s~nt value. To calculate NPV fi of
synonymously; however, It IS t~P s-thus, the tenn net pre I
f the cash inflow.
re
both cash inflows and cash out ow
h
dd the present va ue 0
out the present value of a cas h ou tfl ow' t en a
(NPV) recognize th e terms
to sell the car (cash

fl ow) a Car now' .with a plan
Example: You pay $10,000 to pure.hase (cash out
. o/c
Given this situat10n w h ere t h ere are both
4
rate:~ cai~ulate the NPV, as shown on the slide below.
inflo~) after 2 years for $3,000. The mtereS t

cash mflows and cash outflows, see how you wou
If the interest rate is 4%, what is the net present varue of buying
a car now for $10,000, then selling it in 2 yrs for $3,000?
- Purchase price is already at present value: ( $101000).

- Serling price is a future value of $3,000 in 2 yrs.
Present Value == Future Varue X (1 / (1 + i)f)
PV = $3,000 X (1 / (1 + .04 )2)

PV = $3,000 X {.9246)
PV = $2,774
Finauy, the NPV is the net sum of the inflows and outflows:
($1 0,000 purchase) + $2,774 sale "' ($7,226) NPV
In conducting NPV calculations for Government

...
'd
acquts1t1ons there
t
cons1 _er: the interest rate (generally called a "discount rate" for NPfe wo key factors we must
scenano. As we have already seen, these variables are represented b )}~d the timeframe of the
Y I and "t".
Two Key Factors Affecting NPV

~----..:::::::::=::::::::::::::=:::::::::::::::::::::::::::::::::::=:::::::::::::::::::! - - - - - - --- -- -i ::: timing
discount
or interest
rate
PV = FV orXinterest
(1 / (1 rate,
+ r----=::::..
i)t)-_
I t"
ot'the
cash nows
Discount,
"i"
- When calculating Present value, the interest rate is

generally called the "discount rate for we are
"discounting a future value back t~ present value
- The higher the discount rate, the lower the present
value of an expenditure at a specified time in the fu,tu~e
- the
Select
"i" based upon the maximum timeframe for rm
scenario
Assess the timing of the cash flows, "t'
_ Payment at award, t = O (already at present value)
_ Completion of 1st year: t = 1
_ Completion of 2nd year: t = 2

- Maximum timeframe for
{Ir is lie at the finar cash flow
Two Key Factors Affecting NPV

Setting the t-value
t=2
t=O
t=
1.
Jan 2014
=3
Jan 2015
. the first period;

d date through . d
. the awar
h first per!O , .
Note: t = 0 from completion of th: second penod,
Then, t = 1 upon . ompletron of !he third penod.
. . .
Jan 2012
Jan 2013
= 2 upon
upon com
c pletion of .
Then, t _
Then t - 3
How to Select the
".,,
an
d "t" values for NPV in DoD Acquisitions
.
h Offi Of Manaoement
and B d
0
Per FAR 32 205(c), select from rates provided by t e
ice
u. get: O~fB
.
0
c l A A d. C 0MB rates reflect standard assumptions reoardmg
mflat1on and cost 01
ircu ar ppen ix .
.
1 th ohout Federal Govt Di

borrowino money and provide consistency 1Il ana ysis rou 0
scount rates a
posted o;the oMB website: http://www.whitehouse.gov/omb/circulars a094/a94 appx-.c
rr
I
94
Per FAR 32.205(c)(4), use the nominal discount rate. The ~ominal interest rate ~eflects the real
inflation rate plus a risk factor associated with normal lendmg. We use the nommal rate because it
more closely reflects the business environment where contractors borrow and repay money in the
course of doing business. Contractors commonly refer to this as their "weighted average cost of
capital." The "real" interest rate accounts for the effect of inflation on an investment, and therefore
indicates the growth rate of purchasing power earned from an investment. For example, ifyoueam
5% in one year, but the inflation rate is 3.5%, the "real" interest rate earned is 1.5%.
Remember: in conducting NPV analysis, select the discount rate based on maximum timeframefor
"t" in scenario. If the maximum timeframe is less than or equal to 3 years, use the 3 year nominal
rat~. If the maximum t-value is beyond 3 years, FAR 32.205(c)(4) gives guidance: "Where the
penod ~f proposed financing does not match the periods in the 0MB Circular, the interest rate for
the penod closest to the finance period shall be used."
Selecting the 'T' and "t" for NPV

in DoD Acquisitions
~f ~e;:a~~;;f~~~) ~~l e_~~
Di~~ount rates are posted
f~M8ract~s1rcular
provided by the Office
A-94 Appendix C
O:
th
http :u v~1.,vw .Vt: h it eh o use.gov/on~bi ,~ } 1 e 0MB w~b~tte:

-Per FAR 32 .205(c)( 4 ) use th - c~r ..,,Jl~rs_aOS4 a94_a ppx-c
.
e nominal discount rate
The discount rate is based

.
on ID~ximum timeframe for "'f' in
scenario:
- If <or= to 3 years : use the 3
.
.
- If the maximum value>
-year nominal rate.
period of proposed ft
.3 years , per FAR 32 2or.( ..
Circular, the inter-est~~rc;no does not match the ~ c)(4), Where the
shall be used ,,
a e or the period closest t0 Pttenods
the QMB
1e finance period
The following slide presents a com .
panson of the Re In
Rate Notice th
sho~est- tern~ re:i~mmal discount rates are positiv: fo ts~ount Rate and the Nominal Discount
real discount rate ind:~~~n\~ates are actually negative I
;ear~. However, in 2014, the threeti\e
s e expected inflation rate ~ill sb es~nbed in the slide above, a neg:atePer FAR 32.205(c)( )
.
e higher than the nominal intere 5f
4 , we w1 11 use the nominal d.
I scount rate i
n our NPV assessments.
r;
CONJ7o u .
, mt 2 - Quant 1,
JS
.
f {1ge I
ative Alethodsfor Contract Pricing ~
Discount R
- ates per OMS A- 94
(Example J
Appendix C
~:=
--====~~~~a:n~2:0~1:3~R
~a-~t-e~si)~~~-~aturity
.1n Years
Nominal
Discount
Rate
Real
Discount
Rate
< 3-years
1.4%
-0.8%
0.5%
1.1%
7-years
10-years
20-years
-0.4%
1.5%
0.1%
2.0%
0.8%
2.7%
30-years
1.1%
3.0%
5-years
(Scen~ri o Tim ofrarne)
(Cost of Borrowing)
(Cost of Borrowing 8 lnRatro n)

Pe, FAR .32.205(t _)(4 ):
use th e nomir.ai ai:.co1..nt rate
Simplifying the NPV calculation.
With an understanding of each element in the NPV equation, we can simplify our calculations as
shown in the 2 following slides. The first slide explains how to simplify the PV equation by
substituting the expression "[I / (I + i)' ]" with an element called the "Discount Factor," or DF
Simplifying the
Net present Value Calculation
N t Present Value is based upon :
The equation for calculalln9 eC h flow X ( 1 / (1 + i )' l
C)Gt;o s~.lu:qlJ'!'oitJCll iJ"l l'f'lt':I
Present Value '" future as

.
f ( 1 (1 + i r}, select the
lifY the ca1culat1on
To s1rnp t
1
(DF)"
trorn the "Discount Factor
Discount factor
bstitute the DF in place of
approp~1a e
xt slide, then su
Table!'l 1n the ne
( 1 / ( 1 + i Y)
th Discount Factor Table,
., l OF frorn .... e
the appropr1a e "t" and 1 values
To 5 e1ec1
deterrnine the
@PPropriate
I ulation is based upon:
preserit vaiue ca c flow X Discount Factor
finallY, the Net e "' future cash
present valu
oFr }( Of
p\/:: C
t
.
?-
co-"'110. unit,,
I tsfar Contract Pricing - Page I 49
0ucI11titafiVe .A et 10 l
, f
f / rs./
f JL
....... -
.de For example, if our NPy

the next s11
.
o/
f
.
ng DF value rom
dscount rate 1s. 5 / o, we can
f
thmetic by P1uggi
d th current 1
We can s1mph your an.
. fi me of 3 years, an
e
. 9851.
scenario included a max1~um t_1me ra Factor from the table below. ~
simply select the appropriate Discount
-------,
Discount Factor Taboi;count Rates
' t...'11 IJ.; ,t,'\f.y
94' 3 and 5-year

Per 0MB Circular A- ' s
nt 35 of 20 Jan 2013
(assume Nominal Rate, curre
Scenario Length
Disc Factor
Disc Rate
1.FS
0.997 5
1.rn
0 .9945
0. 5
c.s~.
o.s;-s
0.5"~
0 .9950
1 .1%
0 .9 891
0 .5%
0.9925
1.1
0 .9837
1.5
C.9901
1.FS
0.9784
0. 9730
I
f
Disc Factor
Disc Rate
Yea.r, "tll
11
5 years
3 years
C.5 %
2.5
0. 5';:,
0.9876
1.HS
0 .5%
0.9851
1 .17~
0.96-77
3 .5
1.17-S
0 .9624
1.1~
0 .9572
4 .5
1.1;":
0.9S20
1 .15~
0.94E8
l/,e 'II use this table for our examples!
At this point, we have learned all the elements for calculating a Net Present Value problem as DoD
buyers. Because NPV analysis generally requires calculations of cash inflows and outflows over
several time periods, CON 170 NPV problems will be presented using tables like the one in the
example below.
t:iercise 1. Using the table b I

considering th~ purchase of a vehicl: ow' Solve the fol 0 .
i\Ssume you will use the discount r t now for $IO ooo / Wlng NPV problem. You are
slide). What is the NPV of this arra: e as published by
w!ll sell it in 2 years for $3,000.
gement?
Circular A-94 (20 Jan 2013, previous
o;~
,C alcular
ing Net Present Value
Exercise 1
To simplify th~e-:N:P~V~:::::::::::.~ . ~ ~=====================
follows:
Timeframe
calculations, use a table as

Cash Flow
Discount
Rate
CF
Discount Factor
PV
OF (pert and i)
CFX OF
TOT.AL
NPV
For additional assistance, solve the NPV problem one step at a time by filling in the blanks below,
and then using that information in the table provided above:
Step I: Identify the timeframes and amounts of the cash flows:

First, the $10,000 payment, with t = 0 since it is at the present time.
Next the sale of the vehicle means a $3,000 cash inflow 2 years after the
purchase; therefore, t =7 006
. scenano--2
.
e:
Step 2: Identify the correct
h discount
mrates:
timeframe for thts
years. There1ore,
we
- Determine t. \maxtmt. u nder the "J-year Scenario" columns in the Discount
will use the m1orma ion u
Factor Table.
h.ts
11 b
% for all cash fl ows mt
Therefore, our discount rate w1 e - - - - - scenario.
.
F ctor. per the Discount Factor Table
Step 3: Identify the correct Discount a
'
CONJ70,
r' , ., -
u nt ~
. . \ rethadsfi>r Contract Pricing - Page I 51

Ouanllta 1,ve J 1
-
- '-_...
rio Length" data, at t == O
h "3 year Scena
DF .
,
F the $10 000 payment: under t e .
t factor Table, the
~ IS
or
'
.
o,r, Per the D1scoun
the discount rate 1s

. Length" data, at _t_ __
For the $3,000 sale: under the "3 year ~cenan~actor Table, the D F i~
oJ.o. Per the Discount
the discount rate is - - -
x DF) an d su m
Step 4: Calculate the PVs of each cash flow (CF
'
them to find the NPV.
For the $10,000 payment:

X
For the $3,000 sale:

X
.
.
b
cash outflows, sue h as
Take special care to use negative num ers. ?r
bers for cash inflows, such
payments (placed in parentheses), and positive num
as sales income (not placed in parentheses).
. . h NPV
The sum of the PVs is _ _ _ _ _ _ _ _, which is t e
Step 5: When evaluating two or more pricing arrangements, compare each, and determine
which NPV offers the best value.
Now that we are familiar with fundamental concepts of net present value, we will complete several
real-world problems using net present value analysis, using the 5-step process stated above.
rcise 2. Solve the foUowino NPV
E~!A'
DCMA, and a Pco are anal~zin
h Problem. Consider the following scenario where

gt e area of deferred compensation:
Exercise 2: PV of a Payment
Under CAS 415 Accounr

the cost of a cash bon ling
for lhe Cost of Deferred Compensation O
based on the m:,esent ~s be received 1n a future periOd is measured
assigned to the pe . cl 1
_aru!t,01 th e future benefit to be received and 1s
no n Which the contractor incurs the obligation
xample:
- The contractor selected John Smith for a performance award of

S5,000 on December 31, 2012, Which is the last day of the
contractor's fiscal year.
- The S5,000 award is payable on December 31, 2014.
- The S5, 000 payable on December 31, 2014 must be accounted for
in 2012, but must be discounted using the Treasury Rate in
existence as of December 31, 2012.
How much of the cash award would the contractor assign to FY201 2?
Exercise 2: PV of a Payment
01scount Rate ~ Dtscount facto,
- r,meframe
TOTAL NPV
OF (per t and I)
CF
CFX OF
--
f .,ft.m/i;.
" Contrac t Pricing - Page I ~

,or
:Exercise 3. Solve the fol
different proposals and com lowing NPV p b

. e1t
. h er " end. ofyear'' n pare th e1r
. NPVs T ro
with
. lem In this exa
e,rnmple illustrates how tw tscount Factors, ~r }s example introduc:{he, you will examine two
the timing of cash flow s. o proposals with th e mid-year"
Discount Factors
ow .we
mus~ _calculate NPV
same face
In add1t1on this
1
va ue can have different NPV~ based on
,------
Exercise 3
Compare NPVs usin .
and r f1d y
g End of Year
v
ear Factors
Scenario: You h
t
ave been t as ked to lease an
1 em for 3 years y
- Contractor A pr~ :u get two proposals:
0
year for three ye~rs ~hto ~ease the assetfor $1 ,200 a

contract signing w:t.h e ir5t pay.ment is due at
, subsequent
each annual opti.on
.
payments due upon
exerctse.
1,
- Contractor B pro
year for three . . poses_ to lease the asset for $1 ,200 a

first
..
. years, with 36 monthty payments. The
pay~ent ts due at contract award with
sequentmr, monthly payments afterN~rd.
In this scenario, we will calculate the NPVs of each offer, and then compare them. Before beginning
our 5-step process, notice the differences in the proposed cash flows. Contractor A proposes one
payment each year at the beginning of each year, for a total of 3 payments. Contractor B proposes
one payment each month for 3 years, for a total of 36 payments.
These different cash flow schedules proposed by Contractors A and B introduce us to "end of year"
and "mid-year" Discount Factors. The slide below graphically depicts the cash flow of Contractor A
compared to Contractor B. From what we have learned so far, would you prefer a payment schedule
where you received the entire amount at the beginning of the year, or would monthly payments be
more advantageous?
\tl
Exerc1S
f Year
e3
NPVs using
End o
- -----------~
conipar ~ r1d Year Factors
and 1 -
oi
a1
P,
ij
contractor B' is paid $100 at the beginning of

each month, beginning at contract award
For Contractor A, each of the cash flows (payments) is made at the beginning of each year. When
a cash flow is made at the very beginning (or the very end) of a year, "t" is equal to a whole number.
The Discount Factors that accompany such "t" values are known as "end of year" Discount Factors.
The chart below is based upon the Contract Pricing Reference Guide, Vol 2, Chapter 9, and explains
when to use "end of year" Discount Factors in solving NPV problems.
Exercise 3
Compare NPVs using End of Year
and Mid-Year Factors
In Government NPV analysis , end of year factors should be used in

cases such as :
Us.i"li; Cootrdding tin"Ang
u~r.g CO(lttOdinig titting terms

1/~,en exd'-3n,ge of
cashlfow oc.wrs
CO:'n".$
lhi;5 is t"le 'rorr.""AI' tim:ng ,af the

e!'ld <.f the b-as.v p(ffiOO or lht sliilrt
s:ord option ~
ot lt 11& fir:sl -Optia'I ~ fiOd
&rid th.8 :slar1 or Ule thi!d
~onpe-ricd
ttC'N
t=O
Jan 2012
lhisc i:s ~O 'r,om'l.ll'
timing~ U-.e e:)(1 or lNl
t =1
Jan 2013
t=2
Jan 2014
t=3
Jan 2015
As the chart indicates, analysts should use "end of year" Disco t F

annually, at the beginning or end of each year.
un actors when cash flows occur
CON170, Unit 2- Quantilative Miethods for Contract Pricing - Page.J ,
111 examining Contractor A's

fyear" Discount Facto C proposed cash flow of 3
0 d =
The chart b rs. ?ntractor A's pro os
annual p~yments, it is appropriate to use "end
2 .
an t N.
h
elow htghlig,hts the " Pd ed cash flow ts 3 annual payments at t = 0 t = l
'
'
'
Tabl e. ot1ce' t e " t" va l ues which are hen Of year' , Discount
Factors in our Discount
Factor
Therefore, to calculate the PV of c 00 w ole numbers have "end of year" Discount Factors
piscount Factors highlighted in the ~rdactor A's payments, we would use the 3 "end of year';
s11 e below.
Per 0MB
cD iscount Factor Table
<assumircular_A-94's 3 and 5-year Discount Rates
For Offeror A
use end of
y-ear" Discount
Factors
e Nominal Rate , current as of 15Jan 2013)

Scenario Length
r~=--=~--::-_--:--,-----r---~--_j
"t"
Year,
----...1
s year.s
3 vears
Dic Factor
Di!tt Rate
Oi?.c Fa.cto.r
r=~~~~~~~~~u
0
Dir.c Rate
0 .5%
1 .1%
C. 5
0 .5%
0. 997 5
1 .1
C.9"3~S
0 ,5;6
0 .995{)
1 .E S
C.3 S91
1 .5
0 .5 3'i
o.-ss: s
1 .1~
C.9837
0_ 5;=.
0 .9'9Dl
1 .1.
tJ .9 78 4
2. 5
C.5%
C.9S76
1.1%
C.97 30
o. 5;.=.
0.9851
1 .1
C.967 7
3.5
1 .1%
C.%2 4
1 .1%
C.9572
4.5
1. fa
C.9S 20
1 .F ~
: .9.!E&
,"ie'II use this ta ole for our examples!
But let's take a look at those circumstances that may call for the use of "mid-year" factors. The
CPRG Vol 2, Chapter 9, introduces the "mid-year" Discount Factors for solving NPV problems.
Exercise 3
Com pare NPVs using End of Year
In Government NPV analysis . mid-year factors should be used in

cases such as:
3. A single. mid-year
2 . Cons ecutive
1. Consecutive
payment
payments every 4
monthly payments
months
t=
t=
t- ,:,
t = 2.5
= 1.5
t
2 3 ,
s .a 1 t t
~c 11
t= 1
12 trt-rls
----------=-
P/:rt. t
L_________________
. t
? -
CONJ70, [).m ..
Pa~e / 57
, fi Contracl Pncmg - ,.
Quantitative Methmb . or
In the chart above:

_
. 1 des 12 monthly paymen ts Rather than sum the present
The initial period (when t - 0) me u
ld
10 then 1/12, then 2/12, then 3/12 ... all the
the
here
t
wou
equa
'f the entire years
' cas h fl ows usmg
t
values of each of the 12 paymen s, w
I
.
1 1 te the present va ue o
.
Id
t t
" .
way to 11/12, we can simply ca cu a .
actor Table below, this wou equa e o a mid-year''
"mid-year" t-value of .5. From th e Discount F
DF of .9975.
h t = 1) includes 1 payment every 4 months, which
The next period in the chart above (hw en
the present values of each of the 3 payments
th ear Rather t an sum
'
e can simply calculate the present value of the entire
equates to 3 payments m e Y
8112
where t would equal 1, then 4/1 2, th en
,wb
t _ 1 and t = 2 which is t = 1.5. From the
the " mtd-year" t-value etween
year's cash flows usmg
" "DF of' 9925
Discount Factor Table below, this would equate to a mid-year
d th h rt above (when t = 2) includes 1 payment at the 6 month point. In

The fima l per10 m e c a
.
I h If
this case simply calculate the present value of the year's cash flow by usmg th e t-v~ ue a way
between 't = 2 and t = 3, which is t = 2.5. From the Discount Factor Table below, this equates to a
"mid-year" DF of .9876.
As the chart indicates analysts should use "mid-year" Discount Factors when an offeror proposes
consecutive monthly, ~onsecutive quarterly, or even mid-year payments. The "mid-year" Discount
Factors enable us to calculate the present value of consecutive monthly payments, quarterly
payments, and a single payment in the middle of a year with a single calculation, using a "t" value
that ends in ".5".
Now consider the cash flows for Contractor B's offer. With proposed cash flow of 36 monthly
payments, should we execute 36 calculations to determine the PV of each payment? Though some
members of the pricing career field may enjoy doing so, there is an even simpler approach.
In examining Contractor B's proposed cash flow of 36 consecutive monthly payments, it is
appropriate to us~ "mid-year" Discount Factors; but, do we have to use the "mid-year" factors and
make 36 calculat10ns? Thankfully, no. The "mid-year" Discount Factors enable us to calculate the
PV of the 12 monthly payments in a year with a single calculation. Thus, for Contractor B's
proposed monthly cash flow over 3 years, we can calculate the PV with 3 calculations (not 36) using
the "t" value for each year from the 0MB Discount Factor Table: t = .5, t = 1.5, and t = 2.S. '
~h~- nex:hch,~; highlights the "m~d-year" D~scount FFactors in do~r 0MB Discount Factor Table.
o tee, e
va1ues for the "mid-year" Discount actors en m ".5". To calcul t th PV f
Con t rac t or B 's payments, we would use the 3 " mt'd-year"D'1scount Factors highl'a he de
0
following slide.
ig te on the
PAr
arm c_Discount Factor Table
y
ircular A -94's 3 d 5
(assume Nornin R an
-year Discount Rates
'daiI ate, currentthru Dec 2012)
----~2-====~~=~"
For Offeror s.
us e ' midyea r' discount
factors
Scenario length
3 years
Yea.r, "t"
0
C .5
1
1.5
2
2 .5
Disc Rate
5 years
Disc Fact or
Disc Rate
0 .5%
c. s;s
c.s;.,:.
1. 1
0 .997S
1.1%
C. 9'9 ~ 5
0. 9'350
1.1
C.9 S9 1
0 .5%
0.992 5
1.1
0 .9&37
C. 5
0 .9901
1.1%
C.9 7&4
0 .5%
C.9&76
1 .1%
0.9730
0. 5
0 .9 351
1 .1
0.9677
1 .1;s
0 .%24
1 .1%
0 .9572
1.1%
C.95 20
1 .1 ~
: .9~E8.
3 .5
4
4. 5
Disc Factor
v'I.J e II use this ta ble for our examples!
With this understanding of "end of year" and "mid-year" Discount Factors, we are ready to calculate
the NPV of each offeror, and detennine which is most advantageous to the Government. We will use
the 5 step process to help with these two scenarios. Begin with Contractor A:
Step 1: Identify the timeframes and amounts of the cash flows :

Assess if "end of year" or "mid-year'' factors are appropriate - in this case, we
have payments at the beginning of each year, for 3 consecutive years.
Exercise 3 : Step 1
End of Year or Mid-Year Discount Factors?
What is the timing of the 3 payment~ for Contractor 'A'?

_ Payment re-quired upon contract award
_ Next payment upon end of base period, beginning of 1s.t o~lion
_ Fmal payment upon end of f Jt option, beginnmg of 2r4 option
Therefore, we must use (circle one)

- E nd of y 8 ;.1rf/ or Mid-year factors?
Cash flows occur: (insert a value for "f' )
contr,act award, t = _
End of base period, beginning of 1st option, t = - End of 1 st option, beginning of 2nd option, t = -
. .
or Contract Pncmg
. 2
CONJ70, Umt -
Quantitative M ethods fi
-Pa<,?,e / 59
~
.
F ctors are appropriate.
c- Discount a ward There1ore,
_t -- __
. made upon a
.
cA $1 ,200 payment, is
.
d One year later. There1 ore, f :::::
ent 1s ma e
--Another $1 ,200 paym .
d ne year after that. Therefore, t :::::
A final $1,200 paymentls ma e o
-
Step 2: Identify the ~orrect ~iscount r~es:h. cenario--3 years. Therefore, we will
- The maximum timeframe ior t is s
. ,,
.
Use
the information under the "
-rear Seenano columns m t h e ~
Factor Table.
11 be
% for all cash flows in this see .0
Therefore, our discount rate wi
--nan. _
Step 3: Identify the correct Discount Factor, per the Discount Factor Tab!e
- First payment of$1 ,200, at the t & discount rate above, DF IS _ __
- Next paymeni of$! ,200, at the t & discount rate above, DF is ___
Final payment of$! ,200, at the t & discount rate above, DF is ___
Step 4: Calculate the PVs of each cash flow (CF X DF), and sum them to find the NPV
- Calculate the PV of each of the three $1 ,200 payments in the table
The sum of all three PVs is _ _ _ _ ___, which is the NPV
Exercise 3 -- Offeror A
Compare NPVs using End of Year
Offeror A
T1meframe -
Cash f low
CF
Discount Ratel. o ,scOurit Factor
I
-I
------ ------- -- - - -
PV
OF (per t and i)
CF .X DF
-----------..---. - -
. ~~-- ------- - -/
I
TOTAL NPV
___J
Step 5: When evaluating two or more . .

which NPV offers the best value Befi pncm~ arrangements co
Contractor B :s offer.
ore domg so, we must' lmpare each, and determine

ca cu/ate the NP V of
Now' execute the 5-step p rocess for Ott

Step I: Identify th .
eror B.
e ttmeframes d
- Assess if"end of y a~, amounts of the cash flows
have payments at the
earbeor "mid
. year" '.iactors are appropriate:
in this case we
consecutive years_ 36 ginning of each mont h , every month, for 3
'
,-------monthly payments.
Exercise 3 : Step 1
Identify Cash Flow Timing,
Calculate the Discount Factor
What is the timin of th 36

- First payment . gd
e
payments for Contractor 'B'?
is ue at contract award
.
- Next
35
. payments are made monthly
- 36h (final) payment due upon end of 2"'Q; year
Therefore, we must use

- End of Yea r or Mid-year factors?
- Cash flows occur when t equals __, __ , an. d
~ - - - - - - - Discount Factors are appropriate.

Thus, the 12 $100 monthly payments in the base year will be calculated as a
single cash flow at t =
The 12 $100 monthly payments in the next year will be calculated as a single
cash flow using _t_ __
The 12 $100 monthly payments in the final year will be calculated as a single,
$1,200 cash outflow using _t_ __
-----
Step 2: Identify the correct discount rates:

The maximum timeframe for this scenario--3 years. Therefore, we will use
the information under the"
-rear Scenario" columns in the Discount
% for all cash flows in
Factor Table. Therefore, our discount rate will be

this scenario.
Step 3:
Identify the correct Discount Factor, per the Discount Factor Table
15
_ -
First year's payments of $1,200, at the t & discount rate above, DF

Next year's payments of $1,200, at the t & discount rate above, D~ i_s
Final year's payments of $1,200' at the t & discount rate above, D ts - -
l fir Contract Pricing - Page I 61
CONJ 70. Unit 2 - Quantitative Methot s. o
CF x DF), and sum t~em to find the Nl>v
Vs of each cash flow ( $l zoo payments m the table

Step 4: Calculate the pthe PV of each of the three ' which is the NPV.
.
====~
.J ::::~-----,
- Calculate
pVS 1S
. . .c
The sum of all three
. - . -- Offeror B
---Exercise 3 . g End or Year
-~=~
- -------=--=
cornpa.re ~~vdsYuesa,.1rnFactors
and s\i,1
-----~--==----
---------:::-------.:::.::::::.:..-: :::::::;.:,--
~ ~ ~::.=..:..:....,,:::::::=----
Offeror B
T,meftame
cash f low
o,scount Rate ,
o ,scount Factor.
PV
t;>F (pert and i)
CF X DF
!!
CF
-------~-------____ ---.1--------
-------,
,
TOTAL NPV
Step 5: When evaluating two or more pricing arrangements, compare each, and determine
which NPV offers the best value. With NPVs for both offerors, compare and select the
best value. With all other terms being equal, the lowest NPV, which is the smallest cash
outflow, is the best value.
Exercise 3
Compare NPVs using End
or Year
Offeror Ats PV w/annuaf payments:
Offeror
($_ _ )
($ _ _ )
ss PV w/monthly payments:
- Offerer _ requires more cash outflow than Offeror

- Therefore, if all other terms are essentially equal
is the best offed
1
offeror
Net Present Value - In Class Exercise

tructions: Complete the In Class E
Jns
.
b
1
xerc1se e ow and answer the questions that follow.
Consider a scenario where two offerors have submitted proposals for the same requirement:
Offeror A proposes a lease, with payments of $9,000 at the beginning of each year for
3 years, beginning at contract award, for a total of $27,000.
Offeror B proposes a vehicle purchase for $27,000 due at contract award, with a resale of $2,500 at the end of the third year.
Determine which is the best offer for the Government based on Net Present Value Analysis.
(Remember the 5-step process, also considering "end ofyear" vs. "mid-year" Discount Factors)
Class Exercise
NPV of Offeror A
rune
Discount . .
Rate
T1rnefr
;..._-----y
OF (pert and i)
CF
DiscountFactor
PV
CFX Df \
-1--+--t--____.;ri i
L -J-+-+-t-1
1
_ __
--- --
i TOTAL NPV
.,
____ - - ----- l --------~- - - - ,
NPV Analysis can help you :

- Decide whether it is in the best interest of the Govt. to
lease or purchase
- Decide which offer provides the best value
- Get you to an apples-to-apples comparison of price in
terms of time or coNSTANTt dollars
NPV Analysis does not help you:
- Decide whether a price is fair and reasonable
- Assess cost realism
When am I Required to d0
NPV Analysis?
. ... 0MB Circular_A-94 requires .
purchase ?ec,sion when ..... NPV analysis for a lease- $1 f./1 fair market value of c . ~- Capital asset is
ap,tal asset ANO
. . . .. .
Leased for 3 or more years OR

Ne'N, has economic Hfe of < -3
to the Govt. for 75% or more ofyears
and is. 1eased
OR
its eco
.
8 wit expressfy for the Go .
Leased to the Govt. and vt. OR
commercial use
nom1c lif
clearly no afternat,ve
. .
Net Present Value Analysis

ldentifi;ing Issues and Concerns
r!f1 Is net present va rue analysis
used when appropriate?
~ A
re th e dollar estimates for expenditures and receipts

reasonable?
~. Are th e tlmes
.
proJected for expenditures and receipts
reasonable?
[!l
i!1
~
00
Are the .proper discount rates used in the net present value
carcurat1 ans?
Are the proper discount factors used in analysis?
~re the discount factors properly calculated from the
d1 scount rate?
Are there any differences in the goods or services

proposed? If so, what is the value of the differences.
Conclusion
You understand NPV if you understand:
1
The ~Tfme Value of Money" concept

Hovv the term ~'present varue differs from the term tlnet
present value'f
When to use the nominal versus the reaf discount rate

The difference ber11een discount rate and discount factor
\iVhere to find the latest 0tll'1B discount rates
The rerationship ber,veen present varue and discount rate
Ho'N to cafcuf ate net present value of future payments
(outflows) or paybacks (inflows)
Common mistakes made in carcurating NPV
How to evaruate fease vs. buyfl' alternatives
11
Net Present Value Practice Problem answers
Additional NPV Practice

Two offerors proposed to meet your agency's test equipment
requirements with the fofJ0 .iving proposals.
Offerer A proposes a 5-year equipment lease, which includes
all maintenance costs, for a total price of $120,000. The
lease's pa}ment schedule is $24,000 upon contract award,
with 4 subsequent payments of $24,000 due at the beginning
1
of each subsequent }'ear.

Offerer B s proposal is for your agency to purchase the
equipment for $110,000, then buy it back from you after 5
1
years, a~ a salvage value of $4,000. Under this option, your

agency 1s afso responsible for preventative maintenance and
cafibration at the end of year 3, for $5,500.
Determine which ts the best offer for the Government based
on Net Present Varue Analysis.
Additional NPV Practice

OfferorA
Timef~an-1-e -
cas- h- Flow
.... ,
Discount -. Discoun t F t - -,-- -- - -Rate
CF
'
TOTAL NPV
S:-
...
..,..._..,..
---
....- . ~ : .
__
,,_._
CF X OF I
-----1-------~
--7--
PV
OF {pert and i)
---- ----.
- - - - - - - - - - - - -.!.--.....
ac or
Lesson 5 -- ELO 2.04 Given l\1arket Research data calculate and identify
reasonable Cost Estimating Relationships.
Enabling Learning Objective
2.04 Given Market Research data, calculate and
identify reasonable Cost Estimating relationships.
Introduction
The CPRG, Volume 2, Chapter 4, Paragraph 4.0 defines a Cost Estimating Relationship as a
technique used to estimate a particular cost or price by using an established relationship with an
independent variable. If you can identify an independent variable (driver) that demonstrates a
measurable relationship with contract cost or price, you can develop a CER." . Some CERs are
simple ratios, such as comparing the ratio of "dollars per square foot" on a previous painting project
to estimate the price of a future one. These simple ratios are often called "rules of thumb," for they
become common methods for estimating prices. Other CERs are more complex, such as linear or
curvilinear equations which predict the relationship between a production quantity and total price.
This lesson explores how fundamental CER ratios can help us estimate future prices. The last two
lessons of Unit 2 explore the use oflinear equations as CERs to help us estimate future prices.
What does the FAR say about "CERs"?

As stated in the following excerpt from FAR 15.404-l(b)(2), price analysists may use parametric
estimating methods as tools for both commercial and noncommercial items, in order to ensure a fair
and reasonable price.
(2) The Government may use various price analys~s techniques and procedures to ensure a
fair and reasonable price. Examples ofsuch techmques include, but are not limited lo the
following:
r, ~ Use ofparametric estimating methodslapplicalion of rough yardsticks (sud! as dollars

pe:;ound or per hors~P_ow~r, o~ other units) to highlight significant inconsistenc,es that
warrant additional pncmg mqmry.
CONJ 70, Unit 2 - Quantitative Methods for Contract Pricing - Page
1(
,i
Cost Estimating Relationships (CER )
f fu
s are a type of parametric estimating method, which are used to
.
,stnnate pnces o
ture purch
b
d
.,
h
T .
ases, ase upon a comparison of prices or key parameters from
e.
histonca 1pure ases. o mtrodu CER
ce
s, consider the following example.
An Example o~ Developing and Usino a CER

Assume the Navy intended t0
d h
b
.
d h
.
f
.
upgra et e software ma destroyer fleets' fire control system, an t at
O
this type
upgrade had not been done before on a destroyer. With no historical data on software
upgrades for destroyers the N
d
. .
.
'
avy team would compare fire control system software upgra es on
similar
ships
such
as
cruise
B
d
. " . '
,,
rs. Y stu ymg software upgrades for crmsers, the Navy team wou Id
0
reahze Imes ~ code (LOC) is a critical price driver, or "independent variable," for software
syste~s on cru_isers. Although destroyers are different than cruisers, the Navy team could still
e st abh~h a basis for es!imating the price of the destroyer system upgrade by establishing a CER with
the cruiser syst em. With the data below, how could you estimate the price of the destroyer's
,
software upgrade?
4 years ago
2 years ago
Cruiser System AA
Cruiser System BB
800,000 LOC
1,000,000 LOC
Today
Destroyer System DD
1,200,000 LOC (estimate)
$8,000,000
$9,500,000
$ _ _?_ _
You could calculate an estimate for Cruiser System AA of $1 O per LOC ($8,000,000 / 800,000
LOC) and for Cruiser System BB of $9.50 per LOC ($9,500,000 / 1,000,000 LOC).
Based on the two cruiser systems, the Navy confirmed LOC is an independent variable for upgrading
software systems, which drives the dependent variable, "price." Through market research and
historical data, the Navy calculated a CER which indicates future software upgrades on a destroyer
will cost between $9.50 and $10.00 per LOC, and estimated a total price between $11,400,000 and
$12,000.000.
By this CER, or "rule of thumb" for estimating software upgrades on Navy cruisers, we would
estimate the price of an upgrade on a destroyer with roughly 750,000 lines of code as follows:
Somewhere between $7.125 and $7.5M
750,000 LOC x $9.50 = $7,125,000
750,000 LOC x $10.00 = $7,500,000
But what other factors might you consider to build confidence in this price estimate? You must be
sure to index the CERs to account for time passing. At a minimum, they should be adjusted for
inflation. Even better would be to find a software development index, which would account for
inflation as well as other factors unique to the software development markets.
You must also understand how similar the cruisers' fire control systems are to the system we are
upgrading on the destroyers. The more similar, the more confidence we have that these CERs_ are
giving us a comparable price estimate. The less similarity, the more we ~ould have to recognize a
wider range of variation between our estimate and a reasonable future pnce.
.
. ..
.
ct to be closer to 3 million LOC.
Next, consider the poss1b11Ity that we estimated our de 5troyer proJeld
f
to search for historical
1
Does this pose a problem or cause for concern? It might - We shou con ~~cs may still provide a
projects which required more LOC, closer to the 3 million. These two exa
. .
,
d fi . Contract Pncmg - Page,
CONJ 70, Unit 2- Quantitative A1etho s
o,
I 73
rough idea of the $/LOC however we would have more confidence in the estimate if the CERs Wer
b ased
L
'
,
e
on OC closer to 3 million.
Finall Y, we must be sure we know as much as we can about the h1stoncal
acqms1t10ns,

sue h as:
Are we certain the historical price was fair and reasonable? Particularly ~11_1portant
if the data was provided by the contractor, and to understand the competitive
environment at the time.
Did the historical acquisition face urgent timelines, many changes, SUrged
operations? All of which would drive the price up.
Do we have an adequate number of historical data points? The more data points,
the more confidence we have that our estimate is within a reasonable range.
This
. . with
. CERs reqmres
.
. d example , a s we 11 as th e CPRG reference reveal that pncmg
us to know the
m ~pe nd ent variables for every requirement. Independent variables are typically the cost or
per ormance Hdrivers," which significantly influence the performance and/or price of the
r:~~urement. C~nsider the following categories of products or services with examples of their
pendent variables, as well as examples of possible CERs.
-
,.
Product or Service
Inde~endent Variable
Possible CERs
Construction
Floor space, square

footage, surface area, wall
surface
$ per square foot, $ per floor
Roofing
Square yards, pitch/slope of

roof
$ per square yard (likely with an

adjustment for the pitch/slope of the
roof)
Shipping/Delivery
Distance, weight, hostility in

place of delivery
$ per mile, $ per pound per mile (likely

with adjustments for delivery in foreign
or hostile areas)
Reciprocating Engines Horsepower, piston

(gasoline, automobile, displacement, dry weight,
compression ratio,
tractor, generator)
Turbine Engines
Aircraft
Sheet metal
$ per horsepower, $ per cubic inch

(caution: with a wide range ofsuch
engines, take care to build CERs from
other engines ofsimilar size, weight,
compression ratios, horsepower)
Maximum thrust, cruise thrust,

by-pass ratio, fi1el
consumption, dry weight, inlet
temperature
$ per pound of max thrust, $ per pound

of cruise thrust (caution: with a wide
range ofsuch engines, take care to
build CERs from other engines of
similar key parameters, such as thrust,
size, weight, by-pass ratios)
Empty weight, max speed, load

(passengers, ordnance, cargo),
range, wing area, landing
speed
$ per pound of capacity
Net weight, square inches,

square feet, scrap rate,
number of holes drilled,
$ per pound, $ per square inch

(including a/actor for scrap)
CONJ 70, Unit 2- QuanlltallVe Method,;for Contract
I
A
i
~
Pricin , - Pa e
74.
~umber of rivets placed

inches of welding
'
Security service
Nu~ber ofentry control

points, number of hours,
num~~r ofguards required,
hoSn/zty of environment
(shopping mall vs
forward/deployed location)
$ per hour, $ per entry control point
(caution: ensure CERs are developed by

comparing comparable environments)
Steps for Developin~ a Cost Estimating Relationship
A~ we saw from th e previ?us example, there can be several possible CERs for estimating a ~uture
pnce ?f products a~d ~ervtces. Now we will learn how to pick the best CER. Strictly speaking, a
CER 1s not a quantitative technique. Rather, CERs are a framework for using appropriate
quantitative techniques to quantify a relationship between an independent variable and contract cost
or price. In a sense, CERs are relationships we can use to compare prices of similar items, th~n
estimate prices of similar items when it is not possible to compare the same items. In developing
CERs, the CPRG recommends the following six step process:
Steps for Developing a CER

Define the Dependent Variable
Select Independent Variables to be tested
Collect data about the relationship
between the Dependent and Independent
Variables
Analyze the findings
.
Select the relationship that best predicts
the dependent variable
Document your findings
forth) Define what
t dollars, hours, and so
rial
dent variable (e.g., cos .
dollars labor hours, mate .
~~if:::~ER be used ~;::~::;t~e~~tf:ate totai product ~~=t, ~:ee;::e~t7t
Step 1. ~efine
the CER will estimate.
f cost? Will the
d fl tion of the dependent vana
cost or some other measure ;onents? The better the en~nt
the ~ost of one or more co;e data for CER developme .
will be to gather compara
,
rr
t 2 -
CONf 70. um
Quantitative Ale!
. . - Pa<!e I 75
,.,act Pncmg
h J.,;for C on.,.
<C
O( .
-----~~-~,::]
. estimates of the
ted for develoCpE1nRg development:
to be tes
1 for
.
dent variabt.es
ndcnt variab es
Step 2. Select mdcpc~ potential indcpc
d published sources of
. I I selecting
f thers, an
1
dependent vanab e. n
erience o o
f the-art item, consu t expens
. e the exp
state-o d
Draw on
personnel e:~:~~e;:~ a CER for a n::d production metho s .
. fi nnation. When d
.ate technology
mo .
. h the appropn
experienced wit
.
rs.
I Parameters such as.
Consider the following facto ~titatively meas~rab .e. because they are difficult to
- Variables s?~uld bed~:: ult to use in estimating
maintainab1hty ar~ ~ ic
btain historical data, it will be
measure qua~~ita~1ve1r~ important. If you cannot o dictive tool. For example, an
Data availab1hty is a
d se the variable as a pre
unt would be of
. 1
alyze an u
.
s or parts co
~mpeos:~~c::ov:~iable such as physical d1~:n:~~: development when the values
;~~\:value during the ~onceptual ~~:o:n.yBe especially wary of any CER

-
fthe independent variables ~re n

~ased on 2 or 3 data observat10ns. .
CER based on performance or
If there is a choice between developmgha ter1 sties are generally the better
. .
rfonnance c arac
d .
. f are usually known before es1gn
physical charactenstics, pe
choice, because perfonnance charactens ics
characteristics.
. the relationship between the dependent and

Step 3. Collect data con.cerdnmg.
lly the most difficult and time-consuming element of
independent variables. Collectmg ata is u 5ua
h
II
CER development. It is essential that all data be checked and double checked to ensure t at a
observations are relevant, comparable, and relatively free of unusual costs.
Step 4. Explore the relationship between the dependent and independent variables.
During this step, you must determine the strength of the relationship between the independent and
dependent variables. This phase of CER development can involve a variety of analytical techniques
from simple graphic analysis to complex mathematical analysis. Simple ratio analysis, moving
averages, and linear regression are some of the more commonly used quantitative techniques used in
analysis.
. Step 5. Select the relationsh.ip that best predicts the dependent variable. After ex lorin
a vanety of CERs, select the CER with the least amount of variation among
1d
p
g
between the independent and dependent variables.
severa ata pomts
.
S~ep ~ Document your findings. CER documentation is
.
.
m the e~timatmg process to trace the steps involved in develo i essential .to permit others involved
should mvolve the independent variables tested th d
p ng the relationship. Documentation
data, and any adjustments made to the data.
' e ata gathered, sources of data, time period of the
Now? considering this lesson, and the CPRG

Volume 2, Chapter 4 Sect.
4
consider two examples:
,
ions .0 through 4.4,
Exercise 1. Which of the t0

1ng
a residential ho
bUY
11
.
owing CERs Would b b
use. $ per Bedroom
e est to use to estimate a reasonable pnce for

'
$
per
Acre,
or $ per Square Foot?
Step 1. Define the dep d
en ent variable.
Step 2. Select independe t
.
/J h .
n vanabies t0 b
d
variable. 1 n t is problem based
M,
e tested for developing estimates of the depen ent
$/Bedroom, $/Acre, and $iSq Ft). on arket Research, the independent variables are given:
Step 3. Collect data cone

h
.
.
bl
0
fi
II
.
emmg
t
e
relationship
between
the
dependent
and
mdependent
vana es. 0ee o owing table oifMarket R
hD
esearc
ata.
Market Research Data:
House
Price
$350K
$297K
#BR
4
$/BR
Acres
$ I Acre
Sq ft
.5
3500
3000
$409K
.5
3900
$307K
3200
$303K
3000
$306K
.5
3100
$ I Sq ft
Range
Avg
Range/
Avg
-
.
h.tp between the dependent and independent variables.
Step 4. Explore the relat10ns
. .
h ds for Contract Pricing - Page I
r r 1 2 - Quantitative Met o
CON/70. unz
Step 5. Select the relationship that best predicts the dependent variable.
Step 6. Document your findings.
The following graphs depict another method for determining the variance in a ~ER. Analyzing
these graphs is optional in CON 170, but provides insight into tools and analysts to be learned in
CON 270. The graphs plot the independent variable on the x-axi~ (number ofbe~rooms, number of
~cres, and number of square feet), and the dependent variable (pnce) on the y-axis . The graph also
mcludes the "trendline," which is the line that represents the best fit of the general trend of the data
points. Looking at the graphs, which appears to have the most linear trend, where all the data point
fall on or near a straight line? The"$ per square feet" line presents the most linear trend. Thus, wes
would expect"$ per square feet" to yield the most accurate prediction of future prices of residential
homes.
Residential House Prices

Price Per Bedroom
~ $(.).(>):)
Price
;)O
$40:i.O)J.W
$.j .~:),OCr:,J 00 $.3,,:):)_0 ~ .0 :)
I
Bedrooms
4
3
4
Pri ce
$350,000.00
$297.000 00
$409.000.00
$307,000.00
A
3
$303 .000 00
$306 ,000.00
$2 s,~.0):) 00
i 20::i.o:.::i.o::i
$1 5':),0)0 0:)
$1 00::>:0 0:)
$S(1,oo:i.c(,
SO 00
.
0
Nurnbe r of Be d roon1s

Price Per Acre
Price
r-t:.::.:::::
,____. _
Acres
O.S
Price
5350,000.00
2
O.S
S297,000.00
S330,000.00
$307,000.00
S303,000.00
S306,000.00
0.5
'
~~
....
Number of Acres

Price Per Square Foot
Advantages to Using CERs
Versatility. If the data are available, parametric relat10nsh1ps can be dcnv~d at any leve
Whether system or subsystem component. As the design changes, CERs can be quickly modifi I,
and l ised to answer ''what-if' questions about design
. a1tematives.
led
Sensitivity. Simply varying input parameters and recording the resulting changes in cost
produce a sens1tiv1ty
analysis.
can
Statistical output. Parametric relationships derived from statistical analysis generally h
th
ho objective measures of validity (statistical significance of each est imated coefficient and of:~e
model as a whole) and a calculated standard error that can be used in risk analysis. This infonna/
can be used to provide a confidence level for the estimate, based on the CER's predictive capabil;~;.
.
Objectivity. CERs rely on historical data that provide objective results. This increases the
estimate's defensibility.
Disadvantages of Using CERs

Database requirements. The historical data and database must be consistent and reliable. It
m~y be time consuming to normalize the data or to ensure that the data were normalized correctly
(with respect to time, performance parameters, key terms of the acquisition), especially if someone
outside the estimator's team developed the CER. Without understanding how the data were
normalized, the analyst has to accept the database on faith-sometimes called the "black-box
syndrome," in which the analyst simply plugs in numbers and unquestioningly accepts the results.
Using a CER in this manner increases the estimate's risk of producing a faulty estimate.
Relevance. Using data outside the CER range may cause errors, because the CER loses its
predictive ability for data outside the development range.
Complexity. Complicated CERs (such as nonlinear CERs) may make it difficult for others
to readily understand the relationship between cost and its independent variables.
Additional Guidance and Points to Consider
Some CERs may be simple, linear ratios, while others may be more complex, non-linear
relationships.
The CPRG cautions buyers to beware of data samples of only 2 or 3 data observations
(Vol 2 Ch 4, Para 4.0, Step 2). In such cases, you may not have enough information to
validate the usefulness of a CER, and should pursue additional data points, as well as
expert advice.
When developing CERs, do other subject matter experts agree that your independent
.
?
variables are d nvers.
7(,,,,--
\\
~
-._Quantitative Methods for Contract Pricing - Page I 82
More
----=...:.::~:::::::--.
CER Points to Ponder

'
ADVANTAGES:
Versatile
-
Sensitivity Analysis
Statistical Output
DISADVANTAGES:
Reliability of Data
Relevance
Complexity
Objective Results
Conclusion
After completing these exercises, you have learned to use market research data to identify, calculate,
and analyze the relationship(s) between variables for possible use as Cost Estimating Relationships.
It is important to identify independent variables, which are the "drivers" of performance and price.
It is also important to understand that some CERs are simple ratios, which are often considered
"rules of thumb," for developing price estimates. Finally, understanding how to select the best CER
among several possible ones by seeking the CER with the least amount of variation between the
independent and dependent variables will help to provide you with better estimates as you attempt to
price and evaluate pricing for contracting efforts.
.,.-- .
.
onize the nature of fi
Analysis, rec0 I!,
ted
ELO 2 05 Throuah Cost-Volume t and develop a pnce estnnate. ,
~
e,
d total cos s,
Lesson 6 --
variable, semi-vanable an
s determine a proposed Pric

e Ana Iysi '
et
I
ELO 2.06 Through Cost-Vo um
"buy-in" seller strategy.
o
J 'th respect to a
be rational or irratwna WI
Enabling Learning
Qbiectives
J
0,:/Cnlt~!'.ql.lS.U.:n Lt-'"t
~~fl~
l ==:=========================-~
- -- -- Analysis recognize
2.05 Through Co st-V~lume . mi-va;iable and
the nature of fixed, vanable, se
. t
total costs, and develop 8 price eSfima e.
I sis determine a
2.06 Through Cost-Volume A na.y .'
.
proposed price to be rational or ,rrat1onal with
respect to a 'buy-in' seller st rategy.
Introduction
When you acquire supplies or services, you generally expect to pay a lower price per unit as the
purchase quantity increases. You expect contractors to have lower costs per unit as production
quantity increases. This general expectation remains the same whether you are buying items
specifically built for the Government, or items that are mass-produced for a variety of commercial
and Government customers. Cost-volume analysis can be used to analyze the natural relationship
between cost and volume in pricing decisions.
Background and Assumptions

In cost-volume analysis, you consider only short-term operations. The short term may be defined as
a period too short to permit facilities expansion or contraction, or other changes that might affect
overall pricing relationships.
The CVA technique also ass~mes use ?fa straight line relationship (not curvilinear) between cost
and vo~ume. While actual pn~e b~hav1or may not follow a straight line, its use can closely
approximate actual cost behav10r m the short run. If purchase volume moves outside the relevant
range of the available data, the straight-line assumption and the accuracy of estimates becomes
questionable.
Th "
t" d t
Finally, the CVA technique assumes the terms "cost" and ''price" are the san
.
. CVA
Id fc
. h " . " d'
ze.
e cos
aa
points m
cou re er to e1t er pnces 1scovered through market research, or could refer to
I
'
..,.._aflL
CON/70 Unit' - Quant't

, Mel
J, h d
8./
I a,ive
o s for Contract Pricing - Page I
actual "costs" t? pr~duce the good or service. The important point is to avoid mixing "cost" and
"price" da~a pom~s mto the same data set. In CON 170, the data points used in the CVA examples
refer to pnces paid for goods or services.
Let's consider
th
e following example as we begin our exploration of Cost-Volume Analysis.
Example: Wiring Harnesses. Given the following market research data for commercial grade
wiring harnesses, estimate the price for an upcoming purchase of 18 harnesses.
Data Set 1--Commercial Grade Wiring Harnesses

Quantity
Total Cost
Unit Cost
5
$150.00
$30.00
10
$200.00
$20.00
15
$250.00
$16.67
20
$300.00
$15.00
8
$180.00
$22.50
12
$220.00
$18.33
17
$270.00
$15.88
25
$350.00
$14.00
Step 1: If we plotted this data, we would see the following:
Wiring Harnesses
400
350
300
250
200
150
100
50
0
c==--.-----...-----::---;20;----;25~---;30
5
Step 2:
10
15
.
. 1ine by connecting the data points
"trend line" or estimating
Establish a
.
. 1
what is your estimate for the price of 18?
h and esttmatmg me,
Based
on
the
grap
Step 3:
CON/7 0,
(j,m.1 2
- Pa...~e j 85
. . Methods f or Contract Pncmg
_ Quanlltatlve
From the ?~aph, you will notice that the esti~ating line slo~e~ up a nd to th e. ~ght. This means
every additional unit produced, the total cost increases. This
slope-it
movefor
. is called
. a POSitlve
I
.
an d to the right with each additional unit purchased. The 1ncrease .1n t~ta ~ost _with the purch s Up
an additional unit is the variable cost. Thus the "slope" of the estimatmg lme ts the variabl ase of
'
e cost.
Yo_u m~y be thinking, "I thought costs were supposed to decreas~ as more units were produced.''
This bnngs up a oood Iearnino point - the difference between umt cost and total cost Unit co
;::,
;::,
. l
h
-~
generally will decrease as more units are produced, because it a lows t e producer to spread fi
.h
. bl
Xed
costs over more units . But Total cost is different. In our examp Ies, wit vana e cost remainin
constant, and fixed price remaining fixed, total cost will increase as more units are produced. g
How can we sharpen our cost estimate? Having the graph is helpful, but with the tools from
Lesson 1,. we can dete1:11ine the mathemat~cal express~on fo_r the estimating line we drew in the firs
part of this lesson. This process of analyzmg the relat10nsh1p between cost and volume is know t
"Cost-Volume Analysis," or "CVA." CVA is a more complex form of Cost Estimating
n as
Relationships than the simple ratios we learned previously. Before we explore the use of CVA
must first understand the types of costs involved.
' we
Types of Costs
In the short run, costs can be of three general types, fixed, variable, and semi-variable.
Types of Costs
Ckrtnsc ,~u.,tr.n 'J ,,n r.y
======---=--=---- _ ---------- --==----=------ ---_-___
Fixed
Variable
Semi-Variable
Total
Let's explore each of these in greater detail.

1. Fixed Cost (symbol = F). Total fixed costs remain consta t
range of production. Fixed cost per unit decreases as th
~ as volume varies in the relevant
units .
e coSt is spread over an increasino
number of
::>
Examples include: Fire insurance, depreciation, facili
ty rent, and property taxes .
Types of Costs
Fixed Costs
Fixed costs rem .
changes
ai n constant, even as activity level
Examples f actory, salaries,
.
rent
Fixed cost
Level of Activity
2. _variable C? st (symbol= Vu). Variable cost per unit remains constant no matter how many
umts are made m the relevant range of production. Total variable cost increases as the number of
units increases.
-Examples in~lude: Production material and labor. If no units are made, neither cost is
necessary or incurred. However, each unit produced requires production material and labor.
Types of Costs
Variable Cost
Variable costs: costs which increase or decrease with

respect to each change in the activity level.
Variable cost
level of Activity
3. Semi-variable Cost (symbol = SVu). Semi-variable costs include both fixed and variable cost
elements. These kinds of costs may increase in steps or increase relatively smoothly from a fixed
base.
Examples include: Supervision and utilities, such as electricity, gas, and telephone.
Supervision costs tend to increase in steps as a supervisor's span of control is reached.
Utilities typically have a minimum service fee, with costs increasing relatively smoothly as
more of the utility is used.
CONJ 70, Unit 2 - Quantitative Methods for Contract Pricing - Page I 8 7
Types of Costs
sem,-Vanab fe Cost
. e or decrease with
Vanabre costs costs which ,ncreas level
respect to each change in rhe actlVlfy
d ariab fe element
Semi-Variable includes a fixe d an v
5,:,mivt1rinhle
cost e xamples
variable cost
No tice: semi variable cos.ts

indude a fixe d {
comi,o nent
~------Level of Activity
When these costs are added together, the sum is the Total Cost. Fixed, ~ari~ble and Semi-Variable
Co~ts, when added together will give us the Total Cost (symbol= .c) which rs the sum of fixed and
vanable costs. The total cost for production includes the cost to bwld the factory (fixed cost), plus
the cost of utilities and labor (variable costs). Total cost can be considered a "semi-variable" cost
because it contains both fixed and variable cost elements.
Types of Costs
Total Cost
= Fixed Cost + Variable cost

C = F + Vu (Quantity)
Total Cost
Variable cost
Fixed cost
Level of Activity
Situations for Using CVA

Cost-volume analysis is an e~timat.ing concept that can be used in a variety of pricing situations. You
can use the cost-volume relat10nsh1p for:
Evaluating item price in price analysis. Cost-volume analysis assumes that total cost is composed
of fixed and variable eJeme~Jts. Thi~ ass~mption can be used to explain price changes as well as cost
changes. As the vol~me bemg ?cqu1red rncreases unit costs decline. As unit costs decline. the
vendor can reduce pnces and st1H make the same profit per unit.
CONJ 70, Unit 2 - Quanlitative Alethnds for Contract Pricing Page 188
valuating direct costs in pricin

. gcost
new contracts
Q
d"
.
.
.
cos ts __ particularly dire c t matenal
uanttty 1fferences will often affect d1rect
0
component for development or producti:o trect ~aterial requirements often include a fixed
vo lume umt
costs should d .n operat100 set-up. As that direct cost is spread over an
increasing
ec1me.
Evaluating direct costs in pricin
g contract cha
H
.
.
.
increase con tract pnce? Some costs u .
nges. ow will an mcrease in contract effort
analysis can be an invaluable aid in WI . mc~ease others will not. The concepts of cost-volume
C'C'
cons1denng th e euect
of the change on contract pnce.
Evaluating indirect costs. The pri 1
analysis. Many indirect costs are fi nc~p es of ~0st -~olume analysis can be used in indirect cost
rates decline because fixed costs a xe or semi-vanable. As overall volume increases, indirect cost
re spread ove ran tncreasmg
product10n
. volume.
Situations for Using

Cost-Volume Analysis
ES t imating future costs/prices during market

research
Evaluating
Evaluating
Evaluating
Evaluating
item prices in price analysis.

direct costs in new contracts.
direct costs in contract changes.
indirect costs.
Analyzing the Cost-Volume Relationship

The assumption of linear cost behavior permits use of straight-line graphs and simple linear algebra
in cost-volume analysis. This lesson began with the graphical analysis, and then presents the
algebraic analysis.
Calculating the Total Cost. Total cost is a semi-variable cost-some costs are fixed, some costs
are variable and others are semi-variable. In analysis, the fixed component of a semi-variable cost
' like any other fixed cost. The variable component can be treated like any other
can be treated
variable cost. As a result, we can say that:
Total Cost= Fixed Cost+ Variable Cost
Using symbols: C = F + V, where
C = Total Cost;
F = Fixed Cost;
V = Variable Cost
Variable Cost, represented by "V," is a product of two elements:

Variable Cost per Unit, Vu
and Quantity Produced, Q
Substituting this infonnation into the Total Cost equation, we have the equation used in cost-volurr
analysis:
_ C = F + Vu (Q)
Types of Costs
Total Cost
Total Cost = Fixed Cost + Variable cost
C = \
Total
cost
V\_Quantity)
Fixed
cost
Variable cost
per unit
X r-t-JL-,m-b_e_r
of units
Remember. ..by ~ur math,,"order of operations:

~~hen do I mult1pry the vanabfe unit cost" b ,: u . . _
- 'When woufd I add the fixed costs to th .

_Y the quantity?"
e vanabte costs?
tiercise l_:_ __
1
Cost~V 0 Iume Analysis

If
- ----(Exercise 1)
you were trying to e -.
...:::::::=::==========~================
purchasing 1 ,000 wi~t1mate the cost of
of ~perations of $S,ooog:ts th at had a FIXED cost
nd a VARIABLE cost per
unit of $20 what
to be?
'
would you estimate your total cost
From what we learned:
=F
+ V1:(Q)
Cost-Volume Analysis
{Exercise 1)
========================
1-f you were trying to estimate the cost of
purchasing 2,000 widgets that had a FIXED cost of

operations of $5,000 and a VARIABLE cost per unit
of $20. what would you estimate your total cost to
b0 ?+
C = F + \ 1u(Q)
.,...,
-- ---~ "' t
p.,;,...;11<1 -
Pa{!c
cost-Volume Analysis
. 1____________
_
______(Exercise
_____ )
:.---
ooo
.
t t
units of
Compare: the unit cos a 2 ' .
t 1 ooo units
5t
roduction is less than the unit co ~ ' d
P
equation an .
of production, based on same
production line.
Why?
C
=F +
\ .lc(Q)
At 2,000 units:
At 1,000 units:
Before moving on, be sure that you understand the difference between:
"Total Cost per Unit:" Total Costs (which is the sum of all fixed and variable costs) divided
by the number of units produced; and
"Variable Cost per Unit." The costs associated with producing each unit that are not Fixed
Costs. These are typically the material required to build a unit, and the direct labor associated with
building the unit.
Develop a Cost Estimate with CVA

CVA can be very helpful in estimating prices. There are 4 steps to estimatino the cost for a given
quantity using historical data:
b
4 Steps to Develop a
f:=~!@~~7~\.t1:~
... .?.:'.'"'."~.'~~.;1,'."..''~'.'. '; ~.=-:cY .Q~t ____
-&o~JX~-:-~s ... . .. ...
1. Calculate the Variable Element

2 . Calculate the Fixed Element
3. Develop the Estimating Equation
4. Calculate the estimated
given quantity
cost for the
, 70, Unit 2 -
.
.
Quantllati ve J\ f p tJ.. ,.,.,,, ~~-
~,.,
Exercise 2: The example below 1.11 0st
quantity of items, given the 4 step p
rates h_ow to use CVA to estimate the price for a certain

rocess outlined above.
Using Cost.Volume Analysis

(Exercise 2
Given historic I d
.
a ata. estimate the price you
would expect to pay for 4,400 toolkits.
Historical Data
_co~t
Qty
$40,000
3000
$50,000
4000
$60,000 !
5000
Step 1. Calculate the variable element - Given Total Cost and Volume for two different
levels of production, and the straight-line assumption, you can calculate Variable Cost per Unit.
Remember:
1. Fixed Costs do NOT change as volume changes, assuming we remain within the
relevant range of production. Thus, a change in Total Cost is the result of a change in
Variable Cost (which is Vu(Q)).
2. Variable Cost per Unit does NOT change in the relevant range of production.
As a result, we can calculate Variable Cost per unit (Vu) by:
V
u
Change in Total Cost
Change in Quantity
Total Cost at Point 2 - Total Cost at Point 1

Vu =
vu -
Quantity at Point 2 -Quantity at Point 1
C2-Cl
Q2-Ql
.....
. ... n .. ;~; u
,,.. -
Prtf10
<J.1
Calculate the Variable Element
1.
Cosr
o.1,rru Atqu $<lt0n U.-.,cnty
Qty
Given historical price data: 1_:S-':.:0,:.:.:

00_0+-_3:-=o::
oo__,
.,ooo
S50~000
5000
. I . ent like this:
Calculate the variable co 5t e em
- Pick two cost/quantity points

. _
- Use the Variable Cost{urnt equation.
,
VF 0-Ci
Qi- Q1
60,000 - 40,000
Do the math: \: t: = 5.ooo - 3,000

! ' .
.:o,ooo
l,
= 2.000
'\le
=s10
$1 Ois the ..varia b/e

cost per unit," or
~varia ble efemenr
Step 2. Calculate the fixed element- If you know Total Cost and Variable Cost per Unit
for any Quantity, you can calculate Fixed Cost using the basic Total Cost equation.
2. Calculate the Fixed Element

Rememberour Total Costequation;
c =F
+ ,.rL"(Q)
To calculate the Fixed Element,

manipulate equation:
=C
- \.Tu(Q)
Given the same historical data ,

plus "Vu" from Step 1,
calculate the Fixed Price element
(see next slide)
CONJ70, Unit 2 /- ()uantitative 1~1et,wd(,

1 r
1
r; . .,
Calculate the Fixed Element
Historical Data
Cost
Qty
S40,000
3000
sso,ooo - -4
S60,000
F==C-Vt{Q)
------
000
5000
, U- 60 t ooo
/________
_ 40 .ooo
,
s,ooo 3.uoo
'
.20.000
r u-~,.,..._
1~000 /
'\! u
Vu(Q)
F == 50,000 _ - Vt: (4~000 j
Variable Cost Ele-ment

rfrcm Ste 1'
=l?o:ooo I-
/.,.
/"
=$10., .
------- ~
F == 50,000
-Ll.Qi4,000)
Now ...With all variables plugged in, calculate!
F == 50~000 - 40,000
[F == $10,000
Thisisthe
foed element!
Step 3. Develop the Estimating Equation. Now that we know Vu is $10 and Fis $10,000,
we can substitute the values into the general Total Cost Equation. The result is the "estimating
equation," which can be used to estimate the total cost of any volume in (or at least near) our
relevant, historical range of 3,000 and 5,000 units.
E';fiil~--.-r,'
3. Develop the Estimating Equation
Clilc-nu .t .,qusilio:-n U<:itn,:Y
Remember our Total Cost equation: C = F + Vu(Q)
- This becomes our estimating equation

Steps 1 and 2 revealed
F = $10,000
Vu= $10
.. 0 ,, is the variable representing our requirement
equation is:
Our estimating
'
c = $10,000 + $10(Q)
There fore,
A!eth0<l<;j hr Contract Pricing - Pag e I 95

CON / 70. U111t. -? - Ouanlitative
-
in this example is to estirnat

k
our
tas
.
quantity. .
. equation,
w e can completeeth~
t for a given
est101aung
ciur
Step 4. Estimate the c?s Now that we have an
price for a quantity of 4, 4 oo untts.
task.
t f
h Estimated OS 0
4. Calculate~ e Quant~
it ~ :::::::::::::::=======
- - - - - - _.---
~ O.~
tu~Kf A
~rqu~111~.:n u
~i,~t:0'-Y
! _;::::::::;::::::::;::::::::::::.::::---
Equation, we can. .
By using our Est1mat1ng
f 4 400 toolkits.
cal cu late the estimated cost o
'
C = F = Vu(Q)
Using this method, we estimate the total cost of

4,400 toolkits will be $ _ _ _ __
Does this make sense, based on our historical
data?
The last question on the slide above asks, "does this estimate of $54,000 make sense?" The
following slide indicates $54,000 is roughly the same relative distance between $50,000 and $60,000
as the 4,400 quantity is between the 4,000 and 5,000 quantity. Therefore, the estimate appears to be
within a reasonable range.
4. Calculate the Estimated Cost of

the Given Quantity
4,400 is within our
range of historical
data
Thus, we would
expect the price
estimate to be
between relative
historical costs
Our estimate appears
to be reasonable,
subject to some
limitations ...
Historical Data
Cost
Qty
S40,000
CON170, Unit 2 - Quantitative A.,et

, hods for Contract Pricing - Page I c- .,.....
l.
Great est
t
ima mg tooll but also consider:
- How old is our historrcal data
- Changed market conditions (demand, competitron)
- Order sizes, location, delivery terms/Umelines
- Quality, vvarranty terms
- Business strategies driving changes in supply
1
- Straight totaI cost line," or 1earning curve influence
!
Market research is the key to factoring these

elements in to the estimate
Exercise 3: Now, try an example using Cost-Volume Analysis on your own, using the 4-step
process.
Using Cost-Volume Analysis

OtltnStAaiusitlon u.-,1,tnr:,
Exercise 3}
Now, you try it - After finding the following market

research data, estimate the price of 116 units:
PRICE
s ...,
.
l
QTY
100
-l
$37,soo I
150
225
$29,500
$49,soo
116
the variable cos
t for eac
h unit:
1. Based on data set, calculate

V
C2-C1
U-Q2-Q1
Ju -:: P,( 0 o
ed cost element.
.
t calculate the fi x
2. Using data set 1 and the variable cos '
F
=C
- Vu(Q)
== { 116@s
F ~ (- \JV[Q]
.
t he es t1mafng
3. Based on questions
1 and 2, write
I line equation.
C = F + Vu(Q)
C ::. l 3SPI- '2 7" ( ii b)

5--;_, I QC
<tased on this estimating equation, hypothetically, what is the cost to produce zero wiring
harnesses?
1-J :;oo
4. Now, per our customer's request, calculate an estimate~0 th
Does this estimate appear to be reasonable?
r ....__, 1 170, Unit
/.,
...
2-
n ,,,,.,.~...
e price of 116 units:
Cost-Volume-Analysis Summary
Enables us to use historical data to estimate fixed,
variable and total costs
Enables the Government to estimate future prices
based on historical data
Gives the Gove,rnment insight regarding contractor's
business strategy and production capacity
Can be a great estimating tool, but be sure to be
aware of limitations
ers rovided at the end of 1

Cost Volume Anal sis Practice Problems answ
ess 0~.
.
f1mate for I 8 wiring harnesses With .
Re-examine Example 1, where you developed a p~ice es . t ~or 18 wiring harnesses by u ~ slll)Pl
1esson, "s harpen "your pnce estrma e 1
sinoe e
graph. To conclude this
CVA.
.
d wrin Harnesses
Data Set 1: Commercial Gra e 1
Total Cost
Unit co st
Quantity
$150.00
$ 3 0.00
5
$200.00
$20 00
10
$250.00
$ 1667
15
$300.00
$ 1500
20
$180.00
$ 22 50
8
$220.00
$ 18 33
12
$270.00
$ 1588
17
$350.00
$ 14 00
25
harness
1. Based on data set 1, calculate the variable cost for a wirmg
V C2-C,
U Q2-Q1
'2Du- 1~::.. {D
1
o- s
2. Using data set 1 and the variable cost, calculate the fixed cost element.
F = C - Vu(Q)
p -tr)O
f S6-
ll o J5
3. Based on answers from questions 1 and 2, write the estimating line's equation!
C = F + Vu(Q)
4. Now, estimate what the customer asked us for ... the price of 18 units:
..
Based on this estimating equation, hypothetically, what is th
harnesses?
e cost to produce zero wirmg
,oO
Given the market research data set below for track d h.
analysis and Cost-Volume Analysis to estimate th e ~e icle ball-bearing sets, use both graphical
~
e pnce for 130 ball b .
- eanng sets.
Tracked V eh1cle
.
Ball b
antity
- earin
Q
20
Total Cost
Unit Cost
40
$7,500.00
$375.00
60
$10,000.00
$250.00
80
$12,500.00
$208.33
$15,000.00
$187.50
$17,500.00
$175.00
$20,000.00
$166.67
$22,500.00
$160.71
$25,000.00
$156.25
1. Review the graph of th e data of Quantity .
-m relation to Total Cost.
Bearing Sets
$30,000.00
$25,000.00
$20,000.00
$15,000.00
$10,000.00
$5,000.00
$0.00
20
40
60
80
100
120
140
160
180
2. Calculate the variable cost:

Vu C2-C1
_.t I-l(
Q2-Q1 .-
.;)
3. Using the data set and the variable cost, calculate the fixed cost element.
~s:ooo
CONJ 70. Unit 2 - Quantilalive Methods for Contract Pricing - Page I 10 J
-- ~
t th estimating line's equation!

4. Based on answers to questions 1 and 2, wn e e
( -:-_ t= ..+ \l (_ <i)

5((v--r ,-LS -::-
5 \~s
h
es ti mate for 130 ball bearing sets..

5. Based on the customer's request, what 1s t e pnce
6. How about the estimated price for 200 sets?
7. Based on your market research, what is the lowest price you would reasonably expect to
pay?
Sa. After a recent, city-wide tradeshow, a small business representative visits your office, and
says he can deliver 130 units for a total cost of $16,500. On the graph below, you compared
this price with the rest of your market research data. Based on your market research data,
and your cost-volume analysis, do you believe this is a reasonable offer? What questions
would you ask?
No
Estimated p nces
for Bearing Sets

S35,COO.OO
s~,000.00
S25,COO.OO
Price
S"XJ, C00.00
$15,COO.OO
$10,COO..OO
s~o:o.oo
$0.00
0
130
"Tradesl'lovl1 Price Estimate
Quantity
8b. The offeror responds to your questions, "I'm in a business cycle where I have received
more orders than I expected on other contracts. Therefore, all of my fixed costs are covered
for the rest of this year. For the rest of this year, I can offer you a better price than normal."
What do you think?
p oblem Solutions
Cost Volume Analysis Practice r
..
.
. te for 18 wlfmg harnesses With
. . h
a Si
I ped a pnce est1ma
d
Re-examine Example 1, where you eve o
.
. ate for 18 wlfmg amesses by Us. l11p1
" h
n" your pnce est1m
, Ing ~
graph. To conclude this lesson, s arpe
CVA.
. G d Wirin Harnesses
Data Set 1: Commercial ra e
Unit Cost
Total Cost
Quantity
00
$150.00
$ 3 0.
5
10
15
20
B
12
17
25
$200.00
$250.00
$300.00
$180.00
$220.00
$270.00
$350.00
00
$20
67
$ 16
00
$ 15
$22 50
$ 1833
$ 1588
$ 14 -00
5. Based on data set 1, calculate the variable cost for a wiring harness:
Vu C2-C,
Q2-Q1
,
,
/
Fiom our data set. the variabl<? costs is ca,cuulle<
as
1{ )
1
510 JJer unit
..<:.',.:..,()(
:. d ' _ <,tJ
~
JI) units - 5 uni ls
This Hzeans, for eve1y aJditimiul unit we purchase, 1/te contructor 's cost is an uddit iona! S JO.
6. Using data set 1 and the variable cost, calculate the fixed cost element.
F = C - Vu(Q)
Th<?jixed cos/ is calculated by wking the Total Cos/ equation a11d isolating theflxed cost (f).
Thus. ff tolaf cost i\' $ 150}.Jr 5 1mirs. the.fixf!cl costs is calculated as :
F = $150 - ($ / IY >< 5 units
F "'~ $100
7. Based on answers from questions 1 and 2, write the estimating r ,

. ,
c = p + Vu(Q)
tne s equation.
Total Cos/ ' " $ JOO
+ ($ /0)
x (Quun1ityj
8. Now, estimate what the customer asked us for the

r . I C..
0' /(Jf) , /<l' / (1
/!
price of 18 units
, o fcl
ust = .:,
-r r"' ') x ( 8 unit.\)
Tow/ Cost = $ 100 + 180
Tora! Cos /
$280
Based on this estimating equation, hypotheticaJJ

h .
harnesses? ~ / 00. n, calculate. insert .. 0 ., into ti Y, w. at Is the cost to prod
..
.
. .
..
.
1e es1m 1 1
uce zero wirmg
s11np~l' extend !he e5;t1mo1mg !me all the IFa v 10 ti
. u mg equatio n 1~ .
.
. .
.
te v-axt\' ( . 'I .
01 u rouuh est1m<1te,
0
' H . iere x : :.: :. ();
T/11s J/lustratc:.\ thut !he contractor must !)av it . , r
' ,1L.,ed cOS/..',; (-'Vo/1 1 .
,
..., 1 zero
..
lllltts are J>roduccd
Given the market resear h

analysis and Cost-Volu me
c data
Analset. below.(:'.ior track d
ys1s to estimate the ~ehicle ball-bearin
e pnce for 130 b 11-b g ~ets, use both graphical
Tracked V .
a
eanng sets.
eh1cle Ball-bearin Sets

Total Cost
Unit Cost
$7 ,500.00
$375.00
$lO,ooo.oo
$250.00
$ l 2, 500.00
$208.33
$l5,000.00
$187.50
$17,500.00
$175.00
$20,000.00
$166.67
$22,500.00
$160.71
$25,000.00
$156.25
Quantity
20
40
60
80
1. Graph the data of Q uanti
in relation to Total_C_
os:....::..:t.:____ _ _ _ _ _ _~
Bearing Sets
$30,000.00
$25,000.00
$20,000.00
$15,000.00
$10,000.00
$5,000.00
- , - - - - , - - - - , - - - - , - - -,---
$0.00
0
20
40
60
80
100
120
140
160
180
2 Calculate the variable cost:

Vu C2-C1
Q2-Q1
$ / 0000 - $7500 ::= $125 per unit
40 uniL"' - 20 units
J, Using the data set and the variable cost, calculate the fixed cost element.
F = C - Vu(Q)
F $10000 - ($12.~J (41~)
7~
F = $5000
CONJ 70, Unit 2 - Quantitative Methods for Contract Pricing - Page I I 05
iesson 7 -- ELO 2.07 Thro

the nature of profit reve
ugh Cost-Volume p
contractor's "break-eve r:,ue, ~nd contributio~. rofit <<:VP) analysis, recognize
n point.
mcome 1n calculating the
--..:.....::::::===,- -=
- :abling Learning Objective
2.07 Through C
---
-- -- ----------- -----
of profit, reve~~~V:~~:~-~r_
ofit _ana_lysis, recognize the nature
contractor's "b reak even'~ n~ut1on income in calculating the
point.
-
Introduction:
From Cost-Volume Analysis to Cost- vo Iume-p ro flit Analys1s
(CVP)
Unt1_1now: we have_only looked at the cost-volume relationship. Now, we are going to expand that
relat1.onsh1p to consider the relationship between cost, volume, and profit The revenue taken in b a
firm 1s equal to cost plus profit.
Y
That can be written:
Revenue= Total Cost+ Profit
We have already seen that total cost (C) is: C = F + Vu (Q)

Using this information, we can rewrite the Revenue equation as: Revenue= F + Vu (Q) + Profit
In the cost-volume-profit equation, profit can be positive, negative, or zero. If profit is negative, we
nonnall y refer to it as a loss. If profit is zero, the firm is breaking even, no profit or loss. If we let P
stand for profit, we can write the equation:
Revenue = F + Vu (Q) + P
db
fi
ods or services sold Revenue is
Revenue is the total amount of money receive Y a company o r ~
the product of t~lements:

"R " d
unit, which is the selling price, repre~e~!ed by u , an
~-~"",:c>.lUJle of units sold, represented by Q
. - - ' v .. ;,.;,w -
Pn.l!.e
109
c II
s
Th e Revenue equat10n 1s wntten as 10 ow
Revenue== Ru (Q)
.
d sells all the units that it mak
11
If we assume that a firm makes all the units that tt se s, an
es, \Ve Ca
n
complete the CVP equation: - - - - - - - - - - - : : - - - ,
Ru (Q)= F + Vu(Q) + p
Introducing Revenue aoci Profit

Integrating our new terms:
Revenue - Total cost+ Profit
R - F + Vu(Q) + Profit
Finally, if we assume a firm sells all units
produced, we can enhance our Revenue equation:
Ru (Q) = F + Vu (Q) + Profit
Introducing Revenue and Profit

Revenue: cash receipts from sales esse . . .
price times the quantity of units sold: . nt1ally the
R = Ru(Q)
:otal
Revenue per unit
revenue
(selling price pet unit)
Number
or units
Profit: Revenue minus Total Cost

Profit = R - Tot Cost
Profit = Ru (Q) _ F _ Vu (Q)
JPrnfiA -
Re,enue
Per unit
It
Num~
of untts
Fr:,ced
cost
"Dnit 2 - Q
,
uanfitativp A ,,..,
..
umt
AP
T
plication of the Cost-Volume-Profit Equation
tion and fundamental knowl d Of
h
his equa
c
.
e ge a contractor's cost structure can provide you wit
ly valuabl e .m1ormatton
on the 1m
h
. .
,
c:: b"l"t
xtreme
pact pure ase dec1s1ons can have on a firms pro11ta 1 1 y.
st.
can eve_n use CVP analy to help us estimate a likely selling price. For example, consider the
following circumstances .
We
Exercise 1: The Acme firm prepared an offer for an indefinite quantity contract wit~ the
Government for~ new product developed by the firm. Acme's goal is to sell 5,000 umts, and earn
th
$7,500 pr~fit dunn~ is con~ract peri~d. T~ere are no other customers for the product. _Given the
following mformatwn, what is the selhng pnce (Ru) Acme must charge in order to earn its profit
goal?
Fixed Cost
Variable Cost per Unit
Contract Minimum Quantity
Contract Maximum Quantity
Firm's Best Estimate of Quantity
Target Profit
=
=
=
=
=
=
$10,000
$20
4,000 units
6,000 units
5,000 units
$7,500
Here are the steps to solve for Ru, the Revenue per unit (selling price) that the firm would need to
charge in order to attain their stated profit goal:
Cost Volume Profit Analysis

(Exercise 1)
Solution for finding the selling price per unit:
Ru (Q} -
F + Vu {Q) + P
1
I0000 + t-O
?oo
Knowing a selling price, we can also use CYP Analysis to estimate expected profit given different
scenarios that you will explore on the next page.
Exercise 2: Good news- It appears Acme will receive orders for 6,000 units. In the space below
using the CYP equation and Acme's data from above, calculate how much profit Acme would earn'
if they exceeded their sales goals and sold 6,000 units? (Hint: insert values for Ru, Q, F, and Vu,
and solve for P)
Cost Volume Profit Analysis

(Exercise 2)
Good ne\lvs: U appears the firm will receive orders
for 6,000 units. How will this affect profit?
Profit = Ru (Q} - F - Vu (Q)
Increasing production by 1000 units will
profilby$
---
This ass~mes ~he F and Vu relationship remain perfect! linear .

.
assu~pt1~n will be used throughout CON 170. CON
11 with an increase in Q. This u1
"
relat10nsh1ps.
wi teach you how to ana1yze non-lmear
i~ear
2io
c"ercised 3: IIn addition,

Acme's lead
P~
h
. .
ers were conce d b
Acrne sol on y t e mm1mum quantity of 4 000 . rne a out how profits would be affected if
Acrne's da~a from above to calculate how ~u h urnts . In the space below, use the CVP equation and
c profit Acme would earn if it only sold 4,000 units at
a selling pnce of $23 . 50 per unit.
CoS t Volume Profit Analysis

O: trn1tA.tq1,u11~ n lJ.Jtt,i:',
(Exercise 3}
to
But,
. . dnves
.
. in d emand
orders down
. . what
.
if a shlft
4
only ,000 units? How will that affect their
profit?
At production of 4,000 units, the firm will only

have a profit of $___ .
Note that Acme will earn less profit (than their goal) because sales were lower than originally
forecasted; however, Acme is still not "losing" money.
This leads us to another critical aspect of CVP analysis - determining the "break-even point."
Using CVP Analysis to Calculate the Break-even Point
The "break-even point" is the quantity a firm must produce and sell in order to cove~ all of 1~s fixed
and variable costs and the point at which they begin to make a profit. When analyzmg the nsk of
5
Submitting a prop~sal for an indefinite delivery contract, Acme's (or any company's) leaders mu !
"b k
"
ng they understand the
.
assess the number of sales requtred for the firm to rea even -ensun
@antity they must sell to cover their total cost, and begin to earn profit.
I ?
From Cost-Volume-Profit ~nafysis

.
to the Break-even Point
_.....,.
"' '
t whic ~
Break-even pornt: Quantity a .
h.
- ' 'vi"A{ qu1..1..;:

-~~ ..
All fixed and variable co sts are paid

Revenue equals, surpasses co st
Contractor begins earning profit
Until contractor reaches break-even point

'
can not cover all costs, does not earn profit
Why is the break even point important?
-Answers the key question: "How many units do
I have to sell before I actually earn profit?" ~
- Enables an assessment of risk, and seller's
pricing strategy
Break-even Point
When calculating fh~ bre~k~ev;~ p~i~t: - Use the CVP equation, solve for "Q"
---=
- So/vting for the ~uantit:t where revenue equals total

cos s, and profit ,s set at zero:
Revenue = Total Cost + Profit
R = Total Cost + $0
Ru (Q) = F + Vu (Q)
- AL W ~ YS "round up" Q to the . .

Even if the fraction is
next whole number Iess than s
- If you round down
point
.. .
' you WIii not have reached the 8/E
- Nobody is going to bu
..
---------=-~~~~uy a fraction of something
fne graP
h below illustrates the concept of "Br k E

.
ea - ven Pomt." Notice the lines in the graph:
Sales Revenue
line represents
se 11 mg
. pnce
. x quantity - this is the
h
.
. . Ru(Q) th e umt
money t e company 1s bnnging in through sales
Total Co 5t line represent~ F +_ Vu(Q): fixed cost+ (variable cost x quantity) - this is
the money the company Is puttmg out in order to produce the product
These two lines intersect where Ru(Q) = F + Vu(Q), which is the break-even point
At the break-even point, the Sales Revenue is equal to the Total Cost and Profit= $0
To the left of the break-even point, the contractor is operating at a "loss," because his
revenue does not cover all fixed and variable costs
At the break-even point, the contractor's revenue finally covers all fixed and variable
costs
To the right of the break-even point, the contractor has covered all fixed and variable
costs, and begins to earn profit
Profit is represented by the wedge be~ween the "Sales Revenue
line, to the right of the break-even point
" 1
d th "Total Cost"
me an
e
Break-even Point
_ _ _ _s_a~le--:-s-:-R e,enue' /
1
sreak-E ven Po int
"'
Variable Cost..,
i ota!
Total
. variat:le
Cost
fixed Cost'
Re,enue
Total
Cost
Total/
fiXed
cost
Units Sold
Contract Pricing - Page 1 J15

.
Ouantitatrve Afethodsji.)r
rnNJ70, Umt - - ~
In order to check for understanding
f this concept, answer
the following questions:
, d e" under the Total Cost line, over th

.
t d by the' we g
e
On the graph above, what 1s represen e
. t?
Sales Revenue line, to the left of the break-even pom
Where is profit depicted?
.
.
d high selling price where on the gr h
If an item has a low fixed cost a low vanable cost, an a
'
ap
'
?
would the breakeven point be .. .lower left or upper nght
Comparing the total cost line of two different commodities, which would have a steeper slope,
one with a higher variable cost, or lower variable cost?
Exercise 4: To continue with our Acme example, use the CVP equation to calculate the quantity of
units that would have to be sold (Q) to enable Acme to break-even.
Fixed Cost
Selling Price
Contract Minimum Quantity
Contract Maximum Quantity
Firm's Best Estimate of Quantity
Target Profit
=
=
=
=
=
=
$10,000
$20
$23.50
4,000 units
6,000 units
5,000 units
$7,500
:i
{
CON/70, Unit 2- Quantitative Methods for Contract Pricing \

_,.~,
'
~:,
,f
Break-even Point
o,1cnu, i:t,iiu!olb:0Ui,t0r.-1
{Exercise 4)
Calculate the Break even P .

.
01nt
,You are lo-eking for the 91Jant1t t

costs, and profit is SO):
-1 produce and sell where revenue equaJs total
The calculations above show that the firm would break even at _ _ _ _ _ units. Because the firm
could not sell just a part of a unit, the firm must sell ____ units to assure that all costs are
covered. To verify:
Selling 2857 units
Revenue = Total Cost+ Profit
Ru(Q) = F + Vu(Q) + P
23.50(2857) = $10,000 + 20(2857) + 0
$67,139.50 = $67,140.00
< $.50
Revenue is $0.50 less than costs.

Acme has not reached "break-even" point.
Selling 2858 units

Revenue = Total Cost + Profit
Ru(Q) = F + Vu(Q) + P
23.50(2858) = $10,000 + 20(2858)
$67,163 .00 = $67,160.00
> $3 .00
Revenue is $3.00 more than all costs.

Acme reached "break-even" point.
. e 5 Given the following

Exerc1s
\'
\ <
, proposal for wiz-bangs, ca\cu\at~

. for an offeror s
th~
information
break-even point.
$15,000
Fixed Costs:
. .
$30.00
$33 .08
Selling Price
8'000 units
C pac1ty
Max1mum a
h the firm fina\\y covers a\\ of its
. f .ts sold w en
.
b k
ven
point
is
the
quantity
o
um
c
when
calculating
the
rea -even point
Remember, the break-e
.
am rofit. 1'here1ore,
,
fixed and variable costs, and begins to e ''Q'? here ''P" equals zero.
we use the CVP equation, and solve for
w
Ru(Q) == F + Vu(Q) + p
CVP equation:
Then, set p = 0, and solve for Q:
Ru(Q) = F + Vu(Q)
Break-even Point
(Exerdse 5)
Calculate the Break-e\len Po\nt
(You are 10-01<ing fof the guant1ty to produce and sell where revenue equals tota\
costs. and and profit is SO):
Because we can not produce or se\\ a fraction of a unit, we

must ..round up~our break-even point to _ _ _ units
wh~re we have covered our Tota\ Cost, and begin ear~ing
profit
Break-even Capacity
With an understanding of the break-even point, it is also important to understand how
,
11
d
a
contractor
brea k-even pomt compares tot e1r overa pro uct1on capacity. In the example above
h s
. to break even, and fina\\y begin to, we
ea see t c:e
contractor must produce an d se11 at 1east 4,8 7l umts
. product10n
. output wit. h'mthe company ' s productlon
. capacity.
. ? ln th'1s scenario, we m
ls this
se pro11t.
th
contractor's maximum capacity is 8,000 units. Therefore, w~ have some assurance the cont~act:r
has a reasonable and sound production plan, because they will break even well within their
maximum capacity.
CONJ70, Unit 2- Quantitative Metlwds (or Contrnrt p,.;,,;,,,,. '
I-{owever, consider a contractor wth

1 a b reak-even p
f 4 500
f
capacity o ,
units. In this case the
omt o 5,000 units but with only a
.
cover his total costs. Without a rob;st col ntra~tor cannot even produ~e and sell enoug~ax1_mum
t bl h. h k
exp anation an
d
' units to
unaccep a Y tg ns .
'
awar to this contractor would present an
In order to calculate the Break-even C

stated as a percentage.
.
apac1ty use the . 1
.
'
simp e ratio below. The break-even capacity is
Break-even Capacity == Bre k

a -even Quantity I Maximum Production Quantity
From the example above, the firm's break.
.
(or their maximum production quanf1t ) . ~vin poi~t was 4 ,8~1 units, and their maximum capacity
Y ts , 00 units. What 1s their "break-even capacity?"
From Break-even Point to

Break-even Capacity
With a breakeven point at 4871 units, at what capacity is the
contractor performing?
Break-even capacity = Break-even Quant / Max Production Quant
Break-ceven capacity = 4,871 I 8,000
Break-even capacity = .609 , which 1s about 61%
Thus. at the break-even point, the firm is producing at 61 %

capacity. Why is this important?
- Verifies the break-even point is within firm's production capacity
- It is not so close to the maximum capacity there is cause for alarm

- Contributes to overall risk assessment
- Appears contractor can produce these items and still earn a profit
In order to check for understanding of this concept, answer the fol19wing questions:
What is the purpose of understanding the break-even capacity.
State the risk of the following offers as low, high, or unacceptably high:
Offer I's break-even capacity is )Oo/o .
Offer 2's break-even capacity is 99%
Offer 3' s break-even capacity is 120%

ve
r Y YAJ/ 7 () ( .Tntr ..., - - (Juantirati
_
. ,, Contract Pricing. Page ! / /9

,\ !et hods .,or
int and possible factors which c
It is cnicial to recoonize the importance of the brea -even po . ,

hange to the contract ,ouJd
t1
~
A ny iac
c: t
ves ac.c h b k
in ucnce and cl1ange the break-even pornt.
or that dn II
or s fi1>.ed
shut
t
e
rea
-even
point
811d
l or variable costs, as well as the selling price of the item, wt
A G
ming enough money to remain

s. ovemment buyers, our goal is to ensure the contrac~or is ea us to a study of Contrihution tn
business, and not pay prices that are irrationally low. This leads
.
dh
l
1r g pnce an ow a company
n con_,e, which helps us understand the relationship between se m
contnbutes to covering their costs and profit.
Break-even Point a nd
Contribution Income
What are the key elements that impact the
break-even point?
- Fixed costs, variable costs, selling price
- These costs are influenced by market variabf es
Sflift in market supply and demand
Overall health of the economy
Excess capacity
Learnmg curve, capital investment
Accounting for fixed costs
This brings us to the final topic in Lesson 7 ...

. . . Contribution Income
Contribution Income
The difference between revenue and variable cost is called Contribution Income (CI). The term
contribution income comes from the contribution made to covering fixed costs and profit. If
:ontribution income is positive, increasing sales will increase profits or reduce losses. If
ontribution income is negative, increasing sales will reduce profits or create greater losses.
Contribution Income (C\)

In general:
- Re"enue beyond . .
costs
variable costs is "contributed" to fixed
- Revenue beyond
.
contributed" t
va.nable and fixed costs is
o profit
Cl: Revenue minus Variable Cost

Cl == R - VC
Cl :: Ru (Q) _ Vu (Q)
Cl = {Ru - Vu) (Q)
To cal~ulate Cl on a "per-unit" level, simply set

Quanttty (Q) equal to 1 .
Consi~er an offeror's proposal for 500 ~idgets priced at $900 each, and your analysis reveals the
following cost structure. How would this affect your analysis of contract risk?
Fixed Cost
= $100,000
= $1,000
CI= (Ru - V u ) Q
CI= ($900 - $1,000) (500)
CI= (-$100) (500)
CI= -$50,000
The contribution income from the sale is a negative $50,000. The firm would be substantially worse
off for having made the sale. Unless the firm can offer a positive rationale for such a pricing
decision, such as fixed cost has already been covered under a previous contract, you must consider
pricing as an important factor as you analyze the risk of contract performance.
Exercise 6: Analyze the production of an item where:

Fixed Costs:
Selling Price
$15,000
$30.00
$33.08
Calculate the Contribution Income per unit (hint: set Q = 1).

Next, calculate the total Contribution Income for 6,500 uni
COX I 70, Unit 2 - Quantitati\'e Metlu>l Is fior ( on ta
t ct Pricing - l-'a',!.e \ 1
<
.....
' __/-Lr-- .\~

STUDENT GUIDE
CON 170
Unit 3, Lesson 1
Contract Types, Incentives, and Risks

January 2017
...
faOY people erroneouSl~ ~elieve th at contract type is selected by the Government and dictated
f\i the contractor. Bu~ ~his is not the case. Contract type is subject to negotiation, just as are
t~her terms and cond1t1ons of the contr~ct. Listen to the contractor and their rationale if they
o "gest another co~tract t~pe and consider that information when making a decisions about
~~~tract typ~ .. !heir expenence from other acquisitions may prove to be a benefit to you on the
. stant acqu1s1t10n. They may have experience about what works and what does not.
111
rhe regulations also point out !hat over the life of an acquisition program, changing
circumstances m~y call for a different contract type at different stages of the program (R&D,.
roduction, sustamment) and that contracting officers should not use cost-reimbursement or time
P
contracts. when there is sufficient data to establish firmer prices. FAR 16.103(d)
an d materials .fi
provides speci IC requirements for documenting the rationale for the contract type you have
selected.
Negotiating Contract Type

FAR 16.103(d}( 1)
What does the FAR require in terms of documenting the

selection of contract type?
Include documentation in either the acquisition plan or contract
file to support chosen contract type
Explain why the contract type selected must be used to meet the
agency need
Discuss Government risks and how they will be managed and
mitigated
Discuss the Government resources nec-essary to properly plan
for, award, and administer the contract type selected
For other than a firm-fixed price contract, there are additional
documentaton requirements
There are just a few exceptions to the requirements described above. Those exceptions are for (I)
Fixed-price acquisitions made under simplified acquisition procedures; (2) Contracts on a firm
fixed-price basis other than those for major systems or research and development; and (3)
Awards on the set-aside portion of sealed bid partial set-asides for small business.
Finally, there are several factors outlined in the FAR that should be considered while
~ontemplating the appropriate contract type. They are described in detail at FAR 16.104 and
hsted on the following slide.
ontract Type Selection Factors

FAR16104
contractor's technical
capability /fin a ncia I
responsibility
Price competition
Price analysis
Cost analysis
Type/complexity of the
requirement
Combining contract
types
Urgency of the
requirement
Adequacy of contractor's
accounting system
Concurrent contracts
Extent of proposed
subcontracting
Acquisition history
Length of production
We are required to include in our solicitations a provision to let contractors know what type
contract the Government is contemplating. Contractors may have recommendations concerning
contract type. The Government can consider this and amend the solicitation if another contract
type is deemed more appropriate . .
Contract Type solicitation Provision

FAR 52.216-1
Solicitations must contain the p~ovision at FAR 52.216-1,

Type of Contract unless they are for:
- a fixed-price acquisition made under simplified
acquisition procedure
- information or planning purposes
"The Government contemplates award of a _ _ _ _ _ __

(Contracting Officer insert specific type of contract) contract resulting
from this solicitation.
e will explo~e another i~portant driver for contract type s~lection - the elemen_t ?'.risk
]'lo\N wer formal or mformal, an~~ ~ssessment should be accomp/1~he~ ~Or every acqms1t1on as
w11et~warket research and acqws1t10n planning. Risk assessment 1s cnt1cal to the proper
art 0 . of contract type.
P ectton
sel
Risk Elements
3. 102 Recognize key risk elements of cost, performance,
and schedule.
Risk an~ Selecting Contract Type

The Cost and Pricing Reference Guides,
Volume 4, Chapter 1
Gives insight regarding key risk elements of:
Market Risk
Performance or Technical Risk
Cost Risk
COj\/J 70, [/nit 3 Lesson I - Contract Types, Incentive~~ and Risks - Page I 7
1 , t changes in the marketplace will also

M ,1 rkct Risk We can b e su. re t11, 1 fj fj rward pricing of contract efforts
L et ' s fiirs t cons1ucr
O
t
,
affect contract costs Preferred acquisition practice calls or
because forward pri~ing provides a baseline which you and the contractor can use O measure
cost or price performance against contract effort.
A volatile market will increase the cost risk involved in contract pricing, particularly when the
will
extend several years. T o assess mar
, ket risk , Government
teams can study
.
contract penod

r.
asts of ma ten al ' labor' and product
lessons learned from previous
acqu1s1tions,
ana Jyze 1orec
market r.,orces
,
r th
demand and assess the compet1t1ve
1or
en ear future In cases when results of
such for~casts reflect a wide range of market volatility, a cost reim~urscment type c_ontract may_
be most appropriate. If the forecasts indicate a narrow range of vanance, a fixed pnce contract 1s
likely the best choice.
There are some incentives available in order to address market risk, if needed. Fixed-price
contracts with economic price adjustment as well as fixed price contracts with hi~her profit can
both be effective incentives for the Government and contractors to share market nsk. In
addition, forward pricing rate agreements require the contracting parties to make assumptions
about future changes in the marketplace, evaluate those assumptions, and agree to future rates.
Next, we can examine Performance Risk (also called Technical Risk; in this class performance
risk includes technical and schedule risks). Contract requirements and uncertainty surrounding
contract performance is a key performance risk and cost risk driver. Lower uncertainty equates
to lower risk. Therefore, begin the cost risk assessment with a performance risk assessment. For
larger more complex contracts, request assistance from other members of the Government
Acquisition Team (e.g., representatives from the requiring activity, engineering staff,
contracting, and program/project management). Areas to consider should include:
Stability and clarity of the contract specifications or statement of work;

Stability of technology driving this requirement;
Type and complexity of the item or service being purchased;
Availability of historical pricing data;
Prior experience in providing required supplies or services;
Urgency of the requirement, and the delivery schedule;
Contractor technical capability and financial responsibility; and
Extent and nature of proposed subcontracting.
The greater the performance risk the more likely the appropriate contract type will be a fi d
mcent1ve
or cost re1m
bursement contract.
1xe
pnce
Let's examine the following examples: The graphs below offer a simple representation Of th
~ove~mcnt 's assessment of schedule risk. The gr~~hs represent how contract type and
mcent1 ves can affect contractor perfonnance and mitigate contractor risk in the area of
delivery/schedule risk if structured well.
---------------,,.-,~-a-,,-,.,-,"\-,,-.,-..-,-----:--,r,=--.~lf
Evaluation
o Risk of Schedule Slip
Need Date: Sept 15, 201x
'
'
'
'
(Early)
Delivery Timeframe
(Late)
SMEs assess risk of late deliv
ery as moderately low-consider

FFP contract
In this first chart, the risk assessment from

b.
.
(
our su ~ect matter

d.
risk oflate d e11very on-time delivery is denot db h
. experts m 1cates a reasonably low
to schedule risk, a Firm Fixed Price contract e
Y t e vertical red line). Therefore with respect
may
a
reasonable ch
wtt h low nsk
. '
.
delivery, an a dd 1t10nal delivery incentive beyond the F

oice.
of late
FP contract may not even be necessary.
Evaluation of Risk of Schedule Slip

Need Date: Sept 15, 201X
'
,,
I
,I
I
I "
-,
~ .. ~
"'.
\.
''
~
-.
*
'
""'"" _{
'\
'\
f
- .---r---,-
..
, . ~
'-4
'\
(Early)
Delivery Timeframe
(Late)
SMEs assess risk of late delivery as significant-consider FFP

contract with delivery incentive to address risk
The second chart indicates a higher risk of late delivery than the first scenario. When reviewing
this risk assessment, the Government team may still consider a fixed price contract, but should
~lso consider including a delivery incentive, such as a cash bonus, to drive the contractor to ontune or even early delivery.
CON J70, Unit 3 Lesson I - Contract Types, Incentives, and Risks - Page i 9
Evaluation Of
Risk of schedule Slip
Need Date : Sept 15, 201X
"'
C:
0
;:;
n,
/ - --f
/
:s
ni
>
w
,.
(Early)
_... - - -
''
Delivery Timeframe
(Late)
.
ely high-consider
SMEs assess risk of late dehverv as extrem
. k
. .
t
to address ns
CR contract with substantial ancen ave
. II Y, this
third
shde
.
v ery high risk of late. delivery In
F ma
shows an extreme case where t h ere is
cases like this, the Government may consider a cost reimbursement type ~ontract tnS t e~d of fixed
t O dnve the .nsk of late delivery

pnce,
an d may also consider
s1gmficant
delivery
mcentives
~own._ These are just one example of how risk analysis drives the selection of contract type and
mcent1ve arrangements to manage those risks.
Finally~ we will discuss Cost Risk. we should encourage contractors to accept reasonable cost
risks of contract performance. However, requiring contractors to accept unknown or

uncontrollable cost risk can endanger contract performance, substantially reduce competition,
and/or substantially increase contract price. Choosing the proper contract type requires a proper
allocation of cost risk.
Cost estimates, whether they are the offeror's proposed or the Government's recommended, are
point estimates. In all contracts involving forward pricing, the point estimate is a projection of
what the estimator believes is most likely to happen. In addition, from market research, the
estimators should also evaluate as many historical pricing data points as possible.
The cost estimates should reveal the estimator's optimistic, pessimistic, and most likely cost.
While some variation among cost estimates and historical price data is normal, the greater the
variability among this data, the greater the cost risk.
Evaluation of Risk
of Schedule Slip
Need Date: Sept 15, 201X
l"0
QJ
I
11'1
;:;
l"0
:J
l"O
:>
LU
(Early)
(Late)
Delivery Timeframe
.
SMEs assess risk of late de I,very
as extremely high--consider
.
CR contract with substantial incentive to address risk
Finally, this third slide shows an extreme case where there is very high risk oflat~ delivery. In
cases like this, the Government may consider a cost reimbursement type contract mstead of fixed
price, and may also consider significant delivery incentives to drive the risk of late delivery
down. These are just one example of how risk analysis drives the selection of contract type and
incentive arrangements to manage those risks.
~inally, we will discuss Cost Risk. We should encourage contractors to accept reasonable cost
nsks of contract pe~onnance. However, requiring contractors to accept unknown or
uncontrollable ~ost ~sk can endanger contract performance, substantially reduce competition,
and/or substantially increase contract price. Choosing the proper c t t t
er
aII ocatton
of cost ns
k.
on rac ype reqwres a prop
C~st esti!11ates, whether they are the offeror's proposed or the G

,
p01nt estimates. In all contracts involving fiorwa d . .
o~emment s recommended, are
a projection
of
what the estimator believes is most likely to ha r pncing' the
1s
. . po mt estimate
1
estimators should also evaluate as many histon_PcPalen .. ? addition, from market research, the
pncing data
points as possible.
The cost estimates should reveal the estimator'
.
Wh 1

s optimistic p . .
1 e some vanation among cost estimates a d h"
. , .ess1m1sttc, and most likely cost.
. b"t
.
n tstoncal p
d
nee ata is normal, the greater the
vana I tty among this data, the greater the cost risk.
:,
CON/70, Unit? L
esson I -
c-,0.
=:--~------~
ntrac:t T
1 J{,
YPes. lncemives. and Risks - Past . .,.
Cost Risk a d C
n ontract Types
Cost estimates are po t .
.
.
val
in tirn m estimates
\ ue at a pornt
-a
smglo
estimated
e.
- If estimators offer a Wide
risk
range of p-01nt est
Cost est_imates can also be

- The wider the rang
/\ \
th
e. e greater the cost risk
1- -
,.,_,t,....
,.,.
--
.. . ... .
tt
(,
I .
\. I
----
. . .
a range of opt1m1st1c. most likely,
and pessimistic
. .
imates--md1cates greater cost
Cost Reimbursement
/ '
_ _, /
'1
, -.. r .-
. .
'-
, _ , .-. 41 ,
Fixed Price
General_Iy, a wi~e range of cost estimates indicates a cost reimbursement contract would be most
appropnate, ':"htle a narrow band of estimates indicates a fixed price contract may be best.
B~fore s~le.ctmg the. contr~ct type, analyze the estimates, determine the key reasons behind the
wide vanat1on, and investigate what could be done to narrow the variability.
The chart above depicts a narrow and wide range of cost estimates. The x-axis is cost in dollars.
The y-axis represents the number of responses for that cost value, or, the probability of achieving
that estimated cost. Thus, in this chart, the left and right tails represent the optimistic and
pessimistic costs, and the top/center of the curve indicates the most likely cost
If the curve (or triangle) was skewed right (where most data points/the biggest part of the
distribution curve are on the left), the "most likely cost" estimate would be closer to the
optimistic cost. If the curve (or triangle) was skewed left (where most data points/the biggest
part of the distribution curve are on the right), the most likely cost estimate ~ould be close to the
pessimistic cost. If the distribution was represented by more of~ rect~~gle (1~~tead of a,,normal
or skewed distribution), this would indicate there was not an obv1m~s, _most hkelr cost.. .n
. tes were "uniform"
th ese cases but that aII cos t es t1ma
The bottom lme 1s that. a wide vanatwn
d'1cates more uncertainty,
k, and more of a tendency toward cost reimbursement

m
more ns
contract types.
Matching Contract Type to Contract Risk
.
. .
. i al method of allocating risk between the
.
All in all, contract type select10n 1s the pnnc f
ntract type that is right for every contractmg
I
~ovemment and the contractor. There is no singe c~asis considering contract risk, incentives
situation. Selection must be made on a case-by-c~se the adequacy of the contractor's accounting
for contractor performance, and other factors sue as ty e that will result in reasonable contractor
sYstem. Your obJ.ect1. ve should be to select a contract P
.
.
C tract TJpes, Incentives, and Risks - Page I / 1
COi\/170, Unit 3 Lesson I
~:;;.,,-, er at . . . s
cal contract perfonnance. Select I

n k .
ffi . t and economt
. I ccing h
with the greatest incentive fore icien
ctive to more potentia ouerors, thereb
e
5
proper contract type will make the work more attra
Y
mcreasing competition.
. k onsider the following:

As you match contract type to contract ns , c
Identify available contract types;
Consider acquisition method;
Consider commerciality of the requirement;
Consider cost risk associated with managing a contract type other than FFP
Consider appropriate performance incentives;

Consider the accounting system adequacy; and
Document the selection decision.
Fixed-Price Contracts
3.} 03 Describe conditions f
price contract types.
3.104 Given a Fixed p .
or use of the different fixed
(FPEPA) scenario, calculate

nee Economic
Adjustment
th
. p nee
e adJusted price
Fixed Pric F
e amrly of Contracts
F!rm Fix~d Price (FFP)
Fixed Pnce with Econ
.
.
Firm Fixed Price Leve~mof1cEffPnce Adjustment (FPEPA)
.
.
art (FPLOE)
.
Fixed Pnce Redeterminable P
-
rospecttve or Retroactive
F!xed
Pr~ce Incentive Firm Target (FP1Fr"

F~xed Pr~ce Incentive Successive Target (FPIS)**
Fixed Pnce With Award Fee (FPAF)**
*Addressed in the Incentive Contracts section
Under a fixed-price contract, the contractor agrees to deliver the product or service required at a
price not in excess of the agreed-to maximum. Fixed-price contracts should be used when the
contract risk is relatively low, or defined within acceptable limits, and the contractor and the
Government can reasonably agree on a maximum price. For these reasons, fixed price contracts
are generally preferred over all other contract types. They should generally be used when
acquiring supplies or services under FAR parts 13 and 14 and are also available to be used under
FAR part 15. Finally, a FFP contract is most suitable for use when acquiring commercial items.
Firm-Fixed-Price
FAR 16.202
Price is not subject to any adjustment on the basis of the

contractor's cost experience in performing the contract
Places upon the contractor maximum risk and full

responsibility for all costs and resulting profit or loss
Prov,'des maXJmum ,ncentive for the contractor to control

costs and perform effectively
. mum administrative burden upon the
Imposes a mm,
contracting parties
Contract Tvpes. /ncemives, and Risks - Page I 3

CO:\ '/ 70, Cnit 3 lesson 1
. . of FFP contracts at FAR

cnpuon
.
to the des
ubJ. cct to any adjustment
not s
p rsuan t
;\R 16.202) l 1 ., r a price that is
tract This contract type
.
c
ntrac ts (f
ides 10
.
the con '
Firm Fixed Price O d .ce contract prov

. perfonr11ng.
\l costs and resulting
profit
I 6.202-1 , '.' A finn-fix~tr:C7or' s cost e)(per_1cncef:~1 respons ib ih ty fo~ ~osts and perform e ff~cti vcl y
on the basis of the co
a)(imom nsk and
ctor to contro
. . The contracting
places upon th~dcosn;:~~:,~~ incentive for tdhe ct~Pn:: the contracting parrtd~;;~ incentive (see
or loss. lt prov1 e
. . fve bur en
.
th an awa
nd imposes a minimum admin1stra i
tin conjunction w1
d l () 40' -3) when the award fee
d rice contrac
t 40' -,, an ~
. ti
fi d .
aofficer may use a firm- fi'"e -p .
. entives (see ~
t type remains irm- ixe -pnce
I 6 .404) and performance or dchvery mctl1er than cost. The contrac
. .
d \ ly on factors o
or incentive 1s base so e .
,,
when used with these incentives.
h !": nowin(J circumstances
AR 16 202-2), t e io
~
.
As described in the application of FFP contraclts (F ntracting officer can establish fair and
. .
f .
t nces when t 1e co
are usually indicative
o
circums
.
t ad a FF p contrac t shou\d be used:
1
reasonable pnces at t 1e outse , an
(a) There is adequate price competition;
.
rchases of the same or similar supplies
(b) There are reasonable price_~ompansons with pnodrbpu
or services made on a compettllve basis or supporte
lid certified cost or pricing data;
Y va
(c) Available cost or pricing information pennits realistic estimates of the probable COSIS Of
performance; or
(d) Performance uncertainties can be identified and reasonable estimates of their cost impact can
be made, and the contractor is willing to accept a finn fixed price representing assumption of the
risks involved.
Fixed Price with Economic Price Adjustment (FP/EPA FAR 16 203 w11h th1
contract, a fi"ed price is negotiated or agreed to at the out;et but th
)
~ type of
adjustment
(can
be
either
upward
or
downward)
based
upon'
.fie
contract
provides
for an
.
'
spec1 ied contin
.
Th
a JUstments can be based on any of the following types:
genc1es.
ese
d
(1)
.
ct
. Adjustments based on established -prices. . These pnc
m':reases or decreases from an agreed-upon level in u . e a Justments are based on
pnces of specific items or the contract end items. p bhshed or otherwise established
(2)
based on actual costs of!
b Adjustments
d .
- a bor or mate . I
ase on increases or decreases in specified
ria These p
.
oflabor or materi~~: at
adjustments
are
actually e"periences during contract perfon::~sce.
the contractor
(3) ~diu~tme~ts based on cost indexes oflabor or
.
are ase fion mcreases
or
decreases
1
n
1
b
material.
These pr.
.
a or or mat
are spec1 ically identified in the contract.
enal cost standards
iceor.
adjustments
indexes that
CONJ 70. Unit 3 Lesson 1 - Contract Ty

.~='"'. ,.,. ,,...
pe.~:f..,. ....,.,,;,.-::-:---
Fixed-Price with Economic Price Adjustment

FAR 16 203
Fixed-Price with Economic Price Adjustment (FPEPA)

contracts are designed to cope with the economic
uncertainties that may threaten firm-fixed-price arrangements
The adjustment provisions may provide for both price
increases and decreases to protect the Government and the
contractor from the effects of economic changes
FPEPA contracts are used when:
- Market or labor conditions are proJected to be unstable dunng an
extended penod of contract performance
- Contingencies that would otherwise be mcluded in the contract pnce

can be 1dent1f1ed and separated m the contract by segregated hne
items
Fixed-Price w/Economic Price Adjustment

Contra ct Type ( FP/E:.:..P.:_:A:_)~ ~ - - ,
$ Profit
co,ltracl El&m&nls
15
f ' ed Price:
$ 11 O
c:~t,11n$ ~t~i1!,1t+Q11_C.hlYI" it1 .1t
,,
,~ uHs l n an up-1, .iro 0 ' f10Wft'""'
,,o~jll,(fOMl l
10
In lhM C,G.O fr .>o..l
pn<..1t
.5
he general. fixed price
t because of t
ntract are tha '
e ability to tie a certam .
fa FP/EPA co
e contracts. Th
' . herent fixed-pnce
Some of the notable features o cost-reimbursemen/ t{fo reduce the contract s ~"to calculate and
nature, it is still preferred ovrustment formula h~!wever, because of the ~;:lively burdensome
area(s) of uncertainty to an a J d the contractor.
t can be more adm1ms
risk for both the govemmenAt atn ~s of the contract, 1
/ . 11i,e, am/ Rish - Page I / 5
- ,s nee,
follow through with t he Ep e,,..

., .. ,, _ Contract 1ype
1
c o N110. l; .,.,,'f Y Le.~sv
ith either sealed bidding or

be use d w
.
t type rnaY
rnrnercial items.
FPfEPA contracd hen acquiring co
A
o officer.
b use W
for the contractino
d can also e
ements an
negotiated procur
thods for FPEPA
cost Adjustment Me
"'.:.~
' :.,
- - - -- -
. one of the
ed on variations m
Adjustments can be bas
followi~g: .--
mar1<.cl or catalogue prices for suppheS

-Estab\1;:,hed
~ 1aterial
-Actual cost of Laborr orl;bor or Material
~Price/Cost Indexes or
!low a 5-step procedure:
used in making act1ustments

,vents that will tngger pnce
Identify the base penod and times ore
adJustments
b e price sub;ect to act;ustment
Identify the percentage of the as
,
Identify any 11m1ts on adJu.stment
Calculate the adJusted pnce
In general, adjustments will fo
1. Identify the index(es) which will be
2.
3
4
5.
There are several clauses that should be considered for use in FP/EPA contracts. The clause to be
used is generally dependent on the type of adjustment method to be implemented and the
prescriptions for each of the following clauses can be found at FAR 16.203-4.
FAR 52.216-2 - Economic Price Adjustment-- Standard Supplies

FAR 52.216-3 - Economic Price Adjustment-- Semistandard Supplies
FAR 52.216-4 - Economic Price Adjustment -- Labor and Material
However, DOD contracting professional should be aware that the DF ARS h

1
1
guidance for certain FP/EPA contracts. The relevant DFARS infonnatio n ts
. ashSuppbementa
s own elow:
216.203-4 Contract clauses.

(1) Generally, use the clauses at FAR 52.216-2, Economi p
.
Supplies, FAR 52.216-3, Economic Price Adjustment--S c _nee AdJustment--Standard
t nd rd
52.216-4, Economic Price Adjustment--Labor and Mat ~ml lS a a Supplies and FAR
ena ' only when'
(i) The total contract price exceeds the simplified
...
acqu1s1tton threshold
.. ) r
(11 De 1very or performance will not be completed w
award.
it
h.10
, and
6 months af1te
r contract
(2) Follow the procedures at PGl 216 .203-4 when using

.
clause based on cost indexes oflabor or material.
an economic Price adiu
~ stment
CONJ 70, Unit 3 Lesson 1 - Contract Tv
. pes, Incentives a I
n, Risks_
Page I 16
,.
:tr
J-4-70 Additional provisions and clauses.

216,2 O
(a) Price alijustment for basic steel, aluminum, brass, bronze, or copper mill produds.
1
( 1) (i) The price adjustment clause at 252 .216- 7000, Economic Price Adju st11~ ~t-Basic Steel, Aluminum, Brass, Bronze, or Copper Mill Products, may be use 10
fixed-price supply solicitations and contracts for basic steel, aluminum, brass,
bronze, or copper mill products, such as sheets, plates, and bars, when. an
established catalog or market price exists for the particular product being
acquired.
(ii) The lO percent figure in paragraph (d)( I) of the clause shall not be
exceeded unless approval is obtained at a level above the contracting
officer.
(2) Use the price adjustment provision at 252.216-7007, Economic Price
Adjustment-Basic Steel, Aluminum, Brass, Bronze, or Copper Mill ProductsRepresentation, in solicitations that include the clause at 252.216-7000, Economic
Price Adjustment-Basic Steel, Aluminum, Brass, Bronze, or Copper Mill
Products.
(b) Price alijustmentfor nonstandard steel items.
(I) The price adjustment clause at 252.216- 7001, Economic Price Adjustment--
Nonstandard Steel Items, may be used in fixed-price supply contracts whcn(i) The contractor is a steel producer and actually manufacturers the
standard steel mill item referred to in the "base steel inc.lex" definition of
the clause; and
(ii) The items being acquired are nonstandard steel items made wholly or
in part of standard steel mill items.
(2) When this clause is included in invitations for bids, omit Not~ 6 of the clause
and all references to Note 6.
(3) Solicitations shall instruct offerors to complete all blanks in accordance with
the applicable notes.
(4) When the clause is to provide for adjustment on a basis other than "established
price'' (see Note 6 of the clause), that price must be wrified.
(5) The 10 percent figure in paragraph (c)(4) of the clause shall not be exceeded
unless approval is obtained at a level above the contracting officer.
(c) Price acijustmentfor wage rates or material prices controlled by a.foreign
government.
-----------~~'in,7;~-;:;,-;;,~;;:;;;;-.r::;;;:;-"i:=:=::-~-:-:----CON/70, Unit 3 Lesson 1 Contract Tipes, fncentire~ and Ris,, P . I
'
" a~e 17
.
1(,- 700 3, Economic Pri~e
.
. djustmcnt clause ~ o i l e d by a Foreign
(1)~1) The pnc~age Rates or Matcnal_ Pnces ly and service solicitations and
AdJustmcntd in fixed-pnce supp '
Government, may be use
contracts when D
.
b , formed wholly or in part in a foreign
(A) The contract is to e per
country; and
.
t controls wage rates or material prices
(B) A foreign govcmmcn
.
d
h
contract pcrfonnance, impose a man atory c ange
an d may, dunng
.
in wages or prices of matcnal.
_ ,, ,.,
(ii) Verify the base wage rates and material prices pri?r to contract award
and prior to making any adjustment in the contract pnce.
(2) Use the provision at 252.216- 7008, Economic Price Adjustment-Wage Rates
or Material Prices Controlled by a Foreign Government-Representation, in
solicitations that include the clause at 252.216- 700], Economic Price
Adjustment-Wage Rates or Material Prices Controlled by a Foreign Government.
If the so!i~itation includes the provision at FAR 52.204-7, do not separately list
the prov1s1on 252.2 I 6-7008 in the solicitation.
Of critical importance with the administration of a FP/EPA

Economic Price Adjustment.
contract is how to calculate the
The formula for making the Economic Price Adiustm
. as J.".iollows:
'.J
en t is
1
Adjusted Unit Price -( , x S(P)]
[
+ (1 - S)(P)]
11
CON I 70, Unit 3 le..son I - C

- omrau r)' ) - '
'It.\,
,... ..,..
/'
t:
.. ,
lnce,u; , , -,- it .\, and Ri k..
., \ - J>o~c
'
I 1 .,
n
Economic Price Adjustment Formula
Formula for making adjustment

AdJusted Umt P rice
-(~:
S\P) ]
I -
S)(P) ]
Where:
11 = Index for Base Period
-
12 =
Index for Adjustment Period
- S = Percentage of Price Subject to Adjustment (If the amount

subject to adjustment is an entire line item, then the percentage would
be 100% of the line item and you would only need to compute the first
part of the formula)
- P = Base Unit Contract Price
Given the information in this slide, here is an example of how to compute an economic price
adjustment:
Fixed-Price with EPA

Computation Example
AdJu >ted Umt Pr ic e - [ ~
, C{
f')] [<l
(f')]
Adjustment Computation Example:
- 11 Index for base year 3.50
- 12 Index for adjustment 4.50

- Percenta ge Subject to Adjustment - 15%
- Price of contract (or unlt price)-$2,000
- (4,50/3.SO)x .15($2,000) + (1-.15) x $2.000 ~

- {1.29 )( 300) + (.85 X 2,000)
- 387 + $1,700 = $2087
Now try Le rntle.n in your S ud .nt GL i c
---------------::-::-:-:-:::-:::-;-:-~;-:::-::-;-:r::-;::;:;-;;-;;;-T;;;;~-;;;;;~;--o::=-:-77
CO:V170, L'nit 3 Lesson 1 Contract {ipes, Incenti\'es, and Risks_ Page JI)
I
:)~":?~ -
. h Using t11e
information provided, calcuJ
to practice wit .
ate
. an EPA ca 1cu Iation for yo U

Here 1s
.
the adjusted price:
. dcd in January 2011, with a stated po
.
in the 3-year contract, aw:; is now January 2012.
int
An EPA clause was mcluded
d January 201 3.
201 2 an
to check the index as January
178
Base Index - January 2011
230
New Index-January 20l 2
25%
Percentage subject to adjuS tment
$200,000
Line Item Value
IO% of base unit contract price
Maximum adjustment
Remember to follow the 5 step process, as demonstrated below.

Step 1. Identify the index(es) which will be used in making a~justments. The contract
states that price adjustments will be made using the Producer Pnce Index (PPI) for
"silver, NAICS Code 21222").
Step 2. Identify the base period and times or events that will trigger price
adjustments. The contract provides for adjustment consideration using the January 201 l
index and the January 2012 index. The base period for adjustment purposes is January
2011. Calculate the new line item value.
Step 3. Identify the percentage of the base price subject to adjustment. The EPA
clause. states
d that 25 percent
. . of the contract unit price is sub1iJee t t o a ct~us tmen t . The
una dJuste contract 1me item price is $200,000.
Step 4. Identify any limits on adjustment The cont
. .
.
aggregate of no more or less than IO0 0 f h
. ract hm1ts adjustment to an
t e base unit contract price.
Step 5. Calculate the adjusted price:
You can also see. :'olume 4, Chapter 1. 2. l, Co

.
Terms and Cond1t1ons For Economic p .
~tract Pricing Refi
.
nee AdJustments.
crence Guide, for Establts 1llOe,
(J
-----------
CONJ70, U'nit 3 -L
esson I
C0
_.,.,..,.
i 'iJ
ntract T .
.
.
vl' l )
Ypes, lncent1ves. and Risks - Pa.:~
---------
----
- - - - --
- ---
fixed Price Contract with Pros

.
.
Ceiling Price Contract with Retectiv_e Pric~ Redetermination (FAR 16.205) and Fixed
coup Ie of contract types we will exrchve Price Redetermination (FAR I 6.206). The next
ithin FAR 16.205 and FAR 16 ,., p otrhe are th e fixed price, redetem1ination ones. As described
.... 0 6 ese c t
W
that should be met when contemplatin, th . on ract types have several very specific parameters
aware of.
g e1r use, as well as several limitations one must be
Fixed-Price
Prospective p nee
Redetermination
.
FAR 16.205
Should
be used

.
.
. .for acqUtsit,ons
of ru@nt!!Y..P.roduction
or
services where ,t ,s possible to negotiat;;a fair and
rea~onable FFP for an initial period, but not for subse uent
penods of performance
q
Contracting officer must determine that a FFP or FPI
contract will not satisfy the requirement
Contractor must have an adequate accounting system

Price must be re-determined promptly at time(s) specified
for subsequent periods of performance
Fixed-Price
Retroactive Price Redetermination
FAR 16.206
d development contracts estimated at
Appropnate for researc an
S150 ,000 or less when
- A farr and reasonable FFP canno
t be negotiated
en.od r,,ake the use of any o he'
rt performance P
-Amount involved and sn~, able

r,.xed ,pr,ce contract ,rnprac ,c
d w/shared risk
Ceiling price negotiate
Not used unless:
_ adequate
w.ll tai..e place
system ,s
t - rrrunau.on
-Contractor's accolmtm9
e tt1at the price rede e
-r, 3tJle assuranc
_ here ,s reaso .. f _d t,rne

-i.~!) approves
prcmpt ly at u,e sp-ec1 re
. .-t.-' (O' higher offi1.-
its use ,n
ting actr~i.,
- The he i;ld of contrac
?J
IRisks - pog.e ' ~
writ! g .
. fncer1fi\'t!S, ant
- Contract [Jpe:,,
.. 3 L,essvn 1
--------:-c~o~N 170,
in1t
Ii
F_irm Fixed Price, Level of Effort (FAR 16,207), The final type of fixed price co~tract to be
discussed in this section is the Finn Fixed Price, Level of Effort arrangement. Agam, as
described at FAR 16.207, this contract type has several very specific parameters that should b
met when contemplating its use, as well as several limitations one must be aware of.
e
Fixed-Price Level of Effort

FAR 16 207
.. earc and develo~ment invest1ga11on or study
Suitable for res
h
required
usually produces
1evel ~f eff~'lli2!!
a re ' Ort or the result achieved by apptlcat,on or the
aUs:d
only when
output
result
FFP contract
would
be or
more
appropnate
s cannot be clear1y defined other-'vise ,
contract
The required
.
awardlevel of effo rt is 1dent1f1ed
and agreed upon .in advance of
Contract price must bee$1 c.

. a pproved by the Chi f
of the Contractmg Offic . :J0 .000 or less, unless
P
e
nee and payment is bas
and not on results ach1eve~d on the negotiated level of effort required

--
COJ\'170 l)n,J
, . 3l
Jessor ~--
.. ( lJ. '"""{\,,..~ - ~.:..
....,~"
. ~-:~<i-
Enabling learning Objective

3.105 Describe conditions for use of the different cost
reimbursement contract types. emphasizing the geometry
and enforceability of the Cost Plus Incentive Fee (CPIF)
contract type.
In order to understand the primary differences and general nature of Fixed Price vs. CostReimbursement Type Contracts, consider the following question:
Why do cost reimbursement contracts put less risk on the contractor and more risk to the
Government?
In order to better answer the question above, contrast three key elements of cost reimbursement
and fixed price contract requirements:
1) Payment - Cost reimbursement contracts allow for incremental payments of all
allowable, allocable and reasonable incurred costs (FAR 52.216-7 through 52 .216-12).
Fee may be paid in increments, or be paid at the end of the contract. ln a fi xed price
contract, payments can be made in a similar manner, but are generally paid as "progress
payments" (FAR 52.232-16), with a certain percentage of the payment withheld until
completion or final delivery. Commercial financing arrangements and perfonnance
based payments (FAR 52.232-29-32) may ~ffor a mor~ favorable cash flow than progress
payments, but typically not as favorable as m ~ co.st re1mb~rsement contract. But there
are two, even more important reasons fixed pnce 1s more nsky for contractors.
------------.-:-:---::-:----;--r.::=:::~::-;::::=::-::~-;--~COl\'J70, L'nic 3 Lesson J - Controcc Types, lncentives, and Risks_ Pat?e 23

~
L;;'.\:-~
. 1ude clauses which state that

t contracts inc
k . h. h
.
,, cost reitnbursernen
.'t'lp\ish the wor 32
wit mt e esumat d
...,,ust put
. to
. acCO"'
ton of cost" or 52.2 -22 ' " Limitation
2) "Best efforts
forth their
. best e orts

cof
contrac
"l.,11:lltta
I

ly, b ut ca?not
price ofor
the ...contract (f AR 52.23 2-20. 'the
contractor
works diligent
t S
funds"). pursuant to these clauses, if rice of the contract, the contractor is not
complete the work within the eSt1103ted P \\ cannot be terminated for default.
nd
. to continue. to. perfor!ll,
.
th "best
obligated
a genera
y efforts" language exist for fixed price
15
1
You
might
wonder
1f
s1m1lar
causes
WI
contracts in fAR 52.232, or Df ARS 252.232. The answer . .. ....,~.r " suc h c lauses and
"best efforts" language do not exist in fixed price contracts. So~e ~ay ,;"ondcr about the
intent ofDF ARS 252.23 2-7007, "Limitation of Government Ob hgatl on clause, which is
used in incrementally funded, fixed price contracts. This clause enables the Government
to incrementally fund fixed price contracts (not a "normal" practice in most buying
offices). However, it does not include any "best efforts" language. The only relief the
contractor may receive is when the Government delays putting funds on the contract. In
those cases, the contractor may receive consideration for cost and schedule due to th
Government caused delay, through a negotiated supplemental agreement.
e
3)
Defa~lt
the default/tenninati
. cost reimbursement
.
fixed
pnce Clauses
contracts,- Compare
per FAR 52.249-6
(C
. on clauses m
and
ost Reimbursement) and 52.249-8 (Fixed Price
Supply and Service).
o 52_.249-6:
Contractor
defaul ..m ~overnment, s interest, or for
~:lu~: toJe~fonn
andcan
curebeunaccep~:t:!
i~~
co:r:~;or ~s1~o~e~;~est effort_s" clauses,;:: ~vae:e. Remember' when

prove than missi~g a ard"
forthcontractual
,ts "best efforts"
must
provetoa
deliv. Th.isment
can be
tougher
o 52.24 _ .
ery date.
. Contractor is sub.
9 8or
supplies
services wth
1ectf to default fior f:a11mg t "
f: T
1 111 th
a1 mg to make progres
e ,me specified i
o deliver the
any other provisions / ~s to endanger perf n the contract ... ,,,, Ji
or default" re u
o t _e contract.. "
ormance ... " o " , ... or
efforts" re qmrements
.q lrements
m
the
fix
d
.
.
The
r i ...thperform
e pnc key dif",erence

,, .
contractor does no d ,~ the cost reimb e contract, com
s e deltvcr
subject to default rt ehver on time in :~ement contracf ared to "best
FAR 52.249.
emed1es, pursuant t o the
ixedti price co ntract
s. Ifththe
Based on these clau

reimbursement conts, we can see how much
ixed price d
' ey can be
efault clauses in
than a termination r:c~:::u1tault.

111 costTh~refore~~:/iff'.cult
reimburse
ltlahons itforcould be tote .
F~r these reasons fixed .
ment contracts conveniencennmate a cost
reimbursement c~ntracts.pnce contracts place more nsk
. on the. c
are more com mon
ontractor, as co
mpared to c ost
CON 170, Unit 3 Les son 1 _ (',.. . -
N-CLASS REVIE\V .
'"difference
'
. mbthe
clauses
an d m1onnat10n
.
1
Jlc~vieW thekey
contractual
t table bel ow .. Explore the given
FAR references to
recognize
s e ween fixed pnce and cost reimbursement contracts.
Fixed Price Contracts
No similar clauses. FP contrac ts
do not contain "best efforts"
language. Simplr a deliver or
default situation.
~
t "
,,sest Effors
FAR 52.232-1
Upon submission of proper
invoices or vouchers, the prices
stipulated in this contract fl.Jr
work delivered or rendered and
accepted, less any deductions
provided in this contract.
Payments
Contractor must deliver the

product or service IA W the
contract requirements and
schedule
FAR Parts 13, 14, and 15
Obligations
Applicable FAR
methods for
procurement
AR 52.232-1 - Contractor paid

F
ice upon delivery or a portion
pr
the price as work pr~gresses
of
through contract financing
Cash Flow
--
pa yments.
Fix ed Price Contracts
Cost Contracts
FAR 52.232-20i 52.232-22
no
- Parties estimate the cost to be
more than stated in the schedule
- Contractor agrees to use ''best
effprts" to eerfl.Jrm within the
estimated cost
- Contractor shall notify the
Government when it reaches 75%
of the total estimated cost
- Contractor not obligated to
perfonn beyond total estimated
cost of the tenn contract; however
on a completion contract, if the
Government adds funding, the
contractor is obligated to continue
perfonnance.
- Government is not obligated to
add funding to continue the effort.
FAR 52.216-7
Payment request or proper
invoice submitted and pavmcnt
made (pr all allocable al/mmhlc.z.
and reasonable costs.
1
Contractor uses its "best etihrts "

within the contract funding to
perfonn the required work
FAR Part 15
FAR 52.216-7 - Contractor paid

ac tual costs bi-weekly and paid
fc e based on percent of work
co mplete or the fee dollars earned
Co st Contracts
CONi l O. Unil 3 Lesson/ - Contract ~,pes, lncenti,es, and Risks. Page f 2J
Pr ofit or Fee
Risk
Inspection &
Acceptance
Changes
(Noncommercial
contracts)
Property
Administration
all revenue
Contractor retams
without regard to the ac tual cost
nee
of pcrfom1ance upon accepta
of product; {!arns a profit or
re alizes a loss
Contractor paid a fixed or

va, iable f ee based on ability to
control costs and/or pcrfonn Well
ba sed on work percentage
co mplctcd
FAR l 6.202-1 _Contractor ri~k

in unforeseen cost of perform mg
to the defined scope. Places upon
the contractor maximum risk and
full responsibility for all costs
and resulting profit or loss
Unforeseen cost of performing to-the defined scope on the

Contractor; however, more rislsJg_
the government than the
~ontractor in the area of cost risk.
Contractor corrects defects at its

Contractor corrects defects against
expense; Acceptance or rejection contract;
is upon delivery.
Acceptance may be made within
60 days.
Contractor must e_er{grm.

contract as changed even prior to Contractor mar stoe work once
a price settlement
contract fjmding limit is reached.
However, if funding is added on a
completion tYPe contract,
contractor is obligated to continue
working up to the new funding
limit.
Government has title to accepted
items; Title & risk of loss for
Government has title to all
other property negotiable
property paid for by the contract
and generally assumes full risk of
loss
Minimum Government
Surveillance
M@l_mum Government
~
- Per FAR 16.301-3
At least one contracting officer'
representative (COR) qualified s
accordance With FAR l.602-2 in
must be designated prior to awa
rd
of the cost contract or order.
\
'
!,
,,t,
l
,,,
f:
'.1
,.- '".t
,, ,
~
. les important
cost-Reimbursement Contracts (FAR subpart 16.3). FAR 16.301 ProvJl
details about the nature of costrcimburstmcnt type contracts.
.
ft Otal cost for the
Per the descti~tio~ at FAR 16.3011 , "_th~se cont~a_cts establish an estimate O
eed except
urpose of obligating funds and establishing a ceiling that the contractor may not_exc
( t 5 are
~tits own risk) without the approval of the contracting officer." Because fixed pnce con_trac
the preferred contract type when a requirement can be well defined enough to al~ow for its use,
one can surmise that the use of cost-reimbursement contracts should be for the circum 5tances .
that '(1) do not allow the agency to define its requirements sufficiently to allow for a fixed-~nce
type contract ~see 7 IO~); or(:) :Uncertainties involved in contract perfor:mance do n?,t penntt
costs to be estimated with sufttc,ent accuracy to use any type of fixed-pnce contract.
In addition. because of the preference for fixed price contracts, if a cost-reimbursement contract
is contemplated, the contracting officer is required to document the rationale for selecting the
contract type in the written acquisition plan and ensure that the plan is approved and signed at
least one level above the contacting officer (see 7 1n3G) and 7.105). If a written acquisition plan
is not required, the contracting officer shall document the rationale in the contract file. See
also ~ l(d).
Cost-Reimbursement Contracts
Limitations (FAR 16.301-3)
(a ) A cost-reimbursement contract mdy be used only when:
(1) The factors in .!_6_101 have been com,tdered;
(2) A wr,tten Acq Plan plan has been app-roved/signed at least one level above
the contracting officer;
(3) The co tractor's acco nting wstem Is adeQuate for determining costs
appllcable to the contract; and
(4) Adequate Government reso rces are available to award and manage a
co tract other than f,rm-fixed-priced (see 1.J.94(e)) including(i) Des,gnatlon of dt least one contracting officer's representative (COR). ..
(1i) Appropriate Government surveilla nce dunng pe1formance...
(b) The use of cost-reimbursement contracts is prot11b1ted for the .acquisition of
commercial items (see Part~ 2 a d 12).
' - - - - - - - - - - - - - , (':"(
()~;\:!
' ,:;=
i NlJ,/{~',;-;,,,-;-_;uT.c~s:;
, o:fl;-l,~('~
or~,,;,
rc-;;,c-:;,r1:1~[';::f!:-s,lh:,c::
.(.:-;;/I-;;(i,:.t:'S.-t~,,,=-1c1;-;1~~,-,~:-.- l)--. is - ,age :!7
Cost-Reimbursement
Fami\y of Contracts
Cos\ and Cost Sharing

Contcac or
Cost Plus Fixed Fee (CPFF)

Cost Plus Incentive Fee (CPIF)
Coverruncnl
0
Cost Plus Award Fee (CPAF)*"
c.,_,. l'rl"'
I C'c:i,uc\ \
L ---
__ l
Cost Risk
.. Addressed in the Incentives Contracts section
Cost and Cost Sharing Contracts (FAR 16.302 and FAR 16.303). When the Government and
contractor expect to receive mutua\ benefits from the performance of a contract, sharing of costs
is often agreed. In the case of a cost-sharing contract, the contractor agrees to bear some part of
the incurred costs. FAR 16J03(b) states the application of the cost sharing contract to be: "A.
cost-sharing contract may be used when the contractor agrees to absorb a portion of the costs, in
the expectation of substantial compensating benefits."
Cost and Cost Sharing

FAR 16 302and FAR 16.303
Cost Contracts
- Government pays allowable cost. no fee
- Elements: Estimated Cost
- Application:
Non-profit institutions/organ1zations an d
...
f ac1lit1es contracts
Cost Sharing Contracts: Government gays a portion of the
agreed to, allowable costs
"""" also, no fee
- Elements: Estimated Cost, Govern
,
-Application: Research &Deve\o mment s share
.
or non-profits
P ent efforts with prof its
I
t
(.'(J.Y I 70, Unit 3 Lesson I C

onirac:1
,.
~ J~
lypes. Jncenlives, cmJ 1'
~, , , ''j " .dr::liiil

' --1\aiiiiliolllFF_,.___________
___________
.. . . . ..;..... 'PP ~ -
notice that DFARS PGI 216.104-70 provides some supplemental infonnation relative to
Again,
.
I
.,., of these kinds of contract for certain R&D efforts, namely research and exp oratory
thC ll~ ....
development, rather than for advanced development:
DFARS PGI 216.lo.t-70 Research and devl'lopmcnt.

( \) General. There are several categories of research and development (R&D) contracts:
research, exploratory development, advanced development, engineering development, and
operational systems development (sec DFARS 235.001 for definitions). Each category has a
primal)' technical or functional objective. Different parts of a project may fit several
categories. The contract type must fit the work required, not just the classification of the
overa! 1program.
(2) Research and exploratory development.
(i) Price is not necessarily the primary factor in detennining the contract type.
(ii) The nature of the work to be performed will usually result in a cost-plus award fee.
cost-plus fixed fee tenn, cm,t-110-fee, or cost-sharing contract.
(iii) If the Government and the contractor can identify and agree upon the level of
contractor eftort required, the contracting officer may select a finn fixed-price level-of-effort
contract, except see DFARS 235.006.
(iv) If the Government and the contractor agree that an incentive arrangement is
desirable and capable of being evaluated after completion of the work. the contracting o!licer
may use an incentive type contract."
-----~-----r'fl.V~~T,:;-:-;:::;,--.:.-;::-::;;;:::--::r:-;:;-,.~~--;--;::-:---~
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Cost Plus Fixed Fee (FAR 16306) probably the most \\1.de)
1. used cost reimbursement contract is
the Cost Plus Fixed Fee contract.
Cost Plus Fixed Fee

FAR 16.306
Description
d fee
_ Government pays allowable cost plus f ixe
-Elements.~
. Estima
' tf>fi r:
Cno"stts & Fixed Fee.
. . . Research preliminary studies.
-Application. and test where
.
CPIF not practical
development
Limitations (FAR 15.404-4(c)(4))
,,
- Fee limited to 15% of estimated costs for R&O or 10 ,o

of estimated costs for other contracts
Contract ProfiUFee Analysis

FAR 15404-4
(i) The contracting officer snail not negotiate a pnce or fee that
e.s:ceeds the following statu~at1ons . .
(A) For expenmental deve~p11enta1 or research work pertormed ,

unaer a cost P us-tixea.fee contract. the fee <,t I . . )! .... i , 1-~c (_!._ :2
!J:~-~ of the contracrs estimated cost. exctud1ng fee
1Bl For architect-engineer seivices for public works or utilities. the

contract pnce or the estimated cast and lee for Pf0duct1on and dehverv
of designs. plans. draw,ngs and SPec1fica11ons Shall not exceed 6
~rcent
ot the estimated
ut
hty, excluding
fees. cost of construction of the public work or
(C) For
t h e r ~ contracts
the fee 'fee
''"not-e,r,-.,
10
L:1.:.
:_1 o
of thecontracrsest:mated
cost, excluding
- ~' (Ii) The contrac,ng officer's s,g,ature on the price negot,ation
memorandum o, other docunieniation supparting deterrn,nahon of fair
and reasonable pnce documents the contra, ,ng officer's
exceeded
determ,na,,on that the statutory PflCe or lee tun1tat,ons have not been
CU.\'I70, Un;13 &"un J C

..
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JO
- ontract lypes, Incentives. am 1'

0
Cost-Plus-Fixed Fee Contracts

FAR 16 306
Provides tor payment of allowable costs and a negotiated fee that 1s fi xed
at 1ncept1on of the contract
The fixed fe~ does not vary w1U1 actual cost
of changes to the wor'I( to be performed
May be ad1usted as a result
Contractor has minimum 1ncent1Ve to control costs

Contractor must have an adequate accounting system
Least preferred type of contract because the contractor assumes m inimal
cost nsk for the pertormance of the contract
May only be used w ith negotiated procurements
After reading FAR 16.306, complete the following chart. In this scenario, the total estimated
cost of the CPFF contract at the time of contract award was 2,530,000, with a fixed fee
negotiated at 10%, which was 253 ,000. What would the fee be at the end of the contract, if the
final cost were at the following values?
Computing Final Fee

FIXED FEE Computed at 1~ , of
Fl 'A COSTON CONTRACT
Estimated cost of SZ,530.000
$2,530,000
$253,000)
$3,000,000
$2,330,000
$4,440,000
-----------rmTin,.;;;iTr:,-;:;;;-;;~~;;;;-:;=,;;;.=:~~--:---=--cos, 70. Cmt J Le.,wn I Contract T1pe~.

lnct't1Ji1e, ai,//Ji,/... . JJ
' '
' ' - age 31
Incentive Contracts
FAR subpart 16.4
Fixed Price Incentive Firm Target (FPIF)

Fixed Price Incentive Successive Target (FPIS)
Fixed Price With Award Fee (FPAF)
Cost Plus Incentive Fee (CPIF)
Cost Plus Award Fee (CPAF)
Incentive Contracts (FAR subpart 16.4). In recent years, there has been considerable attention
paid to the different types of incentive contracts. As a matter of a fact, the Director, Defense
Procurement and Acquisition Policy (OPAP) issued a memorandum dated April l, 2016, entitled
"Guidance on Using Incenti ve and Other Contract Tvpes," which is a detailed and helpful
reference to understanding many of the different contract types, particularly, the incentive
contracts.
The FAR allows several different types of incentive contracts in both the fixed price and cost
reimbursement categories: Fixed Price Incentive (Firm Target), Fixed Price Incentive
(Successive Target), Fixed Price with Award Fee, Cost Plus Incentive Fee, and Cost Plus Award
Fee.
We will first explore the Fixed Price l~centive (Firm ~arget) and ~uccessive Target types, then
compares them to the Cost Plus Incentive Fee type. Fmally, we will examine both Fixed Price
with Award Fee and Cost Plus Award Fee contracts.
_,,
,.>- 1 ,
C0:\/170, Cnil 3 Lesson I
Cuti/"
\
~
... ..
........
...
. -
..
fixed-Price Incentive (Firm Target) (FAR 16.403-1)
Fixed-Price Incentive (Firm Target)

FAR 16.403-1
A fixe~-price incentive (firm target) contract specifies the

fol\owmg elements negotiated at the outset:
- Target cost
- Target profit
- Ceiling price
- Profit adjustment formula
Final cost fess than the target cost results in a final profit
greater than the target profit
Final cost more than target cost results in a final profit less
than the target profit, or even a net loss
Because profit varies inversely with the cost, this contract type provides
a positive, calculable profit incentive for contractors to control costs
After reading FAR 16.403-1, describe when a fixed-price incentive (firm target) contract
would be appropriate? \Vhat are the limitations for its use?
A FPl'F)
tive tool for inccntivizing
a Contractor to Control Costs. .
, contract can b e an euec
.
Becaus f th
k' th. type of contract provides a Greater Pr.ofit when final cost 1s less
e o e way it wor s, 1s
.
. ~
dd.
. h
than Target an d Less p ro ti1t w h en fimal cost 1s more than
In. a. 1t1on, 1t retams. ,t e
. Targd.
.
ch"ra
of th e fi,xed -pnce
cont ract 1n that there 1s a Pnce Ce1hng. In tenns of nsk, a
" ctenst1cs
FPl(F)
..
C t actor Risk in that the government assumes a share of the
contract helps to mitigates on r
h
cost kb
G
nent as the Government also s ares m cost savmgs.
ns ut can also benefit the ovemi
. , L .. J
CONJ 70, Unit.) e.\:sun
Contract frpes, /ncentiw:s. um/ Risks Page I 35
:11
fixed Price Incentive (Firm 1arget)

Key E\ements
$h::irolm
Pot : 01hng ...
Target co~t. $100

Target pro~\' S 0
Ta1ge\ p ice. S ,o
Pnce ce1\1 ng. ~ 130
Shl e 11ne. SOi2.0
P,ti;
S~ 25 00
Pc .. , o :it.aJ
A'!isumi:,1C'\ ,P-A.
G
4
2.
e oo , o 1,0 , 20 no ,4c 150 ,eo
Recent guidance (Better Buying Power initiatives, fo\\owed by incorporation into the DFARS
(DF ARS 216.403-l )) has a\so aimed to c\arify and further explain some of the important
considerations regarding Fixed-price incentive (firm target) contracts. Specifically, it has been
noted that ''the contracting officer sha\\ give particu\ar consideration to the use of fixed-price
incentive (firm target) contracts, especia\\y for acquisitions moving from development to
production" and that it is important to "pay particular attention to share lines and ceiling prices
for fixed-price incentive (firm target) contracts, with a 120 percent ceiling and a 50/50 share ratio
as the point of departure for establishing the incentive arrangement." Additionally, you may
review DF ARS PGl 2 I 6.403-\ for further guidance on the use of fixed-price incentive (firm
target) contracts.
Contracting Officers must design the FPIF incentive contract geometry as a ''package,"
which considers Target Cost, Target Profit, Share Rat~o, and the Ceiling Price. The graph
above shows a target cost ?f l_OO, target profit of$\O (which is 10% of the target cost), and a
Price Ceiling of$ \30 (which is \30% of the target cost).
As with other contract types, negotiating the target cost and target profit re .
.
.
quires cost ana1y515
and an assessment of n sk, and
approach for negotiating
profit , such as the We1g
. ll ted
. a structured
..
.
Guidelines method. The pnce ce1hng under an FPlF contract is the maximum d \\ . b. . f
tl1e pnce
cei1mg, c ontractmg
Officers typical\ o ar 11a \l1ity o
the Government. In negotiating
k
f
Government' s cost estimates as well as thens o cost over run then pursue a Yassess
.
.t .1e
. . .
.
'
pnce cei1mg near
or below the pessimist1c cost estimates.
Beyond the ceiling price, the contractor is sti\\ obligated to deliver in accordanc . h l
,,
c:
.
d h
e Wlt t 1e
contract. The FPl(F) is in the "fixed pnce contract iam1 1y, an t erefore includes one of the
fixed price "Default" clauses (FAR 52.249-8 through -10). Pursuant to these clauses, if the
CON / 70, Unit 3 Lesson I Con tract 7~vpes, lncenti\-es an JR ,.
1
'
'
, ,
-"11.s - Page I ., 6-
I''
.. .lo,~- ....
contractor fails 0 dcli~er, even beyond the ceiling price, the contractor faces the remedies of the
Default clause, mcludmg the possibility of a tennination for default.
The next k.cy ~PlF. e\ei~en~ is the "profit adjustment formula," or "share line." The slope of
the share lme ts pnmanly influenced by program risk. An 80/20 share line means the
government sav~s 80% of an under run (final cost is below target cost), and pays 80% of an over
run (final costs is above target cost). The contractor adds 20% of the under run to the target
profit, and subtracts 20% of the over run from the target profit. In comparison, a 50/50 share line
means the government saves 50% of the under run and pays 50% of the over run. The contractor
adds 50% of the under run to the target profit, and subtracts 50% of the over run from the target
profit.
Generally, Contracting Officers would pursue a steeper share line for lower risk programs. A
steep share line offers significant reward for an under run, but a significant loss in profit in an
over run. A steep share line is almost like a finn-fixed-price contract. In contrast, Contracting
Officers typically allow for a flatter share line for higher risk programs. While the flatter share
line does not offer significant increases in profit in an under run scenario, the flatter share line
does not cost the contractor as much as a steep share line in an over run scenario.
In addition, share ratios for the under run and overrun do not have to be the same percentages.
For instance, we could negotiate a 60/40 under run share ratio and a 50/50 over run share ratio.
Finally, the Point of Total Assumption is the point at which the contractor is no longer losing
on\y a portion of his overrun costs (based on the share ratio), and begins losing ALL of his
overrun costs. At the PT A, every dollar the contractor expends is subtracted from the target
profit. The PT A can be calculated as follows:
((Price Ceiling - Target Cost - Target Profit)/ Gov't Share) + Target Cost
Thus, in the scenario above, the PT A would be:
(('::i / 30-
.' J(I(} - :i!fl)
.81
:,/ (}/)
1~5
In negotiating FPIF elements, take care to negotiate a ~hare li~e and ceili~g price an~ establish a
PTA that is above the x-axis (lower than the ceiling pnce). It these two lmes do not intersect, the
incentive does not function as designed in an over run situation.
In summary, the FPl(F) contract type provides signifi~ant profit incentive ~or the contractor to
Under run, allows the contractor to share some losse~ m .an over run, yet .still holds the
contracto r , s "P1eet to th e fi,re" w i'th respect to delivenng m accordance
with
the contract.
.1
b Because
1cula le profit
the
profit
.
'th
the
co.;:t
this
contract
type
prov1ues
a
pos1t1ve,
ca
.
1 vanes mverse 1y w1
., ,
incentive for the contractor to control costs.
----------------:::;-;~;-;-ii
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CON/ I 0, vfll
c 0
Fixed-Price Incentive (SuccesSive

. Target) (16.403-2)
------------
Fixed-Price Incentive Successive Target (FPIS)

FAR 16.403-2
A fixed-price incentive (successive tar~ets) contract
specifies the following elements negotiated at the outset:
-An j!)itial target cost and Qrofi.!
-An
targetinitial
profitQ[ofit adjustment formul~__to establish a firm
- Must include a ceiling and floor for the firm target profit
-The~atwhich the firm target cost is

negotiated and the firrn target profit determined by
formula
- Usually before delivery or completion of the first itern
-A ~ t h a t is the maximum that rnay be Paid to

the
contractor_except
any other contract Provisions that
provide
for adJustments
After reading FAR 16,403-2 descrb
e "' en a fixed
con ract
woutd
be appropriate? ,,,h
t
-Price incentive (successive tar ets)
D
"
a are the 1 ,
associated OD guidance?
un1tations for its use? What is the
t
'
Cost Plus Incentive-Fee Contracts (FAR 16.405-1). The operation of a cost-plus-incentive-fee

contract (CPIF) is similar to that of an FPI(F) contract except that a CPIF contract has maximum
and minimum foes paid at optimistic cost and pessimistic cost respectively . Additionally, unlike
the FPlF contract, a CPIF contract does not have a ceiling price (funding is limited to available
funding; however, can be increased if funding is increased.)
Cost Plus Incentive Fee

FAR 16.405
In a CPIF contract. the Government pays allowable cost and

an incentive fee which is determined by comparing actual
costs to target costs and adjusting target fee in accordance
with the fee adjustment formula (share ratio . The followin
CPIF Contract
elements are specified:
TaJg~t Cq_aj
.l
Target Fee
Sharing (fee adjustment) Formula
~.,inimum Fcc/Mmcimum Fee
'
Application
Services or development and test programs where a
profit incentive is likely to provide motivation for more
effective management
Cost Plus Incentive Fee (cont'd)

FAR 16.405
The adjustment in fee is limited by the minimum and

maximum fee established/negotiated
Target cost and fee adjustment formula negotiated ~hould
be likely to motivate the contractor to manage effectively
Excellent to "wean" contractor from CPFF
I - Contracl h. pes. lnnmtives. m1</ Ri., ks - Pac,.:e

( .Oi\i.1 ~I 0 l ; fl/-1 .>' f ; en(in
"
j C)
In the example below of a CP!F contract, there is a Range of Incentive Effectiveness betwe
$800 and $1400, the optimistic and pessimistic costs. The contractor would receive up to t~n
maximum fee of$120 if his contract costs were $800 or below. The contractor would rec e
little as the minimum fee if his contract costs were approaching or at $I, 400 and above. et ve as
Theref?re, he has no incentive to control costs after he reaches $800 in an underrun situ t'
$!400 man ovenun situation.
a ton or

. Range of incentive effectiveness
,,
Max Fee
------ ~
Targ et
Fee
~ Fe Adjustment Line
$70
"'
----------
Min Fee
$BOO
$1000
Target Cost
Optimistic
Cost
$1400
Pessimistic
Cost
Check- for Understandin .

What does FPI(F) s~~niomparison
betw een FPI F
1or?
What does CPIF
( ) and CPIF
stand for?
Which ofth ose contract ty

pes cont
Wh
ains a
tch contract t
pnce ceilin
funding cla
Requires th
ype requires th
uses prescribed in F e contractor to
AR 32:
dehver "be
e contractor to deriver even if.
st efforts" pursuant t h
Its costs
o t e
exceed t
Includes the fiIXed
default cl
pnce
ause:
CON/70,
unu. 3I
,es.son I - Contrart
'
rr. -
arget cost:
The ni.:xt group of contracts we will explore are the Award Fee contmcts, both the fixed price and
cost plus \'aricty. Awar<l-frl! arrangements arc appropriate when aspects of perfomrnnce cannot
be objectively/quantitatively measured and areas of importance may shift over the course oft~e
contract. The award fee incentive can be used in contracts for research and development, ma1or
weapon systems, production items, operational contracting services, logistical support,
constmction, services or manpower support. When considering the use of the award fee
incentive, the Contracting Oflicer should consider the following factors.
Contractor Motivation Use of an award-foe incentive motivates the contractor to concentrate resources in areas critical
to program success. The award-fee plan should identify the specific areas of perfonnance that
are most important to the program's success. An objective in negotiating an award-fee
arrangement is to achieve effective communication between Government and contractor
personnel at all levels to achieve desired results.
Administrative Cost
We will see that the labor and administration costs associated with the award fee incentive are
significant. In addition to the manpower required to monitor perfonnance, it is also a tremendous
commitment of resources to convene an award fee review board, an FOO briefing, and postdebriefings to the contractor. Pursuant to FAR 16.405-2, and DFARS 216.470, the Government
must consider these costs compared to the benefits of the award fee incentive.
Contract Value
Avoid using dollar thresholds as the sole detenninant to select use of award-fee. Estimated
contract dollar amount is only one measure of value and may not be the most important
consideration. Instead, consider contract value in tenns of the criticality of the acquisition and
its impact on related efforts. A relatively small dollar value contract may be extremely
significant to the overall major program and, therefore, require the flexibility and judgmental
evaluation inherent in using the award-fee incentive
Fixed Price Contracts with Award Fees (FAR 16.404). The Award Fee incentive is a pool of
money which the contractor can earn based on perfonnance, even in addition to the contract's
profit or base fee. The award fee incentive can be included in a fixed-price or costreimbursement contract. An 'award fee contract" is a name commonly given to a fixed-price or
a cost-reimbursement contract which includes an award fee incentive. Speci fie elements of the
award fee incentive are stated in the Award Fee Plan.
First, we will discuss fixed price contracts with award fee incentives. Because fixed price
contracts, by nature, include a significant cost control incentive, including an award fre aspect
with them is usually meant to focus the contractor's efforts on technical and schedule
perfonnance. See I n.40 I (e) for the requirements relative to utilizing this contract type.
CON / 7(}, (,'nil 3 Lesson I - Contrud Types. Incentives. and Ris/..s - Pugc- j 41
Fixed-Price with Award Fee (FPAF)

FAR 1 4
Used to motivate contractors for pspect s_of_p e rfor!]la f}J::e

th a( cannot be m e~sur ed o h1ect1v0l y
Consid erations for use:
- Benefits of adm1n1strat 1on must outwe1gh/excecd the
adm in,strat ,ve costs of conduclJ g award -fee e a lua tions
- Procedures have been establrshe-d for condu ctin g an awa rdfee evaluation
- An award-fee board has been establ is hed

- An award -fee str ategy has been approved at a leve l above
the con tracting o fficer
Cost Plus A"ard Fee (FAR 16.-405-2). A cost-plus-award-fee contract is a cost-reimbursement

contract that provides for a fre consi sting of (I) a base amount (known as the "' base fee " ) fi,ed at
; ncepti on of the con tract. if a ppl icabl e and at the di scceti on or the con t<acti ng officer, and (2) an
award amount (known as the a wa,d fee poor' ) that the contcactor may eam in who! e or in pat1
during pe<fotmance and that is sufficient to ptovide motivation fot e,cellencc in the areas of
cost, schedule,
and technical
utilizing
this contract
type performance. Again, see Jt, 4n l (c) for the requirements relative to
Cnd' a CPAF contractot, a contta~to, is re;mbutsed fo, all allowable costs and is pm,ided the
opportumty to earn an awa,d fee Lnhke fixed pnce wuh awa,d fee cont,acts, cost plus awa,d
fee contrncts may <nclude a base fee . "hh. the contrn.cto, earn, without evaluation against the
.,,.,.d fee criteria Base fee ,snot allm,ed <n fixed-pnce-awa,d.fee (FPAF) contrncts
Base fee in a cost-pl us-a ward-fee (CPA F) conttact ; s a fi '<d amount tecei ved by the contrnctot
rega,dless of the contract m's e,aJuated pe<fotmance The base fee may ,ange from O"/o J of
the estimated contract cost excl ust ve of the fee ( see DF AR S 2 I 6 405-2( c )(ii X )) Like a10fi, ed
P
rice award fee contract, contractors can earn fee In the award fee pool bas . d 8
h .
n,,,rfomlance with respect ro Lhe cnrena.
( t en d "
. . m
. t h ea ward f,ee p1an Per FAR,
e on
should
not be awarded \\hen the fee- detem11nrng
that
r~
o t1i1c1a
J has determined 16
401 c) ' a war I ee
pe
rfonnance has been sub-rnarl!,ln
or
unsa11s1actory
e
as1s
for
award
fi
d
. . .
r
1h b
contractor
documented in rhe contra l file. al
ee etenninat1on 1s
( ( )\I
~o. l. f/J i J Ln,.. If/
'r,,. .~
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....
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Cost Plus Award Fee

FAR 16.'101 & FAR 16.405-2
Under a CPAF contract , the Government pays allowable

cost, base fee , and award fee. Used when the work to be
performed is nei ther fea sible nor effective to devise
predetermined objective incentive targets.
- 8:-i se fee does not vnry; the nward fee is dntarmined by
performance
- Award foe is a unilalornl Govornmout sulljoctive evaluation

dec ision
Elements
- Estima ted cost
_ Base fee (up to 3% of estimated cost)
- Awa rd foe
Cost Plus Award Fee

FAR 16.401 & FAR 16.405-2
Application
- R esenrc h and Development
.
~ .
tivato excoUonce m quality.
- Govornmcnt w~nts .to mo .
d ost -effective management
timeliness. technical ingenwty. an c
Limitations
-Not to be used trl l1~u of C

m easure m ent is feasible
'{) , \ 1I () ' l
PFF or CPJF whom objective
- Pa.~'" i .JJ
. , .e /m en111 t>s. om/ H.1.,A.,
, I t .' ' '(}n I - < nm1ct 7.1'1' '
,,,11 '
---- --'
Cost-Plus-Awa
rd-Fee Contracts
--------- ~
Total
Fee$
Award Fee Pool

)
some or none
11
(contractor can earn a '
'
Base Fee: 0-3%

(DFARS 216.405-2)
Total Estimated Cost $
The following tenns may apply in either a CPAF or both a CPAF/FPAF contract and are
important to understand in order to be able to administer Award Fee type contracts:
Award Fee Pool
The award fee pool is the total of the available award fee for each evaluation period and base fee
(if applicable) for the life of the contract. Base fee is paid on a regular basis without the
contractor's pcrfomrnnce being evaluated. Since the available award fee during the evaluation
period must be earned, the contractor begins each evaluation period with 0% of the available
award fee and works up to the evaluated fee for each evaluation period. Contractors do not
begin with I 00% of the available award fee and have deductions taken to arrive at the evaluated
fee for each evaluation period. However, the potential for the contractor to earn 100% of the
award fee amount should be a mutual goal as it demonstrates the program's objectives were
clearly communicated and achievable
Base Fee
Base fee is fixed at the in~cption of tl~e contract and is regularly paid throughout the performance
of the contract. Base fee 1s nonnally included on a contractor's voucher for costs incurred and is
approved as pa~ of the invoice's payment process. T_he avai_Jable award fee portion of the
award-fee pool is alJocated to each award-fee evaluat10n penod and is earned based u
th
'
f.".
I
l
.
.
d
pon
contractor s performance 1or t iat eva uat10n peno . Base fee is not allowed in fixed-price-e
award-fce (FPAF) contracts.
Your acquisition strategy dctennincs the amount of base fee to include in the award-fee pool
The use of base fee enhances a contractor's cash flow, but it may be unnecessary if th CPAF
portion is combined with other types of contracts. When developing a base-fee obi "' t~ r
f.".
Jee 1ve 1.or
. .
CP~~ contra~ts, see DFARS 215.4 04 -74(c) 1or app 11cat10n of the DOD Offset Policy for
Fac1I1tics Capital Cost of Money.
CON! 70. Unit 3 l esson I
Contract TJ,pes, Incentives' and RIS. ./1.,.S
p age j
,,-""
44
n: ms:zmr mr -
Establishing the Award-Fee P~ol . .
Establishing the award-fee p_ool 1s cntlcal and requires careful consideration. Potential fees must
be sufficient enough to provide the ~ontractor motivation to achieve excellence in overall
contractor performance. The potential fees should not be excessive for the effort contracted nor
should they be.so low that the contractor has limited incentive to respond to Government
oncerns. An madequate award-fee pool docs not provide the motivation incentive to the
~ontractor that this type of contract is intended to stimulate.
There is no single approach required by FAR for establishing the amount of an award-fee pool.
However, it should be logically developed and reflect the complexity of the contract effort. In
FPAF contracts, the award fee shall not apply to cost reimbursable items (e.g., travel and
material).
Award Fee Plan

FAR 16.40l(e)(3) Instructs that all contracts providing for award fees must be supported by an
award-fee plan that establishes both 1) the procedures for evaluating award fee and 2) an AwardFee Board for conducting the award-fee evaluation.
Generally, the Award Fee Plan is signed by both the Government and the Contractor before the
perfom1ance period begins, and can be changed by agreement of both parties. The Plan is
typically included as an attachment to the contract.
The Award Fee Plan states how much money the contractor can earn as an Award Fee, states the
criteria by which the contractor will be evaluated, states the timeframes for evaluation, and states
who the key Government leaders are who make the Award Fee determination.
ln accordance with FAR 16.40I(e)(3), an award fee plan must also: (i)be approved by the Fee
Detennining (FOO) unless otherwise authorized by agency procedures; (ii) identify the awardfee evaluation criteria and how they are linked to acquisition objectives which shall be defined in
tenns of contract cost, schedule, and technical performance. Criteria should motivate the
contractor to enhance performance in the areas rated, but not at the expense of at least minimum
acceptable perfonnance in all other areas; (iii) Describe how the contractor's perfomrnnce will be
measured against the award-fee evaluation criteria; (iv) Utilize the adjectival rating and
associated description as well as the award-fee pool earned percentages shown in the FAR.
Contracting officers may supplement the adjectival rating description. The method used to
detennine the adjectival rating must be documented in the award-fee plan; (v) Prohibit earning
any award fee when a contractor's overall cost, schedule, and technical perfonnance in the
aggregate is below satisfactory; (vi) Provide for evaluation period(s) to be conducted at stated
intervals during the contract period of performance so that the contractor will periodically be
infom1ed of the quality of its performance and the areas in which improvement is expected (e.g.
six months, nine months, twelve months, or at specific milestones) and; (vii) Define the total
award-fee pool amount and how this amount is allocated across each evaluation period.
CONJ 70. Unit 3 Lesson l - Contract Types, lncenti~es. and Risks - Puge I 45
B paid
ard fee To e
ation of the
.
rnent's evalu
r1teria stated In
Amount of Aw
.
Govern
f the c
-Determined by
nee in terms o
, performa
Plan
contractors
the Award Fee
rmining the
the contract and d methodology for dAete ard Fee Plan
-Determination an
ented in the w
award fee must be docum
(
FAR 16 401)
.
the contractor to
. . d rating plan should motivate ut not at the expense
Cntena an
. the areas rated, b . II ther areas.
improve performance in table performance in a o
.
.
t stated intervals during
Of at least minimum accep
f
valuations a
d
Contract shall pr~v,de ore nt of fee shall generally correspon
performance. Part1a~ payme
to the evaluation periods
Goals of the Award Fee Plan

Optimize performance by motivating the contractor to
make use of all his resources
Fully delineate how the Government will monitor
contractor performance in an equitable and timely manner
Facilitate productive communication channels
Charter an effective organizational structure to administer
the award fee provision
Reward success
Keep Award Fee Plans as Simple As Feasible
CON170, Unit 3 Lesson 1
Contract Types In .
cenr1ves
. and Risks - Page I 46
-.).j.;:.;,
(:'..iifii/ll
'i 11110lil!1i111lflif---- - -- --
--
Award Fee Incentive

Advantages and Disadvantages
Advantages
Flexibility
Disadvantages
Administrative burden
- Government can change

criteria throughout contract
life-cycle
Potential for fee payment to

become expected by contractor
Drives Gov't to set objective

criteria (DFARS 216.401-70)
Allows for subjective criteria
when CO determines in Gov'ts
best interest (DFARS 216-401-
70)
Unilateral fee determination
Program Manager leverage
As DOD employees, it is also important to realize that the DFARS and DFAR PGI has a wealth
of additional guidance and infonnation about the use of award fee contracts, cost plus award fee
specifically. For example, CPAF contracts shall not be used to avoid establishing CPFF or CPIF
contracts if the circumstances are right for either of those contract types. There are also specific
limitations regarding the use of CPAF contracts for R&D efforts. And the OF ARS reminds us
not to use the weighted guidelines to CP AF contracts when calculating either the base or the
fixed fee.
Per DFARS PGI 216.40l(e)(i), "it is DOD policy to utilize objective criteria, whenever possible,
to measure contract perfonnance. In cases where an award-fee contract must be used due to lack
of objective criteria, the contracting officer shall consult with the program manager and the fee
detennining official when developing the award-fee plan. Award-fee criteria shall be linked
directly to contract cost, schedule, and performance outcomes objectives." And (ii) Award fees
must be tied to identifiable interim outcomes, discrete events or milestones, as much as possible.
Examples of such interim milestones include timely completion of preliminary design review,
critical design review, and successful system demonstration ... " In any case, award fee provisions
must clearly explain how a contractor's performance will be evaluated.
So, although you may have heard that award fee evaluations are ''subjective," notice that per the
DF ARS guidance, award fee evaluation criteria must be as objective as possible. While FAR
l6.404 indicates award fee incentives are appropriate when "aspects of perfom1ance cannot be
measured objectively," we are still responsible to make criteria as clear and objective as possible.
CON/70, Unit 3 Lesson I - Contrac:t Types. Incentives, ancJ Risks - Puge J 4 7
~
. ~. ;; , J~, ;
audget Implications for both Fixed Price and Cost Reimbursement Contracts
For the fixed price, co~t r~imbu~scment, and incentive type contracts, Program Managers are
expected to ha.ve fm.1dmg m th e 1r program budget to cover "'the most likely price." This is
required per Financial Mana~ement Regulation (FMR) 7000.14-R. As illustrated in the
following charts, th e "mo st hkely price" will vary depending on the contract type.
Budget Implications
Fixed Price Contracts
Contract Type:
Initially Budget to:
Firm Fixed Price
Basic contract price
Fixe Price w/EPA
Basic contract price-no EPA
Fixed Price Incentive (Firm)
Target Cost+ Target Profit
Fixed Price Award Fee
Price of basic contract +

maximum allowable award fee
ALWAYS BUDGET TO MOST LIKELY PRICE (FMR 7000.14-R)
FFP - Budget to the anticipated final negotiated price. Since the price is fixed, this is the best
estimate of the amount the government will ultimately pay.
FP-EPA - Budget to the anticipated final negotiated price, which does not include any economic
price adjustments. The EPA clause represents a contingency which should not occur under the
most likely scenario if the contract has been appropriately negotiated.
FPI(F)- Budget to the anticipated target price of the contract. Budgeting to the ceiling price
indicates that the contracting office/program office does not believe the incentives provided in
the contract will do anything to change contractor perfom1ance.
FPAF - Budget to the basic contract price, plus any base fee, plus the maximum allowable
Award Fee
However, Contracting Officers must be aware. Notice that in FPI and FP/EPA contracts, the
"most likely price" can change. How will you avoid a situation where the "most likely price,"
increases, but you have not secured additional funds? This could be a violation of the AntiDeficiency Act! There are several potential courses of action.
CONJ 70, Unit 3 l esson 1 - Contract Types, Incentives, and Risks - Page I 49
''>,,
1
ceiling price for FPI contracts, or up to h
Course of Action l: Obligate fun sup
, , ._
t e
.
~ FPEPA contrm:b.
.
maximum EPA adjustment 1or
, r ~l uirt: ddiwry of Earned Value Manngcin

Course of Action 2: For FPI contrac 1s.. l,;. 1..
th~ contractor which gives insi1h ent d~tq
(FAR 34.2), or another fon,1 of factual d.itd ,rom
g t to the
updated "most likely price:" .

,.
. . , rice'' has increased to an am
o If the contractor md1catcs the moSl hk1.: 1YP
.
.th th
ount ove1
the funds you have available, take inuncdiatc a~uon w,
e progrnm manage,
.
b d hl . ,1t, add1t10nal funds to cover the ll d
and financial leaders to o tam an
ig, 1.:
P ated
"most likely price."
.
..
o Notify the contrnctor in writing that you an.: pursumg addt!ional funds t_o cover the
updated .. most likely price,'' and seek legal counsel to avoid an ADA violation.
o If funding is delayed or slow in arriving, engage the c~ntmctor, progra_m manager,
and financial manager with a plan to de-scope or tenrnnatc. for c01~vemence to
ensure the contractor does not incur expenses beyond funding available.
o If still unsuccessful in securing additional funds , before executing a de-scope or
tcnnination action, engage legal counsel, the Head of the Contracting Activity and
the equivalent leaders in the program management and financial management
career fields to ensure they are all aware of the potential for an ADA violation.
As with fixed price contracts, program managers are expected to have funding in their program
b~1dgct_to cover "the most likely price" of a cost reimbursement contract. This is required per
Fmanc1al Management Regulation (FMR) 7000.14-R.
Budget Implications
Contract Type:
Initially Budget to:
Cost, or Cost Sharing
Total estimated cost, or Govt's

share of total estimated cost
Cost Plus Fixed Fee
Total estimated cost + fee
Target Cost + Target Fee
Cost Plus Award Fee
Total estimated cost + base

fee + maximum award fee
ALWAYS BUDGET TO MOST LIKELY PRICE (FMR

7000.14-R)
.
. - PuP,., 1 rn
CONJ 70, Unit 3 lesson I Contract Ti.rpes , / ncentrves.
and Rrsh
- - - - - -- - --
and Cost Sharing - Budget to the total estimated cost of the contract, or to the
~~:ennncnt's share of the total estimated cost.
t
cPFf _ Budget to the sum of the expected cost to be incurred plus the fixed fee
(PAF _ Budget to an amou1~t that is the sum of the expected cost to be incurred plus the base fee
s the entire award fee which can be earned (or paid) during the budget period. The award fee
1
p~~eria must be stmctured in such a way that the contractor can actually earn the award fee. If
~he contracting office or program manager b~<lgets for less than this amount, it is tant_amount to
saying that the contractor cannot earn the entire award fee for that period, and may taint the
evaluation process.
CPlF - Budget to the expected cost to be incurred plus the fee earned at the expected cost.
Before contract execution begins, the expected cost to be incurred is the target cost and the fee
earned at that cost is the target fee, the sum of which is the target price of the contract. If the
contract has been properly negotiated and risk appropriately placed, the most likely outcome
should be the contractor achieving target cost and, therefore, target fee .
No matter what, you can see that knowing your contract and keeping abreast of the contractor's
progress can be very important and have significant budget implications.

3.106 Describe conditions for appropriate use of the
Time and Material and Labor Hour contract types
. .
I
'
i
I
I
I
CO.V/70, (;nit 3 l,esson I -- Cvntraci T',ipes, Inc.:enlil'es. and Risks - Page 51
~+ta .
d Labor-Hour
Materials an
16 6
Ttrne-and - FAR subpart - ----1
contracts
~ nt duration and
. t u,e 81'Le '
ib\e to est1rna e
of confidence
Used when not poss y reasonable degree
. ..,-h work to an
'
~
cost of t e
full loaded)
~
Fixed hourly labor rate ( y
>
- overhead, G&A, Profit
Materials at cost or catalog pnce
- Includes all material indirect costs

. .
centives
tabor emc1ency in
- No positive cost contra1or
,
d I t
1 the
t t pe possible, an on Y
Use only if no other c~~trac . . y th t the contractor exceeds
contract includes a ceiling price a
at its own risk.
Requires Surveillance
Time and Materials and Labor Hour (FAR subpart 16.6). Per FAR 16. 60 l_ (c ), a time-andmaterial s contract may be used only when it is not possible at the time of placing the contract to
estimate accurately the extent or duration of the work or to anticipate costs with any reasonable
degree of confidence. Appropriate surveillance measures must be used with a T&M contract,
because there is no positive profit incentive to the contractor for cost control or labor efficiency.
Therefore, Government surveillance of contractor perfonnance is required to give reasonable
assurance that efficient methods and effective cost controls are being used.
A T&M contract must define, up-front, fixed hourly rates that include waoes overhead aeneral
and ad~inistrativi: expe~ses, an_d profit for each category of labor to be in~l;ded in the 'c~ntract.
There 1s also specific guidance m the FAR regarding the hourly rates if the
c. 1

d d h
y are 1or
noncommercia
acquisitions
awar
e
wit
out
adequate
price
competitio
d
c
d
..
nan 1or act10ns
awarded using competitive proce ures. Add1t1onally, when included

f
t
material handling costs shall include only costs clearly excluded fr a~Ja~ ~ matenal COS S,
Material hand_ling costs may include all appropriate indirect costs ~:ca e a or~hour rate. .
.
accordance with the contractor's usual accounting procedures
.
ted. to direct matenals tn
consistent with Part 31.
Keep in mind that in order to use a T &M contract, the Contra f
detennination and findings explaining why no other contract~ mg. O~cer must prepare a
ype ts SUttable and that must be
approved by the appropriate official(s).
Finally, because of the lack of a cost control incentive or m h
18
me Iudea cet1mg pnce
that the contractor exceeds at its ownec anism
' th contract type must
1k
d~c~men~ the contract file to justify the reasons for and amo: :t
contracting officer shall
ce1lmg pnce
any subsequent chan ge 10
the
~ihe
CONJ 70, Unit 3 Lesson J
Contract Tv
. pes,, Incentives, an cIR is
. ks - Page I. )2
-
T & M Definitions
Direct materials - those materials that enter directly
into the end product, or that are used or consumed directly
in connection with the furnishing of the end product or
service
Hourly rate the rate(s) prescribed in the contract for

payment for labor that meets the labor categ0<y
qualification of a labor category specified in the contract
that are:
- Performed by the contractor;

- Performed by the subcontractors: or
- Tran sf erred between divisions, subsidiaries, or affiliates of
the contractor.
.\ ~;lin, due to the fa~t that T&l\t contracts have little inherent incenti ve to control co ts, you mu st
of \\hat goes into the hourly rates proposed on a prospecti ve T&M effort For example,
c m:i- idc-r the issue of a contractor's proposed hourly rates .
~; 3 \\ ;m~
T & M Blended Rates

Prime contractors cannot submit a proposal of blended
rates which include the subs and affiliates

Though FAR 52 .216-29 allows blended rates , DFARS
252.216-7002 Alt A requires separate rates for each
category of labor
COS } 71), i nit 3 Ltsson I - Comract l) p1ts, lncenrin's. and R1,ks - Page . 53
,I
. 0..
Labor-Hour
FAR 16.602
tract is a variation of the

A Labor-Hour c?~ ontract differing only in
tirne-and-rnatena 5 c
,: db the
that n,aterials are not suPP ,e y
contractor.
More T&MIL-H Inforrnation

.
t under Tirne-and-Materials
FAR 52.232-7 payrnen s .
and Labor-Hou~ contra~;s;iate hourly rates (fixed h()IJrlY

- Hours
rates) worked tunes
. apP t +Phandling (no profit or fee)
. are paid at cost shall notifY CO if theY
_ rv,aterials
. - contrac or
. f th
ceifin9 price
.
that the total pnce or e
i,ave reason to believe
t IIY more or 1ess than the
11 be substan ,a
1
ceifif19
dvse
the contractor if theY
effort Wprice,
1
half also a
.
verrifl1ent s
.
the work will be
Go
to t,elteve
i,ave reason
or 1ess
sLI bst2111 tia IIY ,rio re
\
'
More T&M/L-H Information

If the Contractor has reason to believe that
85% of the ceiling will be surpassed in the
next 30 days, they shall notify the CO and
provide a revised estimate to complete
Government is not obligated to pay any
more than ceiling price
Contractor not obligated to continue
performance beyond ceiling price
T&M/L-H Contract Administration

Government must exercise additional
oversight (surveillance)
Government may require re-performance if
the contractual requirements are not met
Contractor only bills hours worked
No incentive for cost control or labor
efficiency; each hour worked carries profit
T&M is similar to cost type contracts in that it's only a "best effort", versus knowing the exact
extent or duration of the performance that must be accomplished. However, with that being said,
th
ere are still some times when a T&M contract type is appropriate, as listed on the next slide.
CO X/ 70, [:nit 3 Lessvn I - Contract Types, Incemnes, and Risks - Pa~e 55
.
.,
-,,;~,,:s\,,~~,,.~
J3ecat1Se
What are the cornrnon uses?

Installation and other support services
Repair, maintenance, overhaul
Evaluation of high dollar repairs
Over and Above
A&AS (non-specific taskings)
What do T&M CLINs Look Like?
Rebuild Engine (Labor)
OOOlAA
Master M echanic (T&M)
20
Hours
OOOlAB
$20
Apprentice (T&M)
$400 {EST)
60
Hours
$10
$600 (EST)
Lot
Lot
Ssoo
Ssoo
Ssoo {EST)
Ssoo (EST)
0002
Rebuild En g1ne
(Parts, T&M)
0002AA
Purchased Parts
0002AB
.
Subcontract (Mill Cylinder
Head)
CON/70, umt. 3l,esson I - Cot
- .
/ ;r .
""
""I\
"/
!Qe'
'lh1IR~
~1',,,_
:\_
''\"'
..
{.
arise if a
potential
abuses v
. ~ ~-,.
Page I 56
-~-
,.,r'_ .
. .
~
. .. .
;,.
- -
--- ------
; art:r 1
- - -- -- - --
....
-- -
---
-- - - - -
lack of incentive to control costs, you should be aware of some issues that may
aeca~se ~
or Labor-Hour contract is not properly administered or surveilled. As a result of
1
arise ~ a . es there have also been DOD Policy letters issued to curtail some of the issues and
ual tSSU '
poten
may see under these types of contracts.
abuses we
I~
1
What have been the perceived

abuses of T&M/L-H contracts?
Over-runs (unrestrained billings)
- Additional profit on every hour worked
Labor substitution
- Costs can be below estimates, inflating profit
rate
- Prime or Subcontractor
DFARS requires visibility to subcontract labor level
11
Excessive "pass-through loadings

- Profit on profit
- Material handling at unsupported rates
T&M Guidance from OPAP

Proper Use of T&M Contract Types (20 Mar 08)
Management of T&M and L-H Contracts for
Services ( 14 Jul 08)
- Include Surveillance Plans
- COs must designate COR for all services awarded
- Work with PMs to determine whether all or part of
effort can be fixed-price
- Memo: !illP..l,\,,",1,V, ar:::g 0$d m1Vdp0i'oo hC)'i't)Ol! C',.;:-1u lti2\..08. ,0320 -DP/\P pd f
1
Consult FAR 12.207 for additional guidance on

T&M/L-H contracts for commercial services
CONJ 70, Unit 3 Lesson 1 - Conlracl T'_\,pes, Incentives, and Risks - Page I 57
.. .. .' .. ,' . ,: . . .4.*24
.1 ,.
t I
The 20 M 08
.
ar
Memo (from Shay Assad) on Proper Use of T&M Contract Types was issued in
an attempt to
d d
dd
. ensure T&M contracts are only used when authonze an requeste cpartmcnts
d
an aoencies t bl. h
b .
d h
I .
~
. es a is procedures to make sure they are only emg use w en aut 1onzed. For
any contractin g activity
that obligated more than IO% oftts
FY 07 services
' spen d'mg using
T&
.M,
th
e_H CA must pro vi de an assessment of the appropriate use of T&M contracts including
acttons being taken to reduce the use of T&M contracts whenever possible.
The s~bsequent 14 Jul 08 Memo (also issued by Shay Assad) discusses the importance of
surveiJlance because T&M contracts do not provide incentives to the contractor for cost control
or labor efficiency.
Take-away Checklist for T&M

Are task completion criteria clear?
- lf yes, think other contract types
- If no, consider short term T&M/L-H or FP(LOE)
What are the uncertainties?

- Technical uncertainties?
- Cost vofatility?
Is there adequate oversighUsurveillance?

- Pre-award {to set price' or cost estimate)
- Post-award (to monitor performance of T&M)
\~
Summary
r&M is least preferred contract type and shall
onlY be used in certain circumstances
cos must advise PMs on risks inherent in
r&M, Encourage use of a more preferred
contract type such as fixed price
r&M contracts are high risk because
contractor's profit is tied to the number of hours
worked
Additional oversight is required
Only requires a Best Efforts

3.107 Given an acquisition scenario, create an
appropriate contracting strategy which includes
a contract type and any additional incentives.
You will work t he fo ll owing exercise In grou ps ar d then
d iscu ss t he answers as a c lass
,
CONJ 70, Unit 3 Lesson I - Contract _ipes.
l rcentiies. and R)sh - Page ' 59
y:ercise: Contracting Strategy

. a trategy which includes a
a propriate contractmt, s
Learning Objective
.
Given an acquisition scenano, create a~ 'p

. I ll 1cent1ves
contract type and any ad ditwna
Introduction
.
f
t act types available. Now, given the
nt
kmds
o
con
r
. bl
This lesson introduced most of t l1e iucre .
d t nnine the most swta e contract type.
.

ou w 11 have to c e
.
f
.
specifics about a pendmg acqws1twn, Y . 1
.
.
arrants the incluswn o an mcent1ve
You may also want to decide whether the given situation w
arran(Tement
to further motivate contractors.
b
d.cr.~
Assessment

Student Instructions: Based on the given scenarios, decide on the best contract type and overall
contracting strategy. You will have 40 minutes to complete this exercise.
SCENARIO ONE:
A requirement exists to purchase 1,000 communication commercial hand-held radios for the Red
Horse Battalion at Hurlburt Field AFB, Florida, at an estimated cost of $900 per radio. This is
an urgent requirement as the Battalion is readying to deploy to Afghanistan and will need these
radios delivered to meet the deployment date which is to occur within 30 days.
fFP
SCENARIO TWO:
NASA requires research and development for space suits to replace the c
space suits must have better thennal protection than the previous models urre;t mo~el. The new
a trip to MARS. Minimum performance based specifications have been d as \ ese will be used on
the safety of the astronauts, optimum performance is desired. For evalu tve oped; however, _for
would be more important than cost. Funding for this development is at ;
~u~oses, technical
period of perfom1ance is estimated to be 2 years.
miIIwn. Contract
/in
; , , . ti I
tr -
rsARIO THREE: . , Command (AFSOC) requires 1.000 units of a recently developed

SCc, ,
~
, t Operations
.
.
.
. force specia . . . t Government estimates of the cost of these suits arc at $5,000 each.
Air
ination su1 .
.
.
tear decontan1 d . ." d at the rate of l 00 umts per month; however, faster dd1very could
nu1. .
. be e11\t:rt:
.
.
The suits arc to . , , they could be shipped overseas m larger containers. Dehvery and
origin as the suits are to be in_spect~d at the contrac~or's plant to assure
acceptance is ~o
. fi ,,,t ons These suits would be m their fourth production run as AFSOC
. , ' ~,1th sp~Cl !Cu 1 .
.
coinpltam:c: v f l tern presently) had previously purchased the first three product10n runs
bU)'Cf O t llS I
} r
tthe on IY .
"' tive Successive Target contract. There are still potcnt1a s 1or cost savmgs
1
1 xcd Pnce nci.::n
ona F
from the first lots produce d.
~;i~
SCE~ARIO FOUR:
. ..
.
.
.
.
reparing for a competitive acqms1t1on for operation and mamtenance of an mfonnation
you are p
. .
h
fi
ti
h
loi)' call center. Prior to finali zing t e per onnance spec1 1cat1on. t e proJect manager
h
tee noouoto contract for a four month stu d y to see I. f any d ata exists
. on how to 1mprme
.
ca II center
asks y
. .
.
operations. He would like 90 hours of work over the next four months and anticipates that this
will cost $ I00.000.
CP F-r
SCENARIO Fl\'E:
Pensacola Naval Station requires services for resurfacing the primary runway. They h::l\e st:ued
the materials for the repair are petroleum based and are concerned since oil prices are now at S-l
a gallon with the possibility of reaching $5 a gallon within the next 6 months. thus having
resulted in petrokum based materials' prices rising significantly. The period of p~rfonnance for
the contract is l year with options for repair of two additional shorter runways. S5 million h:is
~een allocated for this proj~ct. It is possible the contractor could complete the primary runway
n less than a year, thus saving money on labor.
F Pf PA
E.~,.1 ... . . ,_.__

.
'
<
SCENARIO SIX:
Los Angeles AFB is readying to produce the first production nm 0 ~ the newly developed
Amscray missile. Although there is adequate pricing available to discern the amount of
materials which will be required ; and since this is a recently completed R~D effort, there is littl
to no infonnation concerning the number of labor hours or the scrap materials that will be
e
required. The numbers of hours required for each labor category as well as the scrap rate should
b~ available after the second or third production rnns. This is an extremely complicated missile
~tth amazing new technology incorporated. Market research has revealed several competitors
m the market who have the capability to produce the missile. Due to the innovative technology
~nd complexity of the missile, it has already been dctcnnincd that technical capability is more
important that cost for the source selection evaluation factors. Projected delivery is I 00/month
~ith inspection at the contractor's plant prior to shipment. Since the introduction of these units
mto the areas in conflict will greatly enhance our troops capabilities, earlier delivery would be
beneficial.
SCENARIO SEVEN:
An AF missile program is competing the production of 20 launch vehicles to support a longrange launch capability. Market research indicates after the production of 5 launch vehicles, the
AF expects the design and manufacturing process to stabilize. In addition, the parties intend to
integrate design and manufacturing improvements for vehicles 14 through 20 which could save
substantial cost per unit produced. What contract type do you recommend?
/-5 S-i)
FP lf
('~~
SCENARIO EIGHT:
You are preparing for a competiti acqms1t n for operation and maintenance of an information
technology call center. This is a follow-on contract to a requirement that is stable and will be
predictable over the life of the future contract. Market research supports the belief of the
Government project manager that competition will result in the lowest possible cost. There are
pcrfonnance features of the future contractor's se~ice that the proj~ct manager would like to
incentivize. These include non-cost related intangibles such as quality of customer service and
overall satisfaction of call center users.
fPAf
. l Gi\~n acquisitio~ situa!ions, dctcm1inc an appropriate contra<..tin t1~ .rar o1 , r ,c.:.

3
~t type and other mccnt1v~s.
l!J1
th~ ('vntr,1\.
# I
'f
'#_/
!JJllil:
ELO 3.1 Ol Explain the policies and factors involved in selecting contract t., -pe.
, ELO 3.102 Recognize key risk clements of cost, performance, and chcdule.
ELO 3.103 Describe conditions for use of the different fixed price contract types,
emphasizing the geometry and enforceability of the Fixed Price Incenti ve Firm (FPff)
contract type.
ELO 3.104 Given a Fixed Price Economic Price Adjustment scenario, calculate the
adjusted price.
, ELO 3.105 Describe conditions for use of the different cost reimbursement contract
types, emphasizing the geometry and enforceability of the Cost Plus Incentive Fee (CPI.F)
contract type.
, ELO 3.106 Describe conditions for appropriate use of the following contract types:
Time and Material, Level of Effort, and Labor Hour contracts.
, ELO 3.107 Given an acquisition scenario, create an appropriate contracting strategy
which includes a contract type and any additional incentives.
-~
-.
. . . ' -~""':'7:--.:~ - ~ : - - - - 111 ~, /11 111i1 vs. and Risks - Page i 63
' , ,1111, t, 1
-------------
- --: - - ~ . - -:-----TTACffME~TJ_____
IT 3 LESSON 1 A----
..----:---:-----rixed-PrJCC Award- ,faxed-Price ~
CON X?_Q___UN
_ ------ - t 1-vpes____-,;f--;-:-ed-~Price Incentive , 1
Prospective
1
1 Contrac . ~ -~n,ir
Compans~~f ~_!J~~ -- --:---1 Fixed-Price Econonnc
Farm Faxed-Pnce
\rrice Adjustment
rirplf)
nl
- - - - .
,ee
l(FPAF. )
r IX
(f
(FFP)
IR1 s l
. t be fully sat1sftcd
\
--- - - -+---T-:J--t:-;--h-e---11~able market pnces h or I on tract labor or
no
e of
Principal
1Nonte: to1ru:~sumes labor or material overt e cmaterial requirements. ?edcausental
Risk to be
\con rac
f he contract.
u gm
. .
Mitigated
all cost risk.
life o t
acceptance cntcna.
-
--
.l
- _ - - : - -fi 'Moderately uncertall
.
_J ---------r- ------~~-,-
lRedctermination
_____.-t,(f-PRP)
__
- -~
~ - t -: k ti at the user w,ll
(FPEPA)
,Costs of perforrna
nee
after the first year
!because they cannot be
,estimated with
.
~onfidence.
be
Judgmental standards 'The Govern1:1en~

A ceiling pnce can
I
. be r.airly
applied a firm commitment
1'
Th market pnci:s a "
h
vers can
When.. lTI1e requirement is

e
bl
d
established t at co .
lb
Award-fee
from the contractor to
well-defined.
1 are s_evera Thean ri ' k stems Ithe most probable nsksf I y ant T11e potential
deliver the supplies or
significant. e :s
I ature o pane
Contr~ctors ~re
\from industry-wide
inherent m t 1e n
, d fee is large enough to services during
expenenced m
. b
d the the work. l11e propo:se
!subsequent years The
meeting it.
:contingencies cyon
ft sharing fonnula both:
I
. .
Market conditions \contractor's control. 1l1e \pro I
.
the
Provide a meaningful dollars at n sk
would motivate
1
1ncer1t1ve.
outweigh the
dolla rs at risk outweigh
t to contra
are stable.
Financial risks are \' the admini strative burdens lcontrac or d
t other Justify related
administrative burdens
FPEPA.
coststoan mee
.
ofanFPRP.
otherwise
o f an
. .
admini strative
obJect1ves ..
insignificant.
[burdens.
Fixed-price for the first
A firm fixed-price.
period.
A firm fixed-price 'I Afixed-price, ceiling on Aceiling pnce
Standards for
Elements
. .
d
Target cost
Proposed subsequent
for each Ime item or upwar
I t
adjustment, and a formula Tar~et profit .
eva ua ing
one or more
"or adJusting the price up Dehvery, quahty,
!performance.
periods (at least 12
groupings of line
d/
h
Procedures for
m_o nths apart). . .
items.
or dov.'11 based on:
/an c.or ot er t
r. pncmg
t
jT1metable 1or
Established prices.
periormance arge s
Icalculating a fee
Actual labor or material (optional)
based on performance the next period(s).
\
costs.
Profit sharing formula !against the standards
I
Labor or material indices.
Provide an acceptable Perform at the time, Provide acceptable
Provide an acceptable
Contractor Provide an
deliverable at the time and deliverable at the time place, and the price deliverables at the time 1
acceptable
is Obliged
place specified in the
and place specified in fixed in the contract. and place specified in. ;I
deliverable at the
to:
the contract at the pnce
contract
at
the
adjusted
the contract at or below
time. place and price
1
established for each 1
price.
the ceiling price.
specified in the
period.
contract.
Realizes
a
higher
profit
Generally
realizes
an
jFor
the period of
Contractor Generally realizes an Generally realizes an
by
completing
the
work
additional
dollar
of
!performance,
realizes
additional
dollar
of
additional
dollar
of
profit
lncenti\'e
profit
for
every
for
every
dollar
that
costs
an
additional
dollar
of \
below
the
ceiling
price
profit
for
every
dollar
(other than
and/or by meeting
that costs are reduced; profit for every dollar
maximizing dollar that costs are are reduced.
1
objective performance earns an additional
that costs are reduced.
reduced.
goodwill)
targets.
fee for satisfying the
1
performance
\
Use
t ri."k
!
l
- ------t-~::----:-:------;-:--t;--------::---t::---::-------J:'.standards.
Typical
commer~ial supplies Long-ter~ contra~ts for
Production of a major P-er-;:fi:orm
---_ a_n_c_e_-b:-a- s_e_d_ --+----------1
1
1
b
Long-term production
1 d
Application Ian
services.
commercta supp 1es
system ased on a
service contracts.
prototype
of spare parts for a
during a period of high
inflation
major system.
-Pr-in- cipal
Generally NOT
Must b;bi--e~Jju.u~sttiififie~di.- - - 1MMuu~stt lbbce;-J~-u~stit1'fifi;ed~M~-;;--b=
- - : - - - - l- - -- - - --- ~.
ust Must ~
be -negotiated.
Limitations appropriate for R&D.
be negotiated.
MUST be negotiated.
in FAR
I
Contractor must have
Contractor must hav~
Parts 16, 32,
an adequate
an adequate accoun11ng
35, and 52
accounting system.
system that supports
Variants
Finn Fixed-price
Level of Effort.
!Cost data must support

targets.
the pricing periods.

Prompt
Successive Targets
r~
,inatio~
Retroactive
f
Redetermination
se s o the firm.
Goodwill is the value of the name, reputation, location, and mtangible as .t

CON 170, Unit 3 Lesson I
Contract Types, Incentives, and R. k p

~
,s s - age I 64
"t'z:. ,. ,..--"'"-
,t-
MaJor Contract Types

f
co111P;ins on ost-Plus Incentive- Cost- Pl us
Cost-Plus
C CPIF)
Award-Fee
Fixed-Fee
Cost or
fee (
(CPAF)
(CPFF)
Cost- Sharing
.
.
.
(C or CS)
Time & Mater l
--:-hly uncertain and speculative labor hours, labor mix and/or m t .
(T&M)
as
.
H1g
Tl G
. '
a ena1require
-:------:--:---:-.__
~ oc1pal
t m the contract. 1e overnment assumes the nsks inherent . th
ments (and other thincrd
prt
per or
l . r h
k
m e contract b fi .
ing:,;) necess
o,si.tobe ' h theexpectedcost-osmg1 t ewor cannotbecompletedwith th
- ene1tingiftheactu 1
. aryto
~'.. ted t an
m e expected cost of ~
a cost is lower
na~=---
~1 1oga
perlormance.
~ M~o~b;je~c~ti~v;e=~~10~bJfe~c~ti~v~e:in~c~e~n~ti~v~e= ~ ]R~e~l!at~in~ggfife;e~t~o- - -Tr~ ~ ~ ~;-- -~-;-:-~----lise \\ hen.. relationship can be targets are not feasible for performance (e.g . to
The contractor
INo other typ 0 f
1
expects substantial l.
. e
established between critica aspects of
actual costs) would be compensating
!cbo~tract is suitable (e.g.,
'th'' t':ee
and such
performance. Judgmental unworkable or of
b
I ecause. costs are t00
~ 1'
enefits for
1ow to Justify an audit
!measures of
standards can be fairly
marginal utility.
ab b.
sor mg part of the of th
1
\performance as
applied. Potential fee

costs and/or
. e contractor's
1
ctual costs, delivery would provide a
t':
'md1rect expenses)
tOregomg fee or
\a
dates. perfonnance
meaningful incentive.
Th
e vendor is a non:benchmarks, and the

profit entity
l1ike.
Elements
Contractor
is Obliged
to:
'
Target cost
Target cost
Target cost
Perfonnance targets Standards for evaluating Fixed fee
performance
(optional)
A base and maximum fee
A minimum,
maximum, and target Procedures for adjusting
fee, based on perfonnance
fee
against the standards
A formula for
adjusting fee based
on actual costs and/or
performance
A ceiling price
;A per-hour labor rate
that also covers
1
overhead and profit
\Provisions for
reimbursing direct
1material costs
1
Make a good faith effort to meet the Government's needs within the estimated cost in the
Schedule.
Contractor
Incentive
(other than
Realizes a higher fee Realizes a higher fee by

by completing the
meeting judgmental
work at a lower cost performance standards.
maximi-;.ing and/or by meeting
goodwill/
other objective
1
performance targets.
,1
Target cost
If CS, an agreement
on the Government's
share of the cost.
No fee
;Make a good faith effort

,to meet the
1Govemment's needs
within the ceiling price.
Realizes a higher rate o1tf CS, share~ in the

return (i.e., fee divided icost of prov1dmg a
deliverable of mutual
by total cost) as total
1
cost decreases.
,benefit
Tv I
l
:
,,
,,
Jo.int research with :Em~rgency repairs to

pica
Research and
Large scale research
Research study
I
d
Appl'
educational
.heating p ants an
ication development of the
tud
I
s y.
institutions.
aircraft engines.
prototype for a major
system.
.
.
Labor rates must be
Pttncipal
Th
.
,
UST b
1 Government must exercise
11
L_ jrn:tati'ons
e contractor must have an adequate accounting system. e
i.1u t be
negotiated. M
e
uq
s
n
.
f ffi . t thods and cost contro 1s. 1' s
.Th
urve1 ance durmg performance to ensure use o e 1c1en me
b egotiated. j usttlied. e
10 FAR
P
negotiated. Must be justified. Statutory and regulatory limits on th e fees th at ma~ ; n
fGovemment MU_ST
2
Mu st include the applicable Limitation of Cost clause at FAR 52 232 20 th roug
.
\exercise appropnate
surveillance ~o ensure
efiicient pertorm:.ince.
3r~sn~\i2'
v::;---__
\'
ariants
\Completion or Term.
!Labor Hour (Ul}j
Student Guide
CON 170
Fundamentals of Cost and Price
Analysis
Unit 3, Lesson 2
Contract Financing
July 2015
CON 170, The Fundamentals ofCost and Price Analysis
Introduction
1
h's lesson, you will be introduced to several methods of contract financing available. We will also
In
1
111 !~re the situations where You may implement certain financing tenns into your contracts. As
comcated in the fiELOs,. this lesson Presents the methods of noncommercial financing, then methods of
the appropriate
mancmg
mercial financing,
andarrangement.
concludes With exercises for evaluating contracting scenarios and applying
~xf
Job Impact
Contract financing is a c:itica\ element of contracting. Government financing offers contractors a .

mendous value, enabling them to earn returns above and beyond their profit or fee. For commercial
noncommercial contracts over the Simplified Acquisition Threshold, DoD contracting o_fficers
st understand when and how to offer contract financing, and ensure the Government receives
d
::equate
consideration.
An
un
fi
. und~r~tanding o~ the tenns pertaining to contract financi_ng is important to
aspects
of
contract
mancmg.
erstand BEFORE a contract ts issued. This lesson will provide valuable infonnatton relative to most
:d
Ocfonso Acquis ition University
CON 170
Unit 3 Lesson 2
Contract Financing
CON J 70, T.I1<' F1111da111e111als <~/ cost am I Price A,w!vsis
3.2 Differentiate among the financing .

.
arrangements available and the situations
for use.
_,.,r---

Review ELOs 3.201 through 3.213 in the front of
the Student Guide
Lesson Presentation
Contract financing -means disbursing money to a contractor prior to acceptance of
.
.
There are several different types of contract financing, as stated in FAR Part . supp 11es or services.
32
" ".ix;_:" ''".

C,
CON 170, The F1111dame11tals <>fCvst and Price Ana~l'sis
Contract Financing Basics

Definitions:
-FAR 32.001
- uContract financing a n
Government disbur~e~~ent mea~s an authorized
prior to acceptance of nt ?f monies to a contractor
Government.
supplies or services by the
If
-Contract financing payments include

> Advance Pa vments
~ Performa~ce-based payments
. Commercial advance and interim payments
; Progress Payments based on costs
Progress payments based on a percentage or
stage of completion
> Interim payments under a cost reimbursement
contract (unless an exception applies)

Contract financing is providing payments to a contractor pnor
to full delivery
In both commercial and non-commercial financing we must
actively mitigate the risk associated with contract financing .
VVhen we finance commercial contracts we require that the
contractor provide some form of security or collateral in the
event they fail perform
VVith non-commercial contracts the approach is a bit different
but the bottom line is the same--protect the taxpayers
interest\
FAR 32.003 - Unless agency regulations otherwise permit .
contract financing SHALL NOT BE provided for purchases
made under the authority of Part 13.
Theyurpose of contract financing is to assist the contractor only to the ':xtc~t needed to pcrfom1,
r;r11cularly on working capital expenses (short-tern:: ~ot long-t~rnt c~p1tal mvcstme~t). _In contrast, for
ng-tenn mvestments the Government offers a Fac1ht1cs Cap1tc1l Cost of Money mcent1ve.
'
7
CON 170 Umt- 3. lesson 2. Contract Financing
CON I 70. The F,111
Jamentals
.r[vst amI
Price Analysis
01
cO nsic.
ui:
aC q .
.... 51
coi .
abi\lt
ne~
.
f ontractor worktnCJ
- FAR 32.105{a): for fina ncing o c
capital
NOT contract Financing

Payments
FAR 32.001
Contract financing payments do not include

invoice payments, payments for partial deliveries
(partial payments), or lease and rental payments.
As you can see from the following excerpt, contract financin

15
contract has been issued. The need for financing and the le g ; 01 a matter to think about after a
during the acquisition planning phase. Per FAR 32. l 07 th rms do / 0 ntract financing must be discussed
, e nee ior cont
fi
ract mancing cannot be
8
rn.,., , __
CON 170, The Fundamentals of Cost and Price Analysis
.d ed a handicap for award, or as an indicat Of

..
~~
With respect to financial r
"btr a lack of financial responsibility in a compct1t1ve
acqu!sttl~~-financially responsible if th:spia~; Idty, FAR 9.104-l(a) indicates contractors can be
,011~ 1der btain such resources.
y
a equate resources to perfonn the contract, or have the
abihtY too
coI1 5~
Financing as Evaluation Criteria

FAR 32.107
The need for financing cannot be a "deterrent" in a

c~m~etitive acquisition. The Government has other
cntena for assessing contractor responsibility and
financial risk pursuant to FAR 9.104.
Review U~it 1 Lesson 2 for additional insight, and
also consider FAR 32.108 requirement for cos to
seek financial consultation.
, In April 2011, DP AP established a general policy, that in the event a contractor requests a change in
financing arrangements, the contracting officer shall first conduct a present value analysis to determine
the amount of consideration (if any) due to the Government.
For such cases, FAR 32.005(b) and (c) state:

(b) Amount of new consideration. The contractor may provide new consideration by
monetary or nonmonetary means, provided the value is adequate. The fair and
reasonable consideration should approximate the amount by which the price would
have been less had the contract financing terms been contained in the initial contract.
In the absence of definite information on this point, the contracting officer should
apply the following criteria in evaluating whether the proposed new consideration is
adequate:
(I) The value to the contractor of the anticipated amount and duration of the contract
financing at the imputed financial costs of the equivalent working capital.
(2) The estimated profit rate to be earned through contract performance.
(c) Interest. Except as provided in Suhpart 32.4, Advance Paymen_ts for Noncommercial
terns, the contract shall not provide for any other type of specific charges, such as
interest, for contract financing.
CON 170, U, .
lit
.
.
3. Lesson 2. Contract Fmancmg
CON 170 Tlie F1111da111c11tals of Cast and Price A,w~rsis

Financing covered under FAR Part 32
Purpose of contract financing is to assist
contractor in the payment of contract costs:
- FAR 32.104(a): contracting officer must provide
Government financing on.Iv to the extent actua/1 1
needed for prompt an . e :cren per ormance,
- FA~ 32.105(a): for financing of contractor working
cap!tal
NOT Contract Financing

Payments
FAR 32.001
Contract financing payments do not include
invoice payments: payments for partial deliveries
(partial payments), or lease and rental payments.
As you can see from the following excerpt, c~ntract financing is not a matter to t~ink about after a
contract has been issued. The need for financing and the tcnns of contract financing must be discussed
during the acquisition planning phase. Per FAR 32. l 07, the need for
"t financing cannot be
r-
CON / 711
8
;
'1
2, ~ontracl Financing
a handicap for award, o~ as an indicator of a lack

,,
. .. .
..
Qflsid~~ed With respect to financial responsibility FAR of financ~al ~espons1bthty ma compcutive
9
~cqui~ 1uo\1 financial\ y responsible if they have ade 'uate 1 4- l (a) indicates contractors can be
, nsidered . n such resources.
q
resources to perfonn the contract, or have the
~0
to obtal
abi\lt)
Financing as Evaluation Criteria

FAR 32.107
The need
cannot be a "d eterrent".ma
. . for financing
.
compet,t,ve acquisition. The Government h
th
t . f
.
as o er
c_n en~ o~ assessmg contractor responsibility and
fmanc,a\ nsk pursuant to FAR 9.1 4.
Review U~it 1 Lesson 2 for additional insight, and
also consider FAR 32.108 requirement for cos to
seek financial consu\tation.
\n Ap~l 2011, DP AP established a genera\ policy, that in the event a contractor requests a change in
financmg arrangements, the contracting officer shall first conduct a present value analysis to determine
the amount of consideration (if any) due to the Government.
forsuchcases, FAR 32.00S(b) and(c) state:
(b) Amount of new consideration. The contractor may provide new consideration by
monetary or nonmonetary means, provided the va\ue is adequate. The fair and
reasonable consideration should approximate the amount by which the price would
have been less had the contract financing tenns been contained in the initial contract.
In the absence of definite infonnation on this point, the contracting officer should
apply the following criteria in evaluating whether the proposed new consideration is
adequate:
( l) The value to the contractor of the anticipated amount and duration of the contract
financing at the imputed financial costs of the equivalent working capital.
(2) The estimated profit rate to be earned through contract perfom1ance.
(c) Interest. Except as provided in Suhpart 32.4, Advance Paymen~s for Noncommercial
~terns, the contract shall not provide for any other type of spec1fic charges, such as
interest, for contract financing.
co.v17
..
.
Q,
Un;, 3 L
.
esson 2, Contract Financing
. ,fCost am I
CON J70, The Fumlamenta1.s v
Price A11a(rsis
. for contract
consideration .
Financing
5
g clause is
FAR 32.0_0
When a contract financ1n
shall be no
(a) ReqU1rement.
.
f
ontract, there
included at the ince~trono~ t~ec contract financing clause.
separate consideration f
. to the contractor is
The value of the contract fin~nc1~g
ed in either.
h
expected to be re fiect
.
-11 be lower than sue
(1) a bid or negotiated pnc~ that w~sence of the contract
price would have been in the a
financing or
..
h than price that are
(2) contract terms and cond1t1ons, ot er
' fd
man~ beneficial to the Government than they vv~u
hav; been in the absence of the contract financing _
Adequate nevv consideration ts requ_
,red for ch~~ge 5
to or the addition of contract financing after a .,_ard.
J
Before we go further, review the following table to recognize the following terms, definitions, and FAR
references.
Term
Customary
contract
financing
Delivery
payment
Designated
billing office
Definition
FAR Ref
Financing deemed by an agency to be available for routine use by FAR 32.001
contracting officers. Most customary contract financing
arrangements should be usable by contracting officers without
specific reviews or approvals by higher management.
A payment for accepted supplies or services, including payments
FAR 32.001
for accepted partial deliveries. Commercial financing payments
are liquidated by deduction from these payments. Delivery
payments are invoice payments for prompt payment pu_rposcs.
The office or person (governmental or nongovernmental)
FAR 32.001
designated in the contract where the contractor first submits
inv?ices an? contract financing r~quests. The contract might
designate different offices to receive invoices and contract
financing requests. The designated billing office might he(1) The Government disbursing office;
(2) The contract administration office
'
(3) The office accepting the supplies delivered
or services
perfonned by the contractor;
(4) The contract audit office; or
(5) A nongovernmental agent.
10
CON 170, Unit 3, Lesson ) r .. ...
The office designated in the contract to m . .

contract financing payment N
ake mv01ce payments or FAR 32.001
s. ormally th n b h
Government disbursing office.
' is wi e t e
To decrease a payment for an acce t d
FAR 32.001
under a contract for the
Pe su~ply item or service
purpose of recoup mg ti
,
reviousl aid to the contractor.
mancmg payments
Any financing not deemed customary contract financing by the
agency. Unusual c.ontract financing is financing that is legal and
proper .under applicable
. laws , but that th e agency has not
authonzed contracting
officers to use with ou t spec1.fi1c reviews
.
.
or
approvals by higher management.
FAR 32.001,
32.114,
32.202-1 (d)
Parameters for un.usual contract financing differ for commercial

and noncommercial financing methods
Contract Financing Questions. Read from the beginning of FAR 32, through
32.007, and answer the following.
1. What is ''contract financing?"
2. ls the Government entitled to additional consideration for allowing contract financing when
the financing arrangements (implemented by the appropriate financing clause) are set at the
inception of the contract?
3. After contract award, if the contractor requests financing, how would the Government
calculate appropriate consideration?
4 The due date for making contract financing payments can be no shorter than __ days and
definitely by _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
th
5
What if we pay fl
.
yment to the contractor later than the 30 day - is there an
int
a mancmg pa
erest penalty?
\
CON 170 U .
' nu 3, Lesson 2, Contract Financing
I/
.....
nd Price Ana~vsis
CON I 70, The Fundamentals of Cost a
Commercial Item Purchase Fina ncing
. v
methods. They are covered in detail at
. .
urchase financtne
To begin, we will review commercial item P
FAR 32.2.
t h e respons1b1
1 1ty of
R _2 02- l, 1t 1s
32
A
, s pursuant to F
Th
~0 r purcha
f
In contracting for commercial goods an d service '
f the contract.
us,
'ses o
the contractor to provide all resources needed for perfomlance ~ ctor's responsibility. However, in
commercial items financing of the contract is normally th e con ra al practice. In these circumstances
'
. b th b iyer is a commcrct
. 1
h
'
.
. contracts for commerc1a pure ases
some markets the provision of financing Y e t
111
the contracting officer may include appropriate financmg terms
when doing so will be in the best interest of the Government.
, l advance payments and commercial

When financing is appropriate, FAR 32.202 authonzes commcrcta
interim payments under certain circumstances.
Per FAR 32.202-2, a "commercial advance payment" means a payment made bef~re any performance
of work under the contract. Such payments can not exceed 15% of the contract pr~ce. As a contract
financing method, commercial advance payments are not subject to interest penalties under the Prompt
Payment Act.
Per FAR 32.001, a commercial interim payment means any payment that is not a commercial advance
payment or a delivery payment. Such a payment is paid to the contractor after some work has been
done .. As a contract financing method, commercial interim payments are not subject to interest
penalties ~nder the Prompt Payment Act. Per FAR 32.202-1, the circumstances for providing
commercial advance or interim payments are as follows:
Commercial Contract Financing

FAR 32-202-1
Authorization for Commercial Advance and Int .

Payments:
enm
- Contract it~m financed is commercial su 1
.
_
-Contract price exceeds the SAT
PP Y or service,
- CO deter~ines it is appropriate/customary in th
~ommerc1al marketplace to make financing
e
,tern;
payments for the
-Form of contract financing is in th b
.
-A~equate security is obtained e est interest of Gov't
- Pnor to any performance of work
a~vance payments shall not exc ' ~gg~~9ate of commercial
pnce
ee 1J "0 of the contract
-~dequ?te competition is achiev d
,s obtained
e ' or adquate consideration
-If applicable, liquidation terms are
financing payments
on th e same basis as the
12
CON 170 Umt 3. Lesson (1

~
1'
CON I 70, The Fundamentals o_f'Cost and Price Analysis
f
I
While commercial acquisition typicall rel"

.
t ate the need for comme fi y
~cs on pnvate financing, contracting officers should
rem 1 mancmg d urmg
tI1e market research phase. The followmg
sh<lc
1nve:, 1g
, d before
. tes key areas to un dcrstan
mak th
. .
sta
mg e commercml financing decision.
Conducting Market Research

About Financing Terms
FAR 32 202-3
Contract financing may be a subject included in the market
research conducted in accordance with Part 10.
The contracting officer should consider(a) The extent to which other buyers provide contract financing
for purchases in that market
(b) The overall level of financing ' normally provided;
(c) The amount or percentages of any payments equivalent to
comme~cial advance payments (see 32 202 -2);
(d) The basis for any payments equivalent to commercial interim
payments (see 32 001 ), as well as the frequency, and
amounts or percentages; and
(e) Methods of liquidation of contract financing payments and any
special or unusual payment terms applicable to delivery
payments (see 32 001 ).
When providing commercial item purchase financing, FAR 32.202-4 requires the contracting officer to
obtain adequate security from the contractor.

FAR 32.202-4(a)
Security for Government Financing:
-1 O U.S.C. 2307(f) and 41 U.S.C. 255(~) require the

Government to obtain adequate sec~nty fa~
Government financing. The contracting officer.
shall specify in the solicitation the type of secun~y
the Government will accept. If the Governm~nt 1s
willing to accept more th.an one for~ of security,
the offerer shall b~ required to specify the form of
security it will provide. If ac~eptable to the
contracting office_r, the resulting contract shall
specifythe security
p
, v
vnu 3. lesson 2. Contract mane 111t:>
CON 170 ,, .
/3
I ,is
I p,-;ce Ana .i .
eluding the. genera(

financial
~ f111S 10
al different ~
'(c!Ilcnts the 1icn is up~n.), contra
.. . can be in sevc.r
d' g specific c
about the pohc1cs r I .Clar10
111
Adequate security for financing
lien (u1clL1
.1d infoflllauon
c at1ve
1
condition of the contractor, a puram~; 31 zoz-4 for Jctal c
assets, orfor
performance
bonds.
See F
~
.
Security
Government
financuig.
. con dition maY
' fi anc1al
" be sufficient
. to mak e th
1tan offcror s in
. te security ,or commercial contr e
CON 170. The F111ulamentals of CuSI 0 "'
In addition, DF AR.S 232.202-4 st"tes 1 ':s but maY not be adequa " conduct and document addittt
contractor responsible for award ~urpos ' al contract financJOoh
rd and for financing
ona1
financing. Therefore, when offcnng comm~rci, . stifficicnt for bot awa
nd1110
ncrcial
financing,
t e contracting
n is
.
h
analysis that the contractor's financial co
h zations for cotll'
t t
After market research, and reviewing the aut on
hOd or agrees to allow con rac ors to propose it
officer dctcnnines the most appropriate financing met
'
~~--------:o-et-:--e-rm-:;.:in-;:in~g-:-----l
own financing tenns.
contract Financing Terms

FAR 32.203
When the criteria in FAR 32.202-1 (b) are met, the
contracting officer may either specify the financing
terms in the solicitation (see 32.204) or permit each
offerer to propose its own customary financing
terms (see 32.205 ).
When the contracting officer has sufficient
information on financing terms that are customary in
the commercial marketplace for the item those
terms may be specified in the solicitatio~.
Before inserting such financing terms in the s r . .

and 32.205, in order to determine how
o 1c1tat1on, contracting offi
As we learned in Unit 2's Net Present ~:~i;sals will be evaluated with ~:rs should review FAR 32.204
value ?f money of cash flows, maintenance c~esson, we must account for reel to contract financing.
financing arrangements.
Sis, and salvage val ucs when
e ements
such
as the time
c omparmg
. different
The following
. . . provisions and c Iauses apply tO
and contracts when commercial
mancmg ts included .
commercial so 1ic1tations
fi
14
<~
'\ ~
' -:,;
"
1l..
CON 17n , , .
CONJ 70, The Fwulamentals <>/Cost and Price Ana~rsis

Commercial Solicitation Provisions and Contract
Clauses:
- 52-212-4, (Clause) Contract Terms and

Conditions, Commercial items, para (i), "Payment"
- 52.212-5, (Clause) Contract Ts & Cs Required to
Implement Statutes or Exec Orders-Commercial
Items
> Check box for 52.232-29, Terms for Financing of
Purchases of Commercial Items.
- 52.232-31, (Provision) Invitation to propose finance
terms (offerer proposed commercial contract
financing)
Finally, FAR 32.207 provide instructions for the contracting officer with respect to approving
:ommcrcial financing payments.

FAR 32 .207
Payment of Contract Financing Payments:
_ co responsibility to review,
approve, and t:ansmit,

contract financing requests to payment_ office
-Approval shall specify amount to be paid,
necessary contractual info, and accounts to be
charged for payment
.
angcmcnts it is time to examine the
.
crcial financing arr
'
Now that we are familiar with comm
. financing
.
noncomrnerc1al
a rra11gcmcnts.
15
CON J 70. Unit 3, Lesson 2, Con!fal

. t Financing
trsis
rice An0
dp
,~{},jco.,,fan
CON J 70. The Fundarnenta .
..
elll financing
that prudent contract financing

st
Noncommcrc1al It
(l) thru (a)(S) .a~e the performance of essential
R 32 104( a)
,pcd1t1ng

h th t O
uisition by ex
determining w c er include
. vironincnt, FA
111
In a noncommercial ~n
in Government acq . ia in this part
b by including contract
can be a useful workmg too1
t consider the enter
sonable doU ts
fficers mus
R 0 \ve rca
contracts. contractmg O
d contracts. cs
.
licitattons an
contract financmg m so
financing in the solicitation.
The contracting officer muS tded for rom t and efficient
t actuall nee
. G
nt financing onl to the extc_n
fi
cing and the probable impact on
(I) Provide
ovemme
. bt
f privated manduction Icad-ttmcs
d with
e:
considering the availa
1 ity 0 .
associate
penom1ance,
.
ditures an pro
d 1
working capital of the pre-dchvery ex pen
. cd under indefinite- c ivery contracts,
t or orders (e.g. , ISSU
the contract, or groups Of contrac 5
.
basic ordering agreements,_ or th eir eqUI~alcnt): ede the acquisition;

(2) Administer contract financing so as to aid, ~o~mp r:ient through the financing;
(3) Avoid any undue risk of monetary ~oss tot e d ov~rn_ the Government's best interest in the
(4) Include the fom1 of contract financing dceme to e tn
solicitation (see 32.106 and 32.113); and
.
, 5 fi
.
(5) Monitor the contractor's use of the contract financing provided and the contractor
manc1al
status.
FAR 32.104(b) If the contractor is a small business concern, the contracting officer must give special
attention to meeting the contractor's contract financing need. However, a contractor's receipt of a
certificate of competency from the Small Business Administration has no bearing on the contractor's
\ ntitlcment to contract financing.
Non-commercial Financing Methods

FAR 32.101 and DFARS 232.1
Advance Payments
Progress Pa.yments Based on Costs
Loan Guarantees
- DFARS 232..,302(a) The use of guarantee
contr~ct financing mechanism requires th~ loa~s a? a
certain congressional authority. Th D D . ava1lab1llty of
such authority in recent vears ande o _has not requested
15
Payments .tor partial deliveries (g~nera~o~e nmv available.
payment vice contract financing)
Y reated as method of
Progress Payments Based on Pe
Completion
rcentage or Stage of
Perf?rmance-Based Payments
Prov1s1onal Delivery Payments (DFARS
/6
/~:~~~,. ...,. '"
232.102-70)
!,;'...
....
CON 1_7n . , rni, ) .

, ...
~:
CON 170. The Fundamentals of Cost and Price Anulysis
Non-commercial Financing
FAR 32.106 Order of Preference
FAR 32.106 (Order of Preference)
The Contracting Officer must consider the following order of preference when
a contractor , request_s contract financing . unless an exception would be in the
Governn:ent s best interest in a specific case .
(a} Pnvate financing without Gove rnment guarantee . It is not intended,
h~wever. that_the Contracting Officer require the contractor to obtain
prNate financing - (1 ) At unreasonable terms . or (2) From other agencies
tb Customary contract financing other than loan guarantees and certain
advance payments
(c) Loan guarantees . (Note . DFARS 232 3(a) The use of guaranteed
loans as ~ contract financing mechanism requires the availability of certain
congressional authority The DoD has not requested such authority in
recent years . and none is now availa ble )
(d) Unusual contract financing
(e } Advance payments
Ad,ance Payments. First, we '11 explore Advance Payments, which are the least preferred method of
contract financing.
Advance Payments for

Non-commercial Items
FAR 32.102 (Definition)
Advances of money before, in anticipation of and for the
purpose of complete performance under one or more contract
Expected to be liquidated from payments due to the
contractor incident to performance of the contracts
r. .,ay be made to prime contractors for the purpose of making
advances to subcontractors
FAR 32.402
Least preferred method of contract financing
_
fv1ay be provided on any type of contract, used spanngly.
when other reasonable forms of financing are not available
limitations estabhshed FAR 32.401 . and 32.402(c)-(e)
co.v I 7o
, . 3
v l1l/
~'As ,.
Les.rnn 2, Contract Financing
17
'$
~
rice Ana l.r,i
I . o t'CrHI am I P
CON I 70. The F1111d,111u11ta ., 'J
~ tract; but shall be done so

cofcon
f. d.
'Jed on any tyP .
available. I 111 1cators
1 rncnts rnay be prov1
cs of financing are , mcnts may be
Per FAR 32.401 (b), advar~~
if other rcasonab~: ,.~y:Ch indicate advance r:~d in FAR 32.402 are
s11ari11gly, and should not t: t ~t<lf and market rcsc'1
y r,.ciuin:rncnts sta c
r
'"'
. d con rnc
""
from
the
Govcmrm:nt an
fi
,,' all ensure t I1c s' t1tt1tor
'
. 111
1g of ,ccr s 1,
appropriate, the contrnc
.
,
accompli shed in advance.
crcial items. While commcrc1<1I
.. d for either nonco111111crcial o,r ~~;~'~clo; provides basic elements for
Advance pay,m:nts may be u~e , s cd later in this lesson, th~ t.t
acts
1 11 a11d comnu:rcial con tr
.
fill 11u;ing arrangements arc d1 scu, s
'
1
cormncrc ,
using advance payments wit 1 non
L~;~
Advance
Payments
Commercial
Noncommercial
.
d J5 Contracts Appropriate for FAR Part
Part 14 an
J 2 contracts
APl1ropriate 11for otFAR
exceed
the
unpaid
contract
Payments w1 n
Aggregate of payments
shall not exceed 15% of
price

f the
Not subject to interest penalty prov1s1011s o
contract price
Prompt Payment Act

Not subject to interest
May be provided on any type contract but
penalty provisions of the
should be used sparingly
.
Prompt Payment Act
Least preferred method of contract financmg
Not
subject to Subpart
See Statutory Reqmts and standards for

32.4 Advance Payment
advance payments dctcm1ination (FAR
for Noncommercial Items
32.402(c))
See Exclusions for advance payments

(FAR 32.404)
authorized by law.
Contract Clause - FAR 52.232-12
Unusual Contract Financing. After Advance Payments, the next least preferred type of
noncommercial financing is "Unusual Contract Financing." Per FAR 32.114, this includes any type of
financing an-angement that is not addressed in FAR 32. l. If the contracting officer believes use of
Unusual Contract Financing is appropriate, he must obtain approval in advance through his agency's
regulations.
-. J
'
/8
CON I 70, Unit 3, les.,011 2,\
~ fl
'*-~. ~-,
\
o/
'\
\\
CON 170. The Fundamentals of Co.sf an
J Price Analysis
Unusual Contract Financing

FAR 32.114
Any contract financing arrangement that

deviates from this part is unusual contract
financing. Unusual contract financing shall be
authorized only after approval by the head of
the agency or as provided for in agency
regulations.
Examples. The Customary Progress Rates per DFARS 232-50 l-1 are 80% for Large Businc~ses,
and 90% for Small Businesses--granting rates higher than these would be unusual contract financmg.
Paying a contractor more than 15% advance payment for a commercial purchase would also be an
example of unusual contract financing. Both of these examples would require approval in advance, as
indicated in agency procedures.
Loan Guarantees. Per FAR 32.104(c), loan guarantees are a noncommercial form of financing.
However, pursuant to DF ARS 232.302, the use of guaranteed loans as a contract financing mechanism
requires the availability of certain congressional authority. The DoD has not requested such authority in
recent years, and none is now available.
Customary contract financing other than Loan Guarantees and certain Advance Payments.
Per FAR 32.104, there are several forms of customary contract financing. This lesson focuses on the
three most common: progress payments based on stage of completion, progress payments based on
costs, and performance based payments.
Progress Payments. Progress Payments are addressed in many instances in the FAR. For
example, see FAR 32.001, 32.102, 32.l 13~ and 52.232-13 through-16 for just a few. Simply defined
Progress Payments are a form of contract financing used with fixed price contracts when acquiring '
~oncommercial items, where the Government pays the contractor as reasonable progress is made, but
efore contract completion or delivery.
Coll\There. are two types of Progress Payments: Progress Payments based on Percentage or Stage of
P1etton, and Progress Payments Based on Costs.
Ct .v / 7t
::~\'.~
, Unu 3, Lesson
. 2, Contract Financing
.
.
19
ls vl cost (lf/l
I Price A11afysis
1
of CofllP Icton
AtFAR32.102(e)(2) , We
ccntaoe or State
t rt"lcthod under agency procedures
based on Pc r
~
d
payrnen ,1,
1 h
.
Proorcss Pay01cnts
t n1ay be use as a
t with work accomp is cd, which
1cnsura c
~
"ss paymcn '
leam "This type of progrc. sure that payments are cot~tl. urtherrnorc, progress payment~ may not
c o N /70. The funJamenta
Agency procedures mu~t;nestablished under the contrJ~t. fd on undcfinitizcd contract acttons."

meets the quality standar5..
1blc costs of work accotnpltshc
ly allows the use of progress
exceed 80 percent of the c 1"1
. cnt of Defense on
.
. b 'Id'
ship ut mg,
. t OFARS 232.102(e)(2), the Dcparttn . ONLY for constn1ct10n,
ccordmgbased
o on percentage or stage of cotnplct10n
. b ,~
d on a percentage o f cost, no t work completed
Aayments
.
. I
payments ate asc
.
P
conversion,
repair. Typ1ca progress
Progress Payments Based o~

Percentage or Stage of Completion
Progress payments based on percentage or stage of
completion are authorized only for contracts for
construction (as defined in FAR 36.102), shipbuilding,
and ship conversion, alteration, or repair. However,
percentage or stage of completion methods of
measuring contractor performance may be used for
performance-based payments in accordance with
FAR Subpart 32.10- DFARS 232.102(e)(2)
Progress Payments based on Cost. As stated in th

are based on a percentage of cost incurred by th e contractor.
e paragraph above ' typical progress payments
e:,.
CON
J7n , , -
Progress Payments
Based on Cost
FAR 32.102(b) Pr
the basis of co t ~gress Payments based on cost are made on
under the cont~ s mcu~red by the contractor as work progresses
-mcu
act. This form of contract financing does not
1 de -
< ) Payments based on the percentage or stage of

complet1 on accomplished;
(2) Payments for partial deliveries accepted by the
Government
'
(3) Partial payments for a contract termination proposal or
(4) Performance-based payments.
'
Further, FAR 32.SOO(a) & (b) state that Progress Payments based on Costs do not apply to cost
reimbursement, or to contracts for construction, shipbuilding, ship conversion, alteration, repair when
those contracts include progress payments based on stage or percentage of completion.
Progress Payments Based on Cost

Provi si ans/Clauses
Provisions
- FAR 52.232-13 Progress Payments included
- FAR 52.232-14 Progress Payments restricted to
Small Businesses
_ FAR 52.232-15 Progress Payments Not Included
Clauses
- FAR 52.232-16 Progress Payments
. ncing
CON 170, Unit 3, Lesson 2, Contract Fzna
21
of Cost omI P
. e A11alrsis
.
f'[ (
CON I 70. The F1111d,um11tals
.ng payments made by the p .

de financi
b
I1tn~
l
t can inc u
If
a
su
contractor
contact
d acontrac
. FAR3.
.
s.
2 110 .
fi
sts incurrc on
. . 15 stated in
rime contractor, review FAR.
Progress Payments or co'tor under the cond1t1ok~. ,g payment from ak? a any action on behalf of the
t a subcontrac
ffi er sec n
b fi re ta lOt,
d
..
contractor o
, t contracting o ic '.
ontractor c o. fi ncino terms an conditions, is
you as the Govcmmcn . . tion with the prune c
, ct including ma
t,
32.112 and review the s1tua l
bcontractor's contra '
R mbcr t 1e su
'
subcontractor. cmc
' th Government.
N . h D
'th the prime contractor, not c
1rcss payments. ottce t at oD's
wt
.
f the key tenets of prog d. f~ercnt than the rates stated in
.d,
overview o
2 501-1 are h i1
The following chart prov1 cs an . t tcd in DF ARS 23 .
customary Progress Payment rates, s a
FAR
32.501-1~---------------~~====~I
:A
o,.i.,,,w
--
"'"""',YI u
Progress Payments overview
t,"1.1'.y
Condition
Minimum Dollar
Amount
Normal Minimum
Billing Time for first
delivery
Customary Rates per
FAR
Customary Rates per
DFARS
Large Business
small Business
FAR 32.104
Exceeds $150 ,000

FAR 32 104
6 months
4 months
FAR 32 .104
FAR 32.104
80%
85%
FAR 32.501-1
FAR 32 .501-1
80%
DFARS 232 .501-1
90%
$2 .5 million
DFARS 232 .501-1
Note: The specific progress payment rate for Small Disadvantaged Businesses
was deleted from OF.A.RS in October 2014.
Remember the distinction between customary and unusual contract financing presented in the chart at
the beginning of this lesson. The customary Pro~ess Paym~nt rates are stated above. Any departure
from these rates is considered to be unusual. While employmg unusual progress payments is
acceptable, per FAR 32.501-~ and 2, DFARS 232:501-2, and DFARS PGI 232.501-2, the contracting
officer must obtain approval m advance of accordmg to agency procedures,
CON 170, The Fundamentals of Cost and Price Analys is
progress Payment Exe r cise. Review FAR Part 32, DF ARS Part 232, and FAR
52 .232-16 to answer the following questions.
t.
tl10
1
w often and at what minimum
amount may the contractor request progress payments
2. Are the pro~ress payment !ates stated in FAR Part 32 different from the progress payment
rates stated m DFARS 232 Which rates must a DoD Contracting Officer use?
3. How does this clause say the Government will compute the Contractor's progress payment?
4. Within how many days of Contractor's payment request to the Government should he be paid?
5. The total amount of progress payments shall not exceed what? What does this mean if we
have followed DFARS customary progress rate and the Contractor is a small business?
6. Under what situations may the contracting officer reduce or suspend progress payments or
increase the rate of liquidation?
7. What option does the contractor have regarding scrap resulting from production under this
contract?
l
I
I
l
'I
i
~
l
t
CON 170, Unit 3, Lesson 2, Contract Finuncing
t
~
-4;
23
Cow I 70. The Fundamentals a/Cost anc. .ce Analys is

IP11
visional Deli_very Payme?ts. Before moving forward to the next type of noncommercial
p~o a addressed m FAR, it is important to note a financing method unique to DoD. Per DFARS
tinJ11dI1:,
Payments
of financing which apply only when contractors s
Provisional Dchvcry
d
U are
d fia method
z;2.
ds or services un er an n e m1tized Contract Action (UCA) and are similar to progres
ddirer goo Under a UCA, when a contractor is receiving progress paymc~ts and requests payment for a
rr.
k
1 to
Pa)111 ents.
d 1tern the contracting ou1cer must ta e care to pay the contractor under a process sum ar .
re
1
d c-.
Th s
'
dell'.e idation process we eame ,or customary progress payments under a dcfinitizcd contract.
I
r/Je hqU.
ensures the Government does not overpay the contractor,
e-s is outlined under
. DFARS
.
. 232.102-70,
c-.
h
proc " . t ins a financial mcent1ve 1or t e contractor to negotiate a definitized contract as soon as
and
main }he key tenets of Provisional Delivery Payments arc stated in the slides below.
.:ible.
po.,..,
Provisional Delivery Payments

DFARS 232.102-70
The contracting officer may establish prov1s1onal
delivery payments to pay contractors for the costs of
supplies and services delivered to and accepted by the
Government under the following contract actions, 1f
undefi nitized:
_Letter contracts contemplating a fixed-price contract
_ Orders under basic ordering agreements
_Spares provisioning documents annexed to contracts
_Unpriced equitable adjustments on fixed-price
contracts
_Orders under indefinite-delivery contracts
Provisional Delivery Payments

DFARS 232.102-70
Provisional delivery payments shall be
_Used sparingly
r / and
- Priced conserva _1ve Y, revious progress payments
_Reduced by liqwdathtng ogress Pa yments clause
in accordance with t e r
t
Provisional delivery payments shall no
- Include profit
.
d for the undefinit1zed contract
- Exceed funds obligate
the definitized contract price

action
- Influence
I
27
_ ;.,..rr
. ,re/ Price A/llilysis
CON I 70. The F1111d,1mcnr,ils oj Co.\t a
rcial customary contract financin

oncommc ' '
gw
The last form n
d Pa mcnts (PBPs) are another t t
Performance Based Payments.
Pcrfonnance Base 'y " rtn'mce of the co t Gftn
.
.
B ,nd Payments.
. d the pcno ,
n ract b
will explore ,s Pcrfonnance . as~ .
ntractors are paid unng
\ic and process for usin / llt
of customary contract financmg whl:re ~o b the Government. The po .Y. t ,, dated
g Ptsps
2014
1
d
services
Y
p
wcr
lmtia
ive,
'
O
'
pnor to acceptance of supp 1~s an
. The Better Buymg
are stated in FAR 32, and in the HPBP Gutdc,
available on-line by searching the title.
" based upon costs incurr~d, PBPs are financing
"Unlike previous forms of financing where payments an:: bl
cnts or accomplishments that are
fi
11casura
c
cv
1
payments based upon the achievement of ~peel ic,
. , (PBP Guide, Ch l )." For example, instead
defined and valued in advance by the parties to th e contrac\ . curred to build an airplane, PBPs wou\d
of paying a contractor progress payments at_ 80% of _t~e co~~. ~~t milestones, such as fabricating the
pay the contractor upon successful completion of cntical P 1
d FAR 32 l 00 l PBPs link
.
'
.
. l
.
d
. g flight tests As state m
f,
l
d
thcr
forms
of
financing when
use age, mtcgratmg t 1c engmcs, an passm
payments to successful perfonnance, and are generally preferre over O h .
.
the contracting officer finds them practical,
an d t11e contractor agrees tot cir use.
Of
The following slides present FAR 32. l O's framework for PBPs.
Performance Based Payments

FAR 32.1001--Pohcy
(a) Performance-based payments are the preferred
Government financing method when the contracting offi.cer
finds them practical) and the contractor agrees to their use.
(b) Performance-based payments are contract financing
payments that are not payment for accepted items.
the
(c) Performance-based payments are fu\\y recoverab\e
same manner as progress payments, in the event of
default.
(d) Performance-based payments are contract financing
payments andl therefore, are not subiect to the interestpenalty provisions of prompt pay~ment (see S1. L.part :,2.9).
These payments shall be made m accordance with the
agency policy.
1
,n
.
I Price Analysis
CON 170, The Fundamen!lll.s ,d Co sl am

FAR 32.1001-Policy (cont'd)
(e) Performance-based payments shall not be used for
(1) Payments under cost-reimbursement line items;
(2) Contracts for architect-engineer services or construction!
or for shipbuilding or ship conversion alteration, or
repair when the contracts provide for progress
payments based upon a percentage or stage of
completion- or
(3) Contracts awarded through sealed bid procedures.
1
Also cannot have PBP and progress payments on same

contract at same time (FAR 32.1003 (c) and (d))
Based on the policy stated above, FAR 32. l 003 states the criteria for use of PBPs in Government
contracts.
PBP Criteria for Use

FAR 32.1003
The contracting officer may use performance-based payments
for individual orders and contracts provided(a) The contracting officer and offerer agree on the
performance-based payment terms
(b) The contract, individual order, or line item is a fi xed-price
type;
(c) For indefinite delivery contracts the individual order does
not provide for progress payments: and
(d) For other than indefinite delivery contracts, the contract
does not provide for progress payments.
CON 170
.
. Unu 3 l e
'
.
,,_,,)n 2, Contract f inancmg
/_: \)r
2t.J
- ..~ ~,:Hi
.#,. ,
"l-l
CON 170 Tl7
c F1111dame'11tals oj Cos/ and Price A11c1~r.m
PBPs C'tnn
wtth
fixed-pnce
contracts bcmg
awardc d usmg
tI1e sea Ied b'1ddmg
procectu
FAR
' 0 t be used
.Part I4 (FAR 32.100 I). Although PBPs arc payments for completion of perfonnance e res of
arc stdl c s .d
.
.
I .
vents
of th
on , crcd a method of contract financing, and are not subject to t 1e mtcrest-pcnalty Pro .' ~hey
c Prompt Payment Act (FAR 32. I00 I). In addition, PBPs must not be confused with ''part Visions
payments ~, h. I d
I G
iaJ
.
' w tc 1 cscribe payments made to the contractor when t 1c ovcrnmcnt fonnally ac
dc.1ivery
of a portion
. of a purchased quantity (for example, we accept dc11very ~1or 5Oof the 100cepts
t
~n a contract. By accepting the tanks we obtain title and assume risk of loss, and we pay the co atnks
1or the 50 wc. accept. Partrnl
.
'
.
..
f
n racto
payments are subJcct to the prov1s1ons o prompt payment.
r
r
Notice, PBPs may not be used on a contract that already includes progress payments. In addition PBp
th
at ~re ~ot liquidated by contract deliveries must be repaid to the Government in the event of a ' s
tcrmmat1on.
Expected Advantages. As stated in FAR 32.100 I, and the 2014 PBP Guide, PBPs offer potential
benefits in several areas. Because PBPs are only made when the contractor completes significant
events, the parties tend to focus on event completion. In addition, PBPs can offer higher payment
percentages than progress payments, which can lead to better cash flow for the contractor. In some
cases, if a contractor can obtain better cash flow, it may be willing to offer lower overall prices to the
Government. We will examine this further with the "PBP Analysis Tool" later in this lesson.
Financing with PBPs. Before using PBPs, we must first understand a few basic PBP principles, which
are stated early in FAR Part 32. Next, we must comply with the procedures for using PBPs as stated in
FAR Part 32, and we must establish PBPs in a manner consistent with the key steps from DoD's latest
PBP Guidance.
Financing with PBPs
PBP Basics
PBP Procedures
Key Steps
PBP Event Examples
',
~; ;.
- -------------~---,
CON 170, The Fundamentals of Cost and Price Ana(rsis
J2. l 002 through 32.1004 provide ct

fbases.
AR events and criteria.
gm ance on the procedures for establishing PBP performance
PBP Basics
FAR 32.1002 through 32.1004
PBPs establish payments based upon :

(1) performance measured by objective,
quantifiable methods
'
(2) accomplishment of defined events or

(3) other quantifiable measures of resutts.
l
Can be on whole contract or line item basis

FAR 32.1004(b )(2)(ii): total payments cannot
exceed 90% of contract or line item price-this can
mean better cash flow than progress payments
PBP Basics
Bases for PBP Payments--FAR 32.1004(a)(1)
Bases for payments may be:
.
r
.fi II described events or milestones, o
- Spec1 ica y rable criterion of performance
Some measu
h II
f
nee criteria s a
The event or per orma for overall contract performance
- be integral and necessary
- be identified in the conra~t t constitutes successful
- include a descnptlOn o w a
(a)( 1 ) describes events and
32 1004
In add1t1on, FAR
t be used for PBPs.
perfo~~ance
criteria that should !]_Q_
31
CON I 70, Unit 3, lesson 2, Cvnm ict Financing
. Analysis
p 1ce
,1
CON 170. The Funuam
I
entals o;JCostant '
F-ifl:
~}41, ,.
pBP sasics
___.-:=----- -ed on
. h ents
Are contract financin~f_pa:vents or accomplls m
o,t, t'lt"Al~
...,
,cr<.l:f - - -
achievemen
rnents bas
t of speCI IC
of contract financing
- A customary form .
e of default
- Fully recoverable in cas
Are NOT
r services (delivery
- Pavment for accepted goo s o

payments)
. .
- Payments for partial deliveries
As indicated in the slide above, PBPs are not a means to reward contractors for performance beyond
what is required in the contract. It is simply a form of financing, which enables some contractors to
earn more cash flow than customary progress payments, while providing less performance risk to the
Government. Per FAR 32.l002(e), PBPs shall not be used for:
- payments under cost-reimbursement line items;
h'
- contracts for architect-engineer services or construction or for shi'pbui'ldi'n

. or repair,
. when the contracts provide
. for prooress
,
alterat10n,
payment b g dor s 1p convers10n,
O
stage of completion; or
s ase upon a percentage or
- contracts awarded through sealed bid procedures
CONJ 70. The Fundamentals of Cost and Price Ana(vsis
>D' s latest PBP Guide provides the fol\owing guidance regarding PBP use:
PBP Basics
When to Use
May use Customary Contract Financing when:

- Contract ~ $2 5M
- Dellvenes begin NET 6 months after award
Practical to use PBPs when:

- Stable. mature program
- Production contract, ideally w,th at least one production
run complete
Less practical to use on:

-
Service Contracts
Developmental Contracts
Undeflrnt1zed Contract Actions (UCAs)
Compet1t1ve Sohc1tat1ons (DFARS 232.1004)
PBP Gu11:!<: - Ch 4
If PBPs appear to be appropriate for your acquisition, examine the regulatory procedures for
implementing. Notice, implementation of PBPs requires the contracting officer to first agree to a
contract price on the basis of customary progress payments, and then converting to PBPs through the
use of DPAP's PBP analysis tool.
PBP Procedures
OFARS 232.1004
232.1004 Procedures. (b) Prior to using performance-based

payments. the contracting officer shall(1) Agree with the offerer on price using customarv progress
pavments before negot,at1on begins on the use of pe1forniancebased payments except for modifications to contracts that
already use performance-based paym ents.
(u) Anal yze the pertormance-base d payment schedule using the
pertarmance-based payments (PBPJ analysis tool The PBP
analvs,s tool 1s on the OPAP website ,n the Cost Pnc1ng &
Finance section Pertarmance Based Payments - Guide Book &
Analysis Tool tab at the OPAP website
h i! "
-~
.. .. . , c,ct ,,11 L 4 C:J\'-
c,
F .,, 1t C!I '' .3fiC t'
t:-a -s,:-i ,a . , .,. n
k.L..-1
\
I
CO,V I 70 U1111. 3. L es:,on 2. Contract F 111anc1ng

.
.
,.,[Q
33
.i
- - - ........ , .... , .... ,.,i. .., "'J - - -
we can no t
mptcmcnt PBPs on the same co

d
h
.
ntra
As established by FAR 32. t003(c) and (d), ' rt to set pBPs base upon t e entire contra ct as
1
progress. payments However' we
Y use, FAR mandates PBP values be estabr
ct Vah
1 ~t,
. have flcxibi
ti1od we
on a dcltverablc item basis. Whichever me .d
cnts which exceed the stated FAR r11 Sh~
paym
reasonable manner, and we take caution to avot
llits. '
pBP procedures
FAR 32 _1004: OFARS 232.1005
, ..j/\v~
..
~t-,
be made either on a whole

av
Performance-based payrnen t s rn .
.
.
contract or on a deliverable item basis , unless otherwise
~ t ' ~:.;.
prescribed by agency regulations

- WHOLE cor~TRACT BASIS -Financing payments are
applicable to the entire contract, and not to specific deliverable
items (DFARS 252 232-701 2)
Example: a contract line item for 1 lot of 10 airplanes . with a
lot price of S10,000,000, has one deliverable item--the lot.
- DELIVERABLE ITEM BASIS - Financing payments are
applicable to a specific individual deliverable item (OFARS
...
.i
252.232-7013) .
Example: contract line item for 10 airplanes : with a unit price
of S1 000,000 each, has 10 deliverable items--the individual
planes.
PBP Procedures
FAR 32.1004(b)(3)
The contract shall specifically state~
- the amount of each performa
dollar amount or as a percen~~e-based payment either as a

pnce (e.g. , contract price
ge_of a spec1ficallv identified
item)
or unit price of the deliverable
1
The contracting officer shall ensure that(i) The total contract pr
.
ice 1s fair an d reasonable all f t
.. cons1dered and
(11) Performance-based
,
ac ors
with the val
payment amou t
criterion
ue of the performance n s are commensurate

event or pertorma nee
34
~f.
f f i!Hi/1'-. '
CON 170.
:~
.,.,.:.:.,-._,:_.,,.....
T!uit i
, __ _ .... ~ r,,.,1rt1l
CON I lO. The Fund
.,
am<:. ntal\ of Cost and Pnc:e Analysts
PBP Procedures
FAR 3210 4
0 (b}(4) and (5)
PBP amounts (for PBP
by a t10
events or c t
ra _ nal basis including en i n ena) must be established
complet1on, hours expended g neenng estimates of stages of
performance.
, or the estimated cost of
1
P~P schedule shall be adjusted w

drive a contract schedule change. hen subsequent rnod,fications
Notice: PBPs allow payment up to 90% of the contract price, or 90% of the delivery item price. As we
learned earlier, a large business and a small business, with respective progress payment rates of 80%
and 90% of costs, can gain a significant cash flow advantage with PBPs. However, because PBPs are
not paid unless events are completed, the Government tends to gain enhanced technical and schedule
focus.
The following slides summarize the latest DoD PBP guidance regarding the steps to take when
establishing PBPs in a Government contract.
PBP Key Steps

1.
2.
Identify Key Performance Milestones
(PBP Events)
Establish Completion Criteria for PBP
Events
.
d evaluate monthly
3. Obtain an
file
expenditure pro
. PBP Event values
4. Establrsh
. I contract Provision
Develop spec1a
5.
PBP Gu 11j1?- Ch 5
35
CON
17,,
_ " _,., 11ancing
CO.V J70, The Fundamentals of Cost and Price Analysis
Step I-Identify PBP Events. first, the Government acquisition team mus_t id_entify the most critical
events in the project schedule. Only the most critical events, which have a significant impact on the
overall contract performance should be selected as PBP events. Selecting PBP events should be a tc
effort, with inputs from the different program team disciplines, including DCMA representatives.
Chapter 6 of the PBP Guide, PBP events should be selected from key events already stated in the
proi_ect's planning documents, and should not be selected simply to provide the contractor cash flow
Pro1ccts _which have few meaningful milestones, and lengthy ti me periods between signi fie ant event;
p:~
are not likely good candidates for PBPs.
Step 1- Identify PBP Events

~ngage program management. techrncal personnel. DCMA
Use meaningful. ob1ect1ve events
- Consider if event should be cumulative or severable
~ Consider nsk of event :e1ng pertormed out of sequence
- (~t6~f:~cret ne1vuE:_nttsb on whole contract or fi ne item basis

::. e one or other)
- Award of pnme contract cannot be a PBP event
Ut1hze Integrated Master Plan & Schedule
.
- What is program cnt1cal path?
- What are key act1v1t1es that must be completed t
contract delivery?
o ensure
- Are there significant subcontractor act,v1t1es?
PBP Gui:1~ - Ch
1,
Step 2-Establish completion crit .

. th
are
clear, and avoid dcscri ptions such
eria
establishing PBP events
completion."
as. ..w~en
e completion
criteria
951/o complete," "significant! y 'enSure
completed,"
or ''submitted
for
~~\,l
Step 2 -
Es~r~~~~ Completion
: ~se precise, objective, clear criteria

evelop1ng completion criteria is a
- Contractor may draft th
n Iterative process
Government must en e events and criteria but
.
sure events d . ,
meaningful
an cntena are
--C
Each event
.
I . must have an associated
co
I .
umu atr,e events must identlf
mp et1on criterion
- Identify appropriate G
y related events
ve nfy completion of events
overnment person1.organization t
- Obtain DCMA input

o
Be aware of unintended
experts can a!leviat
consequences-input fr
.
completion for pav~e~~spputes over what const,tu~ems field
urposes
36
CON I 1n Unit 3
;,
/,
i
,
'f
...
"'
f=}~~:.; .
....-.,
t_
Lesso n 2. Contract F'

mancing
3-Evaluate th e mon th1 Yexpenditure profile. The third step requires the Government team to
5t
eP
analyze and ~nd erst ~nd the contractor's proposed expenditures throughout the project. The
purpose of this step 1s twofold:
a. serves as the basis for establishing reasonable PBP event values in Step 4; and,
b. Ensures the Government does not pay more for PBP events than actual costs incurred.
The following slide outlines key considerations when evaluating the contractor's proposed, monthly
expenditure profile.
Step 3 - Evaluate the Monthly

Expenditure Profile
Reliability of expenditure profile is irrelevant 'Nith

progress payments but very important for PBPs
E_xp~~diture profile is not the same as Termination
Llab1l1ty schedule--termination liability will always be more
front-loaded than expenditures
Expenditure profile will serve as basis for PBP event
values which will be established upfront before contract
is signed
'
Il
I
I
-Is expenditure profile consistent with cost proposal,

master schedule?
-Is proposed profile supported by actual profile for
same.1 similar efforts?
- Does it refiect timing of costs paid to subcontractors?
It is harder to accuratel y predict monthly expenditures
than to predict the total cost of the contract.
PEP Gui de - Ch 8
Step 4-Establishing PBP event values. After deliberate analysis of the contractor's expenditure
profile in Step 3, we must establish reasonable values for each PBP event. The following
regulations provide an outline for setting dollar values to each PBP event:
a. FAR 32.l 004(b)(2)(i): recognize the contracting officer's goal i~ to provide PBPs as financing
payments only to the extent actually needed for prompt and efficient perfonnance."
b. ~ AR 32. l 004(b)(2)(ii) establishes a limitation for PBPs not to exceed 90% of the contract or line
Hem price.
c. FAR 32.l004(b)( 3)(ii): the contracting officer must ensure the P~Ps do n.ot ~esult in an
unreas onabl y 1ow or negative
estabhshmg
1ev el of contractor investment--av01d
.
. PBPs which
essent' 11
metlts In addition, the reqmred PBP clauses m DFARS
. d
1a y resu 1t m a vance pay
d h
1
252 23 2-0l2and-70I3statete
h
PBP
payments
shall
not
excee
t
e
cumu
ative
costs
incurred
7
on the contract.
C
ON 170, U .
nu 3, Les:wn 2, Contract Financing
37
..
'
~:: :,.
. '. .':'
.
I p,,c,," A110/rsis
CON I 70. The F1111dumcnta Is. o,I Cv5t

. cllll
.
' h cumulative pcrfonnance-based
DFARS 252.232.7012 and 7013(b): (b)(i) ~t _no t1~1c s a II
d. payments exc~cd cumu 1ative
contnct cost mcurrc
l
"Tl10, . ,pre
Jer hrmance-hased a 'tnents should
0
e C<;n,ract. See PG! 23l. /OO!(a)Jor
.
.
. . I it m1v omni l 111 mg 11,e
.
.. h
new>r e.ffcc>d total cost mew tel '
.
.
b i ,yments." This language says s ou/d
. .
.
Jr pe,jormance- ase p,
"A
.
additional 111jonne1t10n on use ''1 -
. _ , I ~efior using PBPs says t no tune
111
1
1
,.
.1
l
ni 5 )ive The actua cont, aL c ' ,
d ,, h . h .
. ,ct cost incurre ... lv tc 1s not
ne\'er, wluc 1 can Je pen
.
. PBP
. 'its erceed cw11u 1alive con 1, l
,5
shall c1mntlat1re
paJmc,
more cash in PBPs than the contractor
permissive. Bottom line: the Govemment s1w 11 no 1. pay
has incurred in costs.
Jnstr11ctor11ote:
DFARS 23]./00J(a):
Slt_,res,I .
Step 4 - Establishing
PBP Event Values
Establish Event Values--what is a PBP event worth?
-Can be less than, but not greater than anticipated costs
incurred up to that point.
- Starting point: cumulative cost projected to be incurred
through scheduled event completion date (using
expenditure profile) less cumulative value of prior PBP
events.
-Adjustments: less important events should generally
have lesser value _ ~111ay need to shift PBP dolfars to
subsequent more significant event.
- ~aution with s~verable events: consider establishing a
-no earlier than payment date to avoid unnecessarily

early completions
PEP Guide- Ch g
Before moving to Step 5, pay particular attention to the cost limitation clemc
fp
.
I
regulatory cost limitation language is designed to protect the Government fro';,,\~e BPs. This .
estimating costs through completion of the contract The limitations reqti,
uncertainties 111
re us tom
expenses to ensure PBPs do not exceed actual expenses,
or 90% of the contract
or . on,t ~r actual
example, man FPl(F) contract, the Government negotiated PBP event val
b
line item pnce. For
which arc estimated at the time of contract award. If the contractor is undues a~ed upon target costs,
. of the first PBP event, the PBP payment could exceed actern111nmg
.tile t argct costs
upon complctton
,
following graph illustrates an actual scenario where an FPl(F) contract's p~~s1co st s incurred. The
Would have exceeded
38
CON I '.() Unit 3, lesson 2

-~
Com1ac1 F111anc 11w

0
~~
"-,
CON 170 Th e Fundamentals
,reost and Pnce

. Analysis
01
~ th
e Contractor's actual expenditures 1or
.
th advance
of
payments.
e project, which would have resulted .ma $55 mt11ton worth
Cost Limitar
Real World Exa l~n Language

mp e, FPl(F) Underrun
Months
--cum Costs Incurred
----Cum PBP Billed
To avoid such overpayment, the Government team must maintain visibility in to the contractor's actual
costs incurred.
a. DFA RS 23 2. 1003-70 Criteria for use. The contracting officer will consider the adequacy of
an offeror's or contractor's accounting system prior to agreeing to use performance-based
payments. The regulation provides latitude for contracting officers to assess the adequacy of a
contractor's accounting system. To assess the level of detail required in such an assessment,
consider the following:

i. Regarding the Administration and Payment of Performance Based Payments, FAR 32. I007(c)
states:
"
.
.
onsible for determining what reviews are required
The contracting officer is resp
.
The contracting officer should consider
fior protccuon
. o f the Gove rnment's interests.cord reliability, financial strength, and
the contractor's experience, perfonna;c~:: cont;actor for the administration of
the adequacy of controls established Y ti1 risk to the Government, post-payment
bY
performance-based paymen t s. Based upon b earranged as considere d appropnate
11
offi,cer, prereviews
and venficauons
shOuld norma Y, e by the contracting
the contracting officer. If considered necessary
. d"
_7006 provides cntena
payment reviews may be require
. . for an_
241
51
Th
. S t m etause at Df ARS_ 2 tli " r can disapprove the accounting
ti.
c Accountin
se
.
the contracting o ice . he clause).
accounting system, and states d ficiencies (as defined ,n t
system if there are significant e
39
l
(n, ,.
. r: .,,ncil1g
---~~-- -J
. e Analysis
if CMt and PIll
CON 170. The Fundamen!llls v
,, hortcoming in the system that

as
I
.
,, defined~- , rtrnent of Defense to re y upon
"Significant Dcfic1cnc~./~y of officials of the
management purposes. "
matcriall7 affocts t~1e/b i ~he system that is nccdc or
infom1at1on prodm.:e Y
b. cti'vc 1s to verify contractor's
fl r's o ~c
.
l isc
D~S'"~
nces, the contracting of .ice. ,. ncics" which could distort cost

Based o~ thes;t:~J~r~o not contain Hsignificant dcfitic~~quired by OF ARS clauses 252.232accountmg sy
.
_ PBP cost statcmcn s
tracking and lead to maccurate
7012 or -7013.
. required when usmg PBPs either on a

1
DFARS 252.232-7012 and 7013. T_hcse are thcbc .:ws~~ both of clauses, paragraph (a) limits
b.
d 1
blc item value
asis.
. thc
whole contract value or c 1vera
.
d I addition paragraph ('b) requtres
l
tual costs mcurre n
'
.
d
PBP payments to at or bc ow ac
.
ell as access
to their cost rccor s m order
contractor to provide actual cost documentation, as :"
to verify PBPs comply with the cost limitation requirements.
A h
FAR and DFARS language interpretation issue, we must
c The Federal Register. s wit any

.
C'. h DF
,
ARS
consider the Final Rule comments in the Federal Register, which were the basis ior t e
PBP language, Federal Register, Vol 79, No 61, Monday, March 31, 2014, DFARS Case ~01 lD045). An internet search can locate the actual record. Highlights of the comments pubhshed
in the Federal Register, Section II, Discussion and Analysis, are as follows (the Federal
Register, Section II paragraph numbers are included for easier reference):
Section II, Paragraph A. Adequate Accounting System: "Since the contractor will be required
to report total cost incurred to date based on its existing accounting system, the contracting
officer must consider the adequacy of the contractor's accounting system for providing reliable
cost data."
Section II, Paragraph B. Administratively Burdensome and Costly: "Each request for a PBP
will require the contr~ctor to provide two dollar val~es: ~umulative value of PBPs completed
to date and
ludes
. total cost mcurred to date. For. DoD venficatton ptirp oses, th e fima I ru Ie me
the re_qu1remcnt
o ffi1cer, to
, for the contractor to provide access , upon requ es t o f th e contractmg
t I1e contractor s books and records, as necessary for the admi t
f
'
ms ration o the clause."
Section II, Paragraph C. Conversion to Cost-Type Contra t . 'Th
18
fixed-price contracts with PBPs into cost-type contracts ;hs.
rule does ~ot convert
detennining a mutually beneficial financial arrangcmcn~ . e ni 1e merely provides a tool for
The focus on incurred costs simply provides a check to usmg pcrfonnance-based payments.
advance payment scenario."
prevent th e contract from being in an
~c~tion_II, Paragraph H. Weighted Guidelines and Profit: 'Th
.
ms,ght mto a contractor's profitability than is already provided~ nilc will provide no more
in cu st0 mary progress
payments."
40
CON I 70, Unit 3 l

. esson
- ancing
. 2 Co n t ract F m
;
~' ,. * ,.
. :. - : .. . ''{ " <':"'-.... --. .,. ~.....
CON 170, The Fundamentals o/Cost and Price Analysis
Cost Limt1 ation Language

DFARS 232
To verify compliance .
language, DFARS re wi!h th~ c_ost limitation
costs expended
dquires in~ight into contractor's
- DFARS 232_ 1oo3~~ -accounting _system
consider the adequac- Tre contracting officer will
accounting system pri~~t an offe~or s or contractor's
O
based payments
agreeing to use performanceDFARS
252.232-7012 , 7013 , paragraph (b )
, 1i
o ensure compliance with th

.
.
addition to pro1,iding the . f 15 r~quireme.nt. the Contractor shall . in
submit su orti
m_ormation required by FAR 52 232-32

stated in tfi~ cla:9s~)~ormation for all payment requests (format
> ~nncdur;:ior~~st ~~h~e~~~minedt by the Contract?r's
accounting books
,
e con ractor shall pro~1de access to upon
re quest of the Contracting Officer for the administration of this
cause
1
. Concl~sion. Based on a review of the above records, contracting officers' actions in planning and
1mplementmg PBPs should be consistent with the following points.
a. In assessing the contractor's accounting system, the contracting officer must verify the system
enables the contractor to adequately track costs in order to keep PBP requests within the cost
limitations set by regulation.
b. FAR 32 provides latitude for the contracting officer to detem1ine how much analysis is
required to determine a contractor's accounting syste?1 to be adequate for purposes of
administering PBPs. A formal audit may not be reqmred.
h p 1Rule suggest with respect to using PBPs, the contracting officer's
c. Th e comments m t e ma
'
. for
,
unting system
should be comparable to the level of analysis
as~essment of a contractorbs ace~ cessarily to the same level for using a cost reimbursement
usmg progress payments, ut no ne
contract..
i
t
t
I ;,:_
finally, after agreeing with the contractor on the

/ep 5-Establish a Special Contract p~ovis!?" cial contract provision" to document to PBP plan.
JP events and values Step 5 is to estabhsh a spe ding implementation, generally, the provision will
.
~ile contracting offi~ers have some flexi?ility re~~r Section H of a DoD contract, and must include
-. bet 1n the fonn of a "Special Contract Reqwrement
m
p Guide.
t
: he following elements, based on the lateS PB
41
CON I 70 U ,
,
ntt 1 T i:>Nnn
:)
Contract. F'II10ncing
., . .~f~1;\::}1~t1\
,;-,''i'
.
,",.
CO'v J 70. The! Fw1da111e11t(1ls <~f Cost lllH
I Price Analys is
'
step 5 _ \ncorporate Special

contract Provision
Develop Special Contract Provision to be inserted in Section
H of the contract wrnch \dent1f\es~
'
- E,ient number
- Event tit\e or description
- Event \Ja\ue ($ or% of tota\--see \imits per FAR 32.1004(t)2'. (ii ,',
- \J'J hether e1ient is cumulative or severab\e--\f cu mu\ative, state the

prior event numbers
- \f PBPs are on a \ine item basis , c\ear\y state the line ite ms subject
PBPs
- Liquidation instructions consistent with v,ho\e contract or CLIM basis
- Fund type
- Comp\ehon criteria
Note : the contract must also include appropriate PBP clause
from DFARS 252.232-7012 or -7013

PBP Guice - Ch 1O
\
..... ,,.,'""-<-
CON 170, The Fundamenluls of Cust and Price Analysis
.
. [;'
, , I) SCllSSIOll r_ \ , \
,
guss 1
~xc, case. PUP l~.vcnts. Evaluate each event below as acceptable or
uot accl'~h~blc. 1f ~o~ helilve the event is not acceptable, explain what changes you
,Hlltld m,,ke to make at acceptable. Consult Chnptcrs 6 & 7 of the DOD PBP Guide
and FAR 32.1 oo.i as needed.

Example I
Example 2
Ewnt: Comp Iellon of fabrication of forward fu selage

Event Ikg1n tl::S
-tmg o l' av1on1cs
software.
,
Completion Criteria: A.1rcra f t arnves

m
test statton # 12
~ .
Ex:unph.' 3
Event: Award of Subcontract #xyz. Completion Criteria: Complete upon

subcontractor signature on subcontract
Ex:1mpk 4
~vent: _Fabrication complete for forward fuselage. Completion Criteria: Shop

mspectton record indicates an earned operation for fabrication as signed o!Tby
DCMA. (Cumulative to Event #4)
Event: Attendance at Management Status Review (MSR). Completion Criteria:
ACO validates meeting minutes which show the contractor's attendance at the MSR.
(End of "Class Discussion: PBP Events'' Exercise)
PBP Administration and Lessons Learned

(h;1pter 12 of the PBP Guide offers helpful guidance with respect to administering contracts with
PRPs. FAR 32.1004(b)( 1) requires the contracting officer to establish a complete, fully defined
sd1e<lule of events or perfonnance criteria and payment amounts. Howcwr, if a subsequent contract
adion significantly affects the price or event or perfonnance criterion, the contracting ofiicer must also
consider an adjustment to the PBP schedule appropriatdy. to protect the benefits to both parties of
using PBPs.
In addition, this lesson includes several ''lessons-learned" from across the DoD community \Vith n:spt:ct
to using PBPs.
t CO.V / 70, U11ir
3. Lessun 2. Cvnlracl Fim@ing
43
co~, 170
' '
Tl1e F1111dwnet11a/s oj.Cost. ancI P,rce 'foal\'sis
, 1,
PBP Administration
When modifying a contract, may:
-Add new PBP events
_ Modifying definition, timing or value of events
Seek to maintain same win-win financial

arrangement as original contract
Ensure payment office is informed of
changes to PBP arrangement structure
Pep Guide - Ch 12
PBP Planning
Lessons Learned
Allow
adequate time - PBP require considerable time and
effort to do correctly
Educate Program Ottice team up front regarding good PBP

e~ents & cntena , purpose of financing . etc.
Discuss Government needs / expectations with contractor
p
cl
- Monthly expenditure profile / Detailed program schedule

Frequency and nature of events
f<
- Use of progress payments if agreement not reached
Special Situations:
Fixed-Price-Incentive contract
,. PBP permitted but special consideration i
s1tuat,ons when total PBP
Id
s needed for under run
. (not sealed bids ) cou excePd
Competrtrve
- final cont rac t price
,. PBP perm,tted but not ad'3able Re .

.
.
.
Recommend solicitation allow f
quire_s extens, ..-e drscussrons
deemed practical by contractin;r ;~:~ersron to PBp after ai.vard if
0
Summary
PBPs are another fonn of financing on fixed price
benefit to the contractor in offering more cash flo~ noncommercial contracts. They provide potent~c
3
Government by linking payments strictly to cornplto_ver stanctard progress payments and be.nefit t
progress payments based on costs, but require add't
e ion of ke Ym,-1cstones. PBPs are' prefcrred ver
and values, and to ensure PBPs do not exceed regulI iona
t 1effort .bYboth parties to establish
. PBP0eve 015
a ory co st limitations.
11
44
CON I 70.
(!.,,;, ,
...,...,1r1ci11g
CON I 70, The Fundamentals of Cost and Price Analys is
PBP Summary
Advantages of Pertor
- links payment to m;nce Based Payments:
schedule focus pe ormance--enhances technical and
- Potential for bett
_B
d
er cash flow for contractor
ase on better cash ft
bett
.
ow
and
time
value of money, may
ield
Y
er overall prices
Whe_n c9instru~ted properly with the PBP liool PBP
prov1 de wm-wm"
,
s can
- gontractor better cash flow, more mission focus
- overnment lower overall price, more mission focus
Exercise 1.
Performance Based Payments: Review FAR Part 32, DFARS 232, and the PBP
clauses at FAR 52.232-32, and DFARS 252.232-7012 and-7013 to answer the
following questions.
1. This lesson states total performance based payments may not exceed 90% of the contract
whole contract price or delivery item price. Which of the following references would you use
to contractually implement this limitation?
a. FAR 52.232-32
b. DFARS 252.232-7012 or -7013
l
l
t
c. FAR 32.1004(b)(2)(ii)
\
i
'f
. .
rafted by the Contracting
d. A special contract provision, d
\
'ir
[
45
if
r,
CON J70 , U111t. 3, Lesson 2. Contract Financing

"
I
'
' ,.
.?
-~ - - / . ~ t
.. -~
! :
' .,, , .
...-.~
------------------------------.:re;i;a.l il t:Cfil !l tat.l i:+1-'l.;i~i.c
-.-~~~
. ,_,- _ '~~.-~ -.. (
.. __ ' '
--
,. t
J P,,n A11aln i:i

0 :\ 170, Tht' Fu m.lumcntuI ~ u.re
1 o r wi,
,
110 0 ft , 11 ma, the contractor be ahle to submit
2. Pursuant to the clause at FAR 52, 232 3~, " ~F /\RS damts at 252.232-7012 and -7013
requests for performance based payments. Do t\te
allow more frequent requests for PBPs?
the nghts
, t to PBPs, as described in FAR 52.232-32 ,

3. Rccogmze
of the Government"'tl\ respcc
paragraphs (j), and (k)(l).
(End of Exercise 1)
Before moving to the fin al section of the PBP lesson, review the following slides which compare
Progress Payments and Perfom1ance Based Payments.
How Do PBPs Compare To

Progress Payments?
Progress Payments
Order or
Preference
Considered customary
contract ftnancmg
Preferred o,er other fonns

of customary financ ing
ApprO'Jal Level
co
co
Cnteria for Use
>$2.SM contract Large
>$2.5r,1 contract Large
Business
>$150K contract Small
Busi ness
( Simplified Acquisition
Threshold)
>$65K for SOB
Business
>S150K contract Small
Bu siness
( s,mplifi4=d Acquisition
Threshold)
Basis for Payment
Based on actual
incurred costs
(eligible, allowable, &
allocable)
46
PBPs
FAR 32.104(d)(2)&(3)
Based on predetermined
amounts, but can not
exceed actual costs
incurred. or 90, contract
price .
..or hne ,.item
_____ ,.._
_____
CON I 70, Unit 3. Lesson 2, Contract Fina
\.
.reosI cmd Price Analvsis
CON J70. The Fimdumentals O;

Progress Payments?
Progress
PBPs
Payments
Entitlement to
Payment
Submission of
allowable costs which
is commensurate with
progress made
Successful and verifiab~e

completion of pertormance
event
Profit
Excluded from
payment
Some profit may be

included
Combining
Financing
Cannot be combined
with PBPs (may be
supplemented \'Jith
advance payments)
Cannot be combined with

Progress Payments (may
be supplemented with
advance payments)
Contract Type
Fixed PriceiFPlf iFixed

Price portion of a
mixed contract
Fixed Price,FPIFifixed
price portion of a mixed
contract

Progress Payments?
PBPs
Progress Payments
Accounting System Must be approved
Frequency of
Payment
Not more than monthly
Not more than monthly (but

may have more than one
event per month
Customary
Payment Rates
80 of incurred costs
for large businesses,
90~. small businesses
May not exceed 90, of

contract price. or 100, of
incurred costs
Co,11 171)
PCO ''will consider the

adequacy of the ...
accounting system"'
Recoverable in
case of Default
Yes
Yes
Alternate
Liquidation Rate
Yes under cenain

circumstances
No
Unit 3. Lesson 2, Contract Financing
47
---------------------------w
-~ ..., ~:'.
; ,-~., I' , ' , '
...sm.r-x,...att-.G:11,....:,
~ ,c.,:.: .~.
CO \
r o. Ti:,
Fwi ~"
m, 11_. ;/_,
>
,,,co.,r mJ Pn,, .fo,,:i ,i.,
Progress Payments vs. PBPs

Proqre-ss pc1ilnt'rrs require ADE U,.\.TE ~
,....0 TRACTOR
SYS , E.1 CONTROLS

.
. Determ, ie and document the contractor s O' era II capabt11ty
to perform (FAR 32 503) The ev:ituc1t1on 1ncluues hnar:cial
capaM t) adeq cy of accounting svstem and control:;,
past periorrnance. experi ence q Jality of management and
reJiab, it,, (FAR 32 503-2)
. Admin,itra~1velv b rdensomer
1
Fe(1era law and reaulations state that performc1nce-based
pa\mens are the preferred method of Government contract
fin<rncmg for f1xed-pnce contracts when the Government and
the contractor agree n their use
- The use of pertorn1dnce-based payments shoufct resu t in

lower
on
costadrnm1strc1tive costs than progress Pd}ments based
In re, i('\\ ing these slidl'S, there are a few distinct contrasts:
- Fm a lacgc business. there is potential for greater C.1Sh flow than ofkrcd by progress payments. SmJII
Bosmcsscs
also gamofg,-earer
cash flow.
rarher
than amay
percentage
the contract
cost. for each PBP can be up to 90 of the contract price.
. B<tter cash flow and less admini trar i, e burden may translate 1 lower overall contract priccs !
0
l'
~,
4/f
Co.v l 7o. u,,,, 3 l ., .
':,
: .~~
t-~.---
.."' ",,,'\,.
'
...
., -~ _
i...
\()17
2, ('11. 111r a c1 /,"mw1c111g

.
,'t .
V
'(.
CON J70, The FunJumf!ntals of Cost a nd Price Anah ~is
Exercise 2.
pBP vs. Progress Payment Exercise. From what we learned in this lesson, answer
the following questions.
t. Rank order the follO\\'ing methods of noncommercial contract financing from the least
preferred ( 6) to the most preferred (I).
Ad\ance payments
Progress payments based on cost
Perfonnance based payments
Private financing
Loan guarantees.
Unusual contract financing
___ (although not currentl y used in DoD)
2. OF ARS 232.1004 requires contracting officers to consider PBPs after first agreeing to a
contract price based on customary progress payments. Contracting Officers may comider
comerting from progress payments to PBPs after award if it is in the Gonrnment's best
interest. Examine the graph below, which shows the potential for PBPs to offer better ca\h
flow than Progress Payments. As a CO, consider which financing method would you prefer
between progress payments based on costs, or performance based payments? \\'hich \\ould
the contractor (a large business) prefer? (ELO 2.04 and 2.05)
Progress Payments vs. PBPs

L P8P ui: t,:i
~1
~we
\
s- s
s _.;-Time
Pha sed
Cost
/ ..
/..
$ ----- $
Esbmate /
- Pa,merit E:f rit

- Criteria for Completion
- Cumulativ e or Se,eratle
co,v / 7(
J , crntrJ..t
Months
-=-~
.
.
' U111r 3. L<:sson 2, Contract F 111Lmcm~
,; .~r a
; 'Jt "-l
C,~f'\)
4
J
=~-1
.J 9
CV.V f 'i(), Tire F11ndamenrals of Cost and Price .foa(rs is
Exercise 3.
Performance Based Payments Exercise and Guided Discussion
Background: Your organization has just awarded a FFP contract with Superior Train_ing
.
Technologies, Inc. (SIT!), for the design and production of ten ( I0) Maintcnanc~ Partial Task 1:ramers
(PTT). Superior Training Technologies is a top 20 defense contractor, la rge busmess. STTI will
perfonn the PTT effort at its main production facility in San Diego, CA. Defense Contract
Management Agency (DCMA) has a plant otlice, Detachment 7L, at the San Di ego facility.
Although the PTT effort sati sfies a unique Air Force requirement, STTI has designed and produced
similar trainers for the U.S. Navy. In completing this effort about a year ago, STTI had a major
subcontractor, AV Technologies. At that time, the Navy awarded a FFP contract with at 12.5% profit
rate.
The contract is based on customary Progress Payments, but STTI has requested Perfonnance Based
Payments. SITI has never used PBPs as a financing method on a contract. The STTI proposa l,
citing the far ri ski er nature of PBPs versus progress pa yments, has proposed a 15% profit rate ( I 4%
plus I% for added financing risk). STTI management considers the I% risk adjustment to be "on lhe
low side" but is willing to "take the challenge'' in order to help the AF meet its PBP goals.
Your task is to evaluate the contractor's proposed documents and determine if it is a reasonable
bas is for PBP negotiations. The exercise is in three parts.
Part I; Analysis of Contractor's Proposed PBP Events and Completion Criteria.

Part 2: Analysis of a Contractor's Cost Expenditure Profile.
Part 3: Establish negotiation objectives for the proposed PBP Event values.
il
'-."t,
50
rr.'
\.
I Price A ,w!l'~is
CON 170. The F11nd11111ent11ls oj Cost anl
. hsis of Contractor's Pro o~cd PRP F:nnts and Com ktion Critrria.
t Ana
part
he following documents:
t. R:ad~ of the "PBP Key Steps" from this lesson.
pTT Master Schedule

' PTT Pcrfom1ance Based Payment Schedule (SIT! Proposed)
: pTT Performance Based Payment Event Schedule and Completion Criteria
As a team, complete the blank columns in the "Blank PBP Schedule.'' Use the following que ~tions
2. . a!Liatina each event. Note: at this point, you do not need to eialuate the e).ent mlue.-..
in ev
e
In the ..Event Acceptable?" column: arc the events listed under the Event Description
' ;eaningfol? Are they identified as cumulative or severable? If cumulati\e. have they
identified to which event? Recommend improvements as needed.
, In the ..Completion Criteria Acceptable" column: can the completion criteria be objecti vely
detem1ined? Is there a verification method that clearly relates to the objecti ve detennination of
event completion? Recommend improvements as needed.
3. In 20 minutes. be prepared to discuss your analysis with the class.
co.vf 10
Unit 3 L
('H
' 0 11
2, Contract Financing
CON I 70, Tltt! F1111J11mtn1t1/s oj Cm-ran</ Pnce Anal rsil"

t" 1 1 Master ::,cneau,e
N
~
ractAward
Post Award Conference
2012
F
J
2011
2013
F
J
6
~
Vendor Efforts
AV Tech (Simulation Systems)

Award
6
6
Pre liminary Engineering Review (PER)
Final Engineering Review (FER)
-~
--
T echnicat Interface Meeting
Acceptance Test
Delivery
j
1
NuBuild (Workstation Racks)
Purchase Order
--6
De li very
-l--j
Program Reviews
Techn ical Interface Meeting (TIM #1)
Technical Interface Meeting (TIM #2)
Hardware Design
Preliminary Engineering Review (PER)
Final Engineering Review (FER)
Program Management Review (PMR)
{
i
6
~
1- -
I
I
b.
b.
Drawing Release to Production
52
L:,/
, .,, ...,
/ 7 0
.,,
.......
I
... , . .
j
,
_,....,........ _ _ _
CO:V / 7r). Tlw F1111damcrrt(lfs u/ Cost ar,d Price ,,fna(11is
PTT Performance Based Payment Schedule (STTI Proposed)
[ Gjrif"/ fu.!J.LJ)~~ T~~~t Award

/
1- ~
_ f ~rence
f--; /
t-
:.,i,
Subcontract Award
PER
T/M#1
I6
:) ';
,;; ,<;. ,,.,.;~"er,~.I.,\
7
' ~-
.~.),;,,,i,'Yt .,:"' _:,.
Training S-Oftware
-f
Training Software
fI
10
PMR
.,..
12
. ...- !
,l
=.{ .=
13
,:t
15
''-!
ls
Final Data Package
taJ
.su?co~t~~:!~--- -- -
Conduct Technical Interface

Meetin9 (TIM#2)
25% Training Software
Complete
!
75% Training Software
Complete
Conduct Program Management
Review PMR
Begin Test of Maintenance

Partial Task Trainers
Check-out Plan and Procedure -
Final
Engineering drawing package

for customer release complete
.
and submitted
=--+---,-~--------.__
I
To
~-'
... -
AV I ecnnorogies Preliminary
lt;,;;_;,,001-- 7 Logistics Support Requirement
14
i
Data Item Aoo
,____________ 2
Verification of
:ayrne_n! _,
vuu,111.:,~JVII
Engi_neering Re!'} e""!_

Deliver briefing package for
Pre/1m1nary Engineering Review
(PER)
/
~eeting (TIM#1)
/
Meeting at AV Tech (Sub TIM
#1)
PTT Test
;;" !.
- Data
Award of AV Technologies
VI
7c~::"
r , ')
-
Meeting Minutes
f -
"
Va.!!Je
Nov. 2011
$517,500
Dec. 2011
$859,500
Jan.2012
$913,500
Mar. 2012
$990,000
Apr. 2012
$1 , 125,000
C : 4,5,6
Jun.2012
$2,317,500
Jul. 2012
$1 ,057,500
C:8
Aug. 2012
$409,500
Sep. 2012
$579,600
Nov. 2012
$202,500
~~.._,, Transmittal
, , ~ .. ..,......~,
Letter
...,..,..,_
Dec.
2012
.., , v..J,..,uv
$103,500
.
Letter of Completion
s~
Submission of
Meeting Minutes
Submission of
Meeting Minutes
Submission of
Meeting Minutes
- Submittal of Meeting
Minutes
C: 9
letter Transmittal
letter Transmittal
r\.,..
12
,v "
$895,500
Feb. 2012
Letter Transmittal
Begin Assembly of Workstation / Letter of Completion
PTT Assembly
11
Submissron of
Meeti'29_ Mi~utes
Tim#2
K . kO ff M
@ STTI
,c
ee ,ng
Sub TIM #1
i.".:
Subcontractor PER
-~ .;
~~;ff;~~jj~~-M
~;hod '/ t~; vor
l.2$.11.~lon-cri;.M
--
Jan.2013
.Jcm.
LU,.,
:i,
tj.1, ruu I
$ 83,700
--
Feb.2013
$88,200
--
I
Mar.
2013
$56,822
,._........
~,.-
_$ 10, 199.8227
J.:.
.re . l Priet! '411ul,~i~

CO .'-: J 70. Tile FunJaml.'11ru I~ <>.J 0s t um
Exercise 4. PBP Den1onstration

Part \-Comparing Progress Payment and PBP Cash Flows
As we \earned in the previous lesson, the current DoD process for implementing Pcrfonnance
Based Payments is stated in DFARS 232.\004:
.
~
(b) Prior to using perfonnance-based payments. the contractmg ofitccr shall(i) Agree with the offeror on price using customary progress payment: bcf~lrc negotiation
begins on the use of perfonnance-based payments, except for mo<l,ficatlons to
contracts that already use perfom1ance-based payments:
(ii) Analyze the perfonnance-based payment schedule using the pcrfonnance-based
payments (PBP) analysis tool. The PBP analysis tool is on the OPAP website in the
Cost, Pricing & Finance section, Perfonnance Based Payments - Guide Book &
Analysis Too\ tab, at
http://wv.'w .acq.osd.mi\ldpap.'cpic!cp!Perfonnance based pavmcnts. html.
What factors wou\d you consider to detem1ine what is in the Government's best interest? Such
factors include the timing and amount of cash flow , the rates paid by the contractor and the
Govemment for short tenn borrowing, and contract perfonnance risk.
Calculating and comparing the do\\ar values of a contract with progress payments and the same
contract with PBPs can be complicated. Thus. pursuant to DFARS 232. l004(b), the .. PBP
Analysis Tool" must be used by DoD acquisition teams when comparing progress payment
financing to PBPs.
When cva_\uating t~e ad:antages of ~onverting from progress payments to PBPs, the Government
must receive. cons1derat1on
for.d offenng the.contractor
the potential for bette r cash fl ow. Though
.
d .
~
profit negot1at1onsbmlay ~rov1 e ~odme ~or\Sl eratton, the Weighted Guidelines approach is not an
~dequate tool for a ancmg cons1 eratlOn.
,. a '..-~
-
--_--__~--, _ _
P_B_P_O_e_rn_on-s-tr-at-io_n_ __
{>
66
Per DFARS ~32 .1004, contracting officers shall

agree to a pnce based o~ customary progress
payments before converting to PBPs
PBPs can offer better cash flow to contractors

\AW FAR 32.005 . when a contract financin
method is changed to a method that is mo~e
favorable t_o th~ cont~actor, adequate new
consideration 1s required
CON 170, Unit 3. L , ..

"
-.,.,~
ts.iott 2, Contrnct
Fi11,111d11t
CV N / 70,
nw FunJumental., of Cost anJ Price Anoly.,is
PBP Basics
Cons1derat1on for Better Cash Flow
If PBPs provide better cash flow than Progress

Payments, Gov't must receive consideration for
using PBPs
Weigh_ted Guidelines (WGL) is inadequate for
analyzing cash flow benefit to contractor-for the
benefits extend beyond a profit obJective
Th~s, DPAPdevelopeda "PBPAnalysis Tool,''
which enables Government teams to compare the
net present values of progress payments and PBP
cash flows , and determine a "win-win" range for
using PBPs
PBP Basics
Cash Flow
To understand PB P's potential benefits to a

contractor, we must understand the importance
of cash flow and the time value of money
Changes in contract pricing resulting in
improved cash flow for industry
- 1970s Fac1htres Capital Cost of Money
- 1980s Flexrble Progress Payments I Milestone
81lhngs
- 1990s Performance Based Payments
- 2000s Paid Cost Rule / Prov1s1onal Award Fees
ln additional to understanding the concept of early cash flow is better for the contractor." This
lesson will actually enable us to calculate the financial advantage.
CON I 7(), Unit 3. lesson ]. Contract Financing
fi 7
~I
...ij
CO:V 170, The Fundamcnrals of COS f w,d Price A11alvsis
Cash Flow and the

Time Value of Money
Most contracting people understand t1e basic
concept of cash flow and time value o mon9.y
_ 'A dollar today is worth more than a dollar
a "i=iar
) - fro m now
Not many know that the financial value of cash flow

can be measured
E'en f~wer know how to measure it through meth ods such as
- o:scou-nted Cash Flow, Internal Rate of Return (!RR) l~et Pre sent
Value (l~PV)
Very few understand the financial returns

represented by government contract cash flows
- Return is usually much higher than the profit / fee rate
To help us understand the financial returns contractors may gain through Government contract
financing, let's compare three possible financing scenarios. In each scenario, the dollar amounts
are the same (12,000 outflow, to receive a total of$ 13,200 in flow). The overall time period (\ 2
months) is also the same. Do you believe the timing of cash inflows and outflows can make a
difference to a contractor? Which of these offers provides the best deal for the lender?
Understanding Cash Flow

Example: Why "Cash is King"
Example : Certificate of Deposit (CD) Offers

Bank # 1 Deposit S12 000 today. get s13 200 in
months,
12o,
- Return 1
:IRR) = 10% {would be a&1ert1S1>d
percentage rate /yield (APR /APY )
as 10 ro annual
Bank # 2 'Deposit S1 000 per month for th

$13 200 at the end of month 12
e next 12 months and get
- Return (IRR) :: ?
Bank # 3 Deposit $ 1 000 per month for th? nP
S800 each month starting the 2,: month th~xt 12 months withdraw
withdraw all rema1n1ng Cash plus $1 200 1n Inter~~~ Of month 12
- Return (IRR} :: ?
at
Same collar amounts Sarne ovHa11 ti me Perioo , ,. . .
L--~========----:...::~.::_l\h1ch IS-4-%-t?. 6M
.- .... ,,,,.....-. ,
..__-
CON I 70, Uni1 3
Lesson 2, Contracl Finan
cing
~ , fdlIP'"
CON I 70, The Fundamentals of Cost and Pri"e Ana~vsis

Cash Flow Picture of Bank #1
Example : Certificate of Deposit (CD) Offers

Bank# 1. oeposit $12 000 today get S13 200
in
12 months"
- Return (IRR) = 10% {would be advertised as 10% annual

percentage rate/yield (APR /APY)
Time period: 12 months
Cash inflow.
513.200
Cash outflow,
. $12.000
Entire cash outflow in 1" month get all of cash

outflow plus interest at the enc of 12 months

Cash Flow Picture of Bank #2
Example: Certificate of Deposit (CD) Offers

Bank # 2 ~Deposit $1 000 per month for the ne xt 12 months and g~t
$13 200 at the end of month 12'
- Return (IRR) = ?
Cash rnflo'N.
S132
r,me period. 12 months
Cash outflows,
$1 .000 per month
.
tf}~wover12rnonttis. ~e : eec mJreCJsh
Bi spreau1n9_ca:>h ou~ ~
at tM end of mcnm 121
in-hand over t, me Jn1.. ~til 1ge151 3
~ 200
I
I
I
I
cox I"
' O. Unit 3. Lt!sson 1, Cvntracr Fina11c111~
CO\" I 70 , The Fundamental of Cost a11d Prict Analr is

Cash Flow Pie ure of Bank #3
Example : Certificate of Deposit (CD ) Offers

Bank # 3 Deposit S1 000 per month for the ne 12 rro nths 1thdra
S300 each month starting the r: rror.th at the end of month 12
w thdraw all re n aining cash plus S1 200 1n
- Return (IRR)
in
ere st
=?
Cash 1nflo,,.
all rema1111n,.
cash plus "
Time penoc 12 month~

Cash 1nflo s.
S800 per ,nonth
$1.200
Cash outflows.
S1.000 per month
IJow. scre~dcashoutfl cw over 12m,:;nths.i;et 80% ::ac~: each monththen get a ' rema :n,::g ca~l'I .o,'us S1 200 at the enc of month 12'
CD Example - Returns
Internal Rate of Return (IRR)
60% . . . l
50%
40%
\
60o/,
\ '11 _ _ _ _ __J
,_
a Bank 1
o 8ank 2
a Bank 3
~ ., enano ts very sim II

contract with 8C1 ;, cu-:;to arto 3 one-fear. ftx.ec-price
- ma r1pro~ress pa,-m.:.rt
J . 'j ,
,.,:: t
70
CO V /
1
. ,ct F;,zu"'.'
70, Unit 3, Lesson ], ( 0111"
_. .,
(O(YYtl
'
.
d Price Analysis
CON / 70, The Fundamentals oj Cost an
. xamp!e Banks l and 2 are similar to commercial financing arrangements. The offer .
'
H k 3 rangemcnt is
. rn Bank 3 may seem unusual, and almost too good to be true. Yet. the an
ar_
tcs the
t~o . r to Progress Payments for a large business on DoD contracts. This example 1llu5 rra '
1
s~rn_ia of cash flow can make a significant financial difference to contractors!
In this c,
wning
k, clement in calculating the value of cash flow to the contractor is estimating the
A cyactors' average cost of borrowing money to pay for short-term liabilities. Contractors
contr
b these
. all)' borrow funds through bank loans. bonds, and stock sales. The cost of o tam mg
typic
...
d
fi d. is called a "Weighted Average Cost of Capital:' or "W ACC." Through ex tende
0
. ~ r:ction with industry, senior DoD and Industry leaders agreed that contractor's short-tenn
1
rate is close to the Bank Prime Loan rate (published at "federalrescrve.gov", minus tax
1en
us 35%
deductions for interest expenses. Thus, the PBP Tool uses the Bank Pnme Loan ra te, mm
of the rate to account for corporate tax deductions for interest.
~tna
i:,
Basis of Win-Win Agreement

Govt cost of raising funds 1s what rt costs Gov't to borrow
money for short term
- 0MB Circular A-94 , 3-year nominal rate
Contractor's cost of raising funds 1s "Contractor Short Term
Borrowing Rate" (similar to the Weighted Average Cost of
Capital (WACC) for working capital)
- Prime Rate' mult1piled by 65%
Pn me Rate published as BankPnme Lo~rn rate. see fe deralreserJe.gov"
Corp orate tax rate generally 35%. ttlus. use 65% as an aner-ta.J. nas,s
Contractor's short term borrowing rate typically > Treasury

Rate. whrch 1s basis for negotiating lower pnces in exchange
for accelerated fund1ng
This rate is used as a type of'"hurdle rate" to measure the benefit of using PBPs as a method
financing. If the NPV calculated by using PBPs with the contractor short-term borrowing rate as
the basis for discounting cash flows is great than the NPV calculated using progress pay~ents,
the use of PBPs would be beneficial to the contractor.
~~ indicated in the slide above, generally, a contractor's shon-tenn borrov,ing rate (the Bank
Lending is a higher percentage rate than the Government's Treasury Rate. This means the
~o~:rimeIncing
c?st for financing through private aven~es \~ill ~c~erally be ~rcater than the cost of
through Government avenues. This point
m the next
slides.
1s 11lustrate.d
C'(),V 17()
u.
several
nit 3. Lesson 2, Contract Fmancmg
7/
cov1
A,w/pif
' 1n, The Fundamemals of Cost and pnee
.
Comparino the Contractor~s Cost of Financing to th c Government's Cost of f 10.an"
.
.
.
''lg,
FtrSl . we consider the Contractor's cost of financing. We
.. will exam meI how PBPs 'hen h
provide more cash flow for a contractor early in the proJcct, can save t 1c contractor a S1.gnt1r.ey
1
amount of costs associated with financing.
' Can
In this example, the contractor's costs are $30.000,000, their profit is 12%, $3,600 oo th
price is therefore $33 600 000 Thus their proorcss
payment limitation is 80% of t,h ' eto1a/
0
S..,
' '
'
e total
' - 4,000,000. The contractor's cash flow in the next slide assumes the contractor's c051 co !(
tenn fimane mg 1s
18%per year, or 1.5%per month (18% / I2 months).
of sh on.
Example of Financing
Using Progress Payments ($)
llonrh
1
(5['(): CrJ)
(1,] ....,!)'. 0)
(2.215.cm
Progress
P1~1Dent
hpenditure
o~- "o.;;ri
- (}~
,l,
(l ,
0-6~ ,w
10
li
12
Total
II
, ~
V 'J.\/Wt,I
6
7
_(V:1')
1(1
.- ~I .... ...
, "<'
.._,
(1 20)~ , ~
!S0}'J1
950,~
2.3~ .X-O
(3,100,~) )
2,4S0,Y-'-O
(_; _6,!X.,.. o:. ) j 2.SS0.X-0
'
(3,S!J}J~>,
) . ..,~ .... ..,"' "
"':
Cub Flow DiscouncNf
Dtli,tr}
)
(2,SW,00 ,,
(1,525,C,1)0)
,00))
()0.000,000)
'
J ,_ ..,v ,V
2,sso,m
!
2 1.:0.000
L2~0...,.., \J
23.521.000
..... ....... -.;'
(620.!XO~
, , .m
,1}: 1())
{ {, "
-
'
f1
\
.... 'oJ\J'J ;
I
10.0SO.OO ~
!0.0S0.0-JO
:ll S,22 7)
(~32.959~
,~n
1.1''
I - -' - ' V
.&.
(555.SS9;
{~; '\ .;11 \
1 -
;- i
r 20,. ~'J)
( 7 ~ .0C~i
:'Sv.,,X'-9)
t 2JOCO)
(560,0L l
{65 SA70.
(6S.t. "S.. -:
r:'10.!69~
(62?, 705}
(./. S~.53.J.;
{305.0C",~
{2~S.9251
9ASO.OC-O
7.92S.953
3.m.o-cr.o
2.59-5 1 12
Here, we see monthly cash inflows from pr

o0
of the contractor's expenditures, but differ ogress paym_ents. The progress payments cover SO
st
indicated in the "Cash Flow" column As ~ndc~ mu paid through short-tenn financing. as
m 1cated m th b
.
nt
value to the contractor of the cash inflows an d outflows e'thottom nght comer' the
net ~96
prese?J2.
.
.
wi progress payments 1s $2,., Next, consider a cash flow scenario with PBP s.
I' i
71
.,,,,,,,,,,ill.'- ~'
CON 170, Un;t 1, le.rson 1. (ontra<I
\ /::
/ J,
Example of Financing
, /.:....~.
-----=-========~-Us_in~g_ PBPs ($)

~lonch
1
I.rpendirure
(6 ..
(1. 2,. )0,)0)
:,
(__225.1. . ,)
C .9~0.000,J
(~)
0)
(3,
0)
(~.Su).M(~
8
9
10
11
12
(.i ,1. 'O.
Tctal
PBP
Dtlntry
0)
l,SOO .. :,o
600,000
5S2)9-
{591,1;3)
5.i-5,')Q()
2.225 _!}')I)
6,,00,000
7 ,S00,000
(3, lC>0. 00 ,))
2.'}9-~_361)
c2 ,s-- ,60:)
3,100.000
2,335, 31
c;,SCJ.00 ))
(3,42~.9(1 2;
3y:3_;,1)2
3,S.... )')
(3.6(,0,t)O ))
6..1~ ,0(: I
1.1~5,000
(6l . .. ' )
(3d(l(l,0)))
Discounted
G,ns,oc.J) (_.1r,sc5)
(; _w.). , Ci)
C .Sl 000)
(i,525 ... . 0)
Ca.sh now
( 6(i(I,000)
i 600.000
(l O., . .)
1.600,0(Y.)
29,000,0(>')
(3,118.5:-2)
; ,i02.1)<)2
(;;i } -3 )
)')
;).i~ .5~0
3,6:))_i),))
2,r~o,139
.1_():)0
Here, we see the cash flows from PBPs. When comparing the cash flows, notice the PBPs
provide $29,000,000 in financin g, while progress payments provide only S23,520,000. In
addition, the PBPs provide more cash to the contractor sooner than the progress payment profile.
As indicated in the bottom right comer, the net present value to the contractor of the cash inflows
and outflows with PBPs is $2,826, 139.
~ -~-~.
,-
0Yerall, the PBP financing offers a $229,927 higher net present value than the progress payment
financing.
.~~, .
..
'
-v':r.
. . . .-~'!
Next, we consider the Government's cost of financing. We assume the Government pays PBPs
by borrowing at the Treasury Rate, set by OMB's Circular A-94). This example assumes the
annual rate is 3.1 %, or .25% per month (3.1 % / 12 months). Under the same set of cash flows.
the next two slides show the Gowrnment' s cash outtlo-..vs in the fonn of progress payments and
PBPs to the contractor, and the accumulated interest expense in the "Total lntert!St'' column.
!.
CJ/'
-./
,.,.
~-
/;/
~
f,;; '
~. -~
...
>~}- ~
_.;j
: r, ...,.
Cov' 110. Unit 3. Les on 2. Cvnrract r,nancm:,;

..
73
(') ,\ . I :..,0,
The
FunJammt,d, oj( osf onI PriC(' ,'1 11.r

.4
,i,
/1
lnteres t Co st to the Government

Progress Payments
~lf'~( .C.(,,:- '
.-,i
~umber
llonch
Progrtss Psymtnr ~lonthl~ lnttrest
Oct
sis.:, O{>O
~O\"
s ~~~ .
D~c
Sl ,,SO.Y.
Jan
t~b
S2 ..-6-0.'. 10
52, S~)_.)J 0
:\1ar
52 SS 'l.0<. 0
..\pr
s; _o.10.
:\:av
SY.~~. .00 0
Jun
SJ); Oo,.
S2,.1St
10
SJ,5 s ~)()
St
S-.11 ,2S5
s.is ,,3
.,
~..1.sr
6
5
S.!.!.6.lO
_',
Jut
52.SSO. I)
52,2.10. 0
S".S:3 . 0
SS.~6-. 0
5, ,.u ()
S5, -:- s-. 0
Aug
s1.~~0. o
s.,,152 oo
1
.
!):~' ~)()
s- _.1 10:}:
~o
Sl., 6-LO
S2.i S
56,.10- 00
Tor:al lnr,rur
) fonrhs
S~9..?67
53 _; _()6-
.1
S2.? ,_,20
s 1u -3
S., .I~.?
s_,.? 7,J6j
Interest Cost to the Government

PBP Payment
lfonthly
Interest
~umber
lfonths
lord Inreresr
Oct
sv
so
11
~o,
SI,S0-0.000
so
S! .S~0
10
Dec
so
so
Jan
55 ,175,, :)!)
S13.3~9
Feb
so
s.:s.~c-o
so
so
:\:ar
S.6,-oo.._'}O
S1-..3CS
Apr
so
so
Sl03.S~O
so
~fonrh
S! Oc.9~0
so
:\~av
s-:.soo.0< o
S2C. 150
Jun
so
..i
SS0.$80
'
Jul
Aug
So,.:.c-o,oc. o
so
s.,
S1 6.53 3
Sl ,125,(){ 0
S~.9-0-6
2
l
S3 LS'
S~.9".)6
S3.,:(S73
'
This comparison of Total Interest expenses reveals the PBP method costs the Government abour
54 7K more than the progress payments. This is because PBPs require the Government to p.'.IY
more cash to the contractor sooner than progress payments.
74
. 1(
CON I 70, Unit 3, Ll:'.uon 2, Contract
f"/Ufl(II ,
1
'
,
I Pncc ;lrwlPi~
( '()NI 70, /1/f! F11ml,11ne11tols oj ( osl um
PBPs
i.:na 11J c 11 1c: co
11tractor 10 <.:arn
. , vith r1:..,pl.' I lo II11. i.:1111lra1."tor ,s costs o1 l111a11c111g,
0
I
t Iurd. . '. ' tl' v 111 nn: fa vorable NJ V o f c,h I1 I1ow than progn:ss payments. w 1111 n:.) J1c.:d to th t:
111
I I's n:qutrc
the (Jowrnmtnl
,
t, I tlnn
lo pay 1110n: 111 111 1.:n.::s
(,li\'l'.'~nini~;,'v,;K.lllS. Should th1. Govcn1111c111 recei ve consid~ratiun'! We will 1.!xplort: this
11 :-.
1 ,11!111.,
, 1.., i.;,i,l ol 1111.111(111 , >14
r1. 111,ll-"~
I
t i1)11m ,\ t.
J
qu~~
.
, , .,
[\lg01 11I 111 h
Consilkration to the Government when using PBPs
. , >int tlt1.' only form of c1msitkrati,111 the Govcn111K11t n:cci vcs is dccrL:Jscd pcrfomwncc
. f
t
. 1,,,.ni.
. .. . ,i..:, PBPs link .11ay1111:11110 pcrfomumcc. Huwcwr. when n:vicw111g
the s1gn1
1ca 11
n~k.
,
.
. d wi ins t,i tll{' l.'nntrarlor, the Govcmmrnt should abo pursue f 111ancral con Hit:rutwn 1or
l!!l;llll. 1' M '
,
,
,
,
u~in~ PBl's. Tlw tollowrng slid~ 1llustrnlcs why.
1\ l I Ill~ 1I
Why We Must Pursue Consideration

when Converting from PPs to PBPs
Progress Pa~-rotnn
PBP
ost
., l
1-
rofit
()
lnttrest
Iptnst
ot:il Cost to the

o,'t
'IR (uh flow

;p\
S2,59'6.2! 2
S2,S26, 13 9
Converting from pro 9res$ pa ments to PEPs d'oes the following

Inertias es Go\ernment s interest ex.pense-we paJ more cash so n er
Increases the tJPI/ or cash ftows to th e contractor-tMi recer.,e 1ore c...1.:h s 0n~r
ln return. the Gov't gets some cons1der;11on in the r rm of towe r perforn1:m;:.e ns
for P8Ps ltn\. . pa, ments t,:, performance-CLh\ie should pursu Scons1 .....-2r.i, n t
~his slid~ illustr';ltcs how PBPs provide a higher NPV to the cnntra.:tor. and also n:quir~ the
11
' i:mml.'n1 to pay more for fin:incing. lf we USl' 1he samt prnlit rate,, ith PUPs as prnl!rl'"s.
P,l)'.'11.'nts. the Tutal Cost to the Go\cmmcnt f1.Jr using PBPs \\\mid be l;!\'t'n rnc.m: than \;ithPrt'llri: , , .
.
G
.
.
.
... :.~ p,t}111~nts. Our gl1al 1s to ~nsurc the.' c.m:mtm:111 !.!:llllS a port10n ot tht' h~ndit~ of tl .
niure frl\orahlc PBP cash now.
~
'
K'
l hn P~rSlling Cl1nsidl..'ratil)ll for PBPs. th~ DFARS 232. IOO~ dri,.:s (.'c.,mr.11.:tin,~offo>r~ to t II
e It'll O\\ tng prul'Css:
~
.. ,
o nw
CU \ I .
O. l '1 mlL
~.' ( '(lllff',I
- e M>n
f .//1(./lll rn;:
COV
J r.) The F11ndt1111c111<1/s oj.(ost (Ill< Ip1in: '411ulrsis
. db the Government if the perfonnanc:

- Negotiate the consideration to be rccct\'C r: y . ble to the contractor than cu t e-base11
s ornary
payments payment schedu Ie w111 b"i.: more tavor.1
progress payments;
.
.
~ .
approving official, or one \eve\ ab 0
- Obtam the approval of the bus mess deaiance
. d
d
ve the
h. 1 r: the negotiate cons1 cratton; and
contracting officer, whichever 1s 1g 1er, ior
,
. that the p1::r
,. .-1onn ancc-base<l payment. schedule
prov1des a
- Document .m the contract hie
.
that n.:11ects adequate const<leration to th e
. settlement pos1t1on
mutually benelieial
Government for the improved contractor cash flow .
Obtaining consideration can be done in several ways, including:
- downward adjustments to PBP Event values;
- moving PBP Events to a point later in performance;
- obtaining additional work at no additional cost and
- downwardly adjust the profit objective.
By using one or more of these methods, the parties can pursue a PBP solution which offers the
contractor a more favorable net present value than progress payments, at a lower Tota\ Cost to
the Government than progress payments. This is called a "Win-Win" agreement.
The Goal: Reach a Win-Win Agreement
The following slide i11ustrates a "Win-Win" Agreement. The left column shows the original
agreement of the parties with standard progress payments. The middle column shows the
contractor's proposed agreement using PBPs. Notice, the contract price for this PBP
arrangement is the same as the progress payment arrangement, but the Tota\ Cost to the
Government and the NPV of the contractor's cash flow significantly favor the contractor.
\
~
\
i
76
CON I 70, Unit 3, Lesson 2. Contract
rr1011cillg
1
,
reost anc.Ip'-ice '4nafr,is
COY I 70, The Fundamentals ,~
We Must Pursue Consideration

~,~:JJ Why
when Converting from PPs to PBPs
&,71
,;;;.
:r.,~... ~ .-. ~
PBP
PBP
Original
.A.grel?'nent
t..greement wfo
Cons1ceraua,
A.~reement w/
Cons1derat100
f_
Progress
PaYmtnu
PBP (not adj)
PBP (adj)
(01t
s:,0.000.0 o
30.000,000
530.000.000
r rofit
Fo11rract
~rict
r"'
r
(n1eresr
lrxpenu
~oul Cost
so tht Go, 't
f lR Cuh
~low '.\-PY
s.;.600.000
12 0
3,600.XlO
120
11.75~0
53.525.000
533.600.0 0
533,600,000
533,525,000
5_;27,~63
5373,8-3
5j60,000
S3.:i.92" ..16J
s:;3_9-.,,s.,3
533,885,000
52.596.2I 2
S2.8~6.139
S2.S00,000
Therefo re. v.hcn negotiating a PBP arrangement. the parties can reach a ..win-win" arrangement
by ~imply aJju ting the profit lo a range where:
-The contractor cams a better NPV than with progress payments;
- The Government pays an owral l lowcr Total Cost, including its interest expense, than with
progress ra)1ncnts.
- Even if the Total Price under the PBP arrangement is less than the Total Price under
progress rayments, the contractor wi ll likely prefer the PBP arrangement due to its higher NPV.
This exercise reveals that reaching _uch an agreement requires multiple calculations to:
compare the NPVs of progress payment and PBP cash flows for the contractor; and,
compare the Government's interest expense for progress payments verses PBPs.
compare the Total Cost to the Government, including interest expense for progress
pa;ments and PBPs
Yet the exercise also reveals the potential for significant benefits to both the contractor and the
Government in negotiating a "win-win'' agreement.
~crefore. when negotiating a PBP arrangement, pursuant to DFARS 232.2004(b ), contracting
The PBP
s
;:aly is Tool is posted on the OPAP website in the Co~t, Pric(~g & Finance section,
h rfo nnance Based Payments - Guide Book & Analysis Tool tab. at
~
.acq.osd.mi 1/dpap/cpic/cp/Pcrforrnance based payments. htm I.
ot ficcrs. are re.gum:
d to use the PBP Ana Iys1s Tool to reach a "wm-wm
" arrangement.
~i_th_a fundamental understanding on what the PBP Analysis Tool is used for it is time for
raining on how to use it!
'
Co.v I i O,
:~.,, .
. . , ' . ' .~
...
,)
' .~ ~
Un,r J, Lesson 2. Contracr Fmoncmg
--
M"-k'j
f'h ' ~
(?.)I (A
"
Y)ot~
~ f l.
"'bo\,/\1-77
.,
CO.V 170. The Fundamentals<~! Cost am
I Prict! A110/\'sis
Exercise 4, Part 2-lntroducin~
the PBP Analysis Tool
PBP Analysis Tool v4.1

So how do we determine a "win-win ,
ag;eement for converting from Progress
Payments to PBPs?
By using the PBP Analysis Tool!

Follow instructor demonstration in your
Student Guide
Individual (student) PBP Demonstration
Exercise to follow
Introduction and Background
OF ARS 232.1004 requires agencies to, on all fixed price contracts, use customary progress
payments as the basis for negotiations. After agreement on price as the basis of customary
progress payments, the contractor shall have flexibility to propose an alternate payment
arrangement for the Government's consideration. To assist contracting officers in dctem1ining
appropriate consideration for a more favorable payment structure using PBPs vice progress
payments, OPAP developed a Cash Flow Tool that is mandatory for use in analyzing the
differing payment terms for contract awards resulting from solicitations issued on or after July 1,
201 l.
The amount and timing of contract financing has a direct impact on the cost to the Government
and the financial outcome to the contractor as measured by the Internal Rate of Return (IRR) and
Net Present Value (NPV) of the contract cash flows. The purpose of this tool is to demonstrate
the financial impact to both the Government and the Contractor using Pcrfom1ance Based
Payments (PBPs) versus Customary Progress Payments.
As outlined in Mr Assad's Memorandum of April 27, 20 I I, Subject: Cash Flow Tool for
Evaluating Alternati ve Finance Arrangements, this tool was developed to allow the contracting
officer and industry to easily determine a win-win price that equitably accounts for the cost,
benefits and potential risk associated with PBPs.
A \Vin-Win
PBPs offer a unique opportunity for a real "Win-Win" financial arrangement for the Government
and the contractor. This opportunity presents itself due to the Government and the contractor
having differing views of the time-value of money. The "Win" for the contractor is better cash
CON J 70, Unit 3, Lesson 2. Comract Financing
78
:r
-
: ; , __ . . . . . . . . .
..- .
>('
,.-
...... -
.. ,..
..... ~ : _...
\.
~-.:
....
.... -
.I'>
--
,.., J- , .... ,..,....... ,_.-
.... -
__,
- . . . . "( - --
_ ...-
I
\
CON I 70, The Fund

amentals of Cost and Price Analysis
flow resulting in a more favorable fi

.
t
d
d
nancial
outcom
cash fl ows a a re uce contract price.
e as measured by the IRR and NPV of the
The "Win" for the Government is a 1
.
. .
ower contract p . h
st f
financ111g co s O providing a better cash fl
nee t at more than offsets the additional
a discounted cash flow analysis to help the ow to th ~ contractor. The PBP Analysis Tool employs
solution for any PBP arrangement. The t0 tontr~ctmg of~cer determine the Win-Win financial
0
feature on the timing of PBP event comp l t. provides a unique and simple to use "what if'
c ion
th a t ena bl cs bot h s1.des to
objective Iy assess t h e potential risk of PBP
. dand payment
. .
s In ctennrnmg the Win-Win solution.
The Tool
The current PBP
t? 01 i~ Ve~sion 4.1.
The tool accommodates Undcfinitized Contract Actions

(UCAs) and other Situahons Involving the conversion from progress payment financing to PBPs.
The tool allows the user to select between "New Award" and "Conversion". The "Conversion"
option will allow the model to reflect financing provided before the conversion to PBPs. The tool
uses XNPV and XIRR functions which are standard functions in Excel 2007 and later versions
but are only contained in Microsoft's Analysis Toolpak on earlier versions. Under the "Important
Notes" section of the Instructions worksheet tab in the tool are the steps needed to enable the
Analysis Toolpak in Excel 97-2003. Users should review the Version Notes sheet in ~he tool to
understand the changes incorporated in the latest version. A copy of the PBP Analysis Tool can
be found on the OPAP Cost, Pricing, and Finance website at:
http ://www.acq.osd.mil/dpap/cpic/cp/Pcrformance hascd pa~mcnts.ht~nl or at the DA(!
Acquisition Community Connection (ACC) Contract Cost, Pnce and Finance Co?1mumty of
Practice (CoP) at https://acc.dau.miJ/pricing under Tools and Templates. A tutorial on PBPs,
CLC 057, Understanding Performance Based ~ayments and the Value of Cash Flow can be
found on the DAU Continuous Leaming website.
rt a contract from another contract financing
The PBP Analysis Tool may be used topc;;ve U ers can select the contract situation that applies:
s. s
method, such as progress payments, to
. has et been provided to the contractor

"New Awards" where no financ1~g
yd nderway and the contractor has been
"C
on" where the contract is alrea y u
onvers1
d t
provided some financing to a e.
.
on tract Summary and Data Input sheets. For .
Th. d
. n contains sample data tn the CD PBP Tool to enter the applicable dat~ for their
IS emo vers10 .
sers should use the Do .
d under the Cost, Price, and Fmance
real-world PBP act10ns, u h D O PBP Tool can be foun
t exactly the same as the tool.
.
1
n
T
e
o
.
ersion
opera
es
specific contract ac 10 .
Th. dcmonstrat10n v
15
PAP ebs1te
section of the D
w
.
b taken immediately upon open mg
.
t10n must e
. W .
use the tool. This ac
readsheet that reads "Security . ammg.
r the top of the sp
. depending on the verswn of
Macros must be enabled to
prompt
nea
t step vanes,
" I E I
the file Users will see a
. bl . d ,, The nex
i k "Enable Content . n xce
.
b n d1sa c .
h ser must c ic
II "OK''
Some active content ~as ec In Excel 20 IO, t e_ u ''Enable this content" and fina Y,
,, then click
bema used.
.
M1crosoft
1
Exce 1s . e click "Options ,
2007 and earlier versions,
79
rnl\1 ,,.,,1
, ,.. :.
, , .,,.tnn2. Contrac
t Fina11ci11g
..,
CO.V I 70, The Fimdam<:'nt,ils ~ lcV.'i-f anl/Price A11alrsi'
tunc, ti1c prom1>t will disappear and the tcrnplate

lf the user fails to enable macros at tlus
will not function properly.
Do not 'Cut and Paste' cells on the "Data Input" sheet as th is will ca~se errors in protected
cannot be reversed by t\1e 'U ndo, c:,.
t , 'Copy' and 'Paste' .1s allowed but
cdls wluch
Ll:'1 un.:.
. th e. 'R1ght.
Click' method for doing so is disabled. Copy and Paste can be accomplished by usmg the menu
toolbar or Ctrl-C and Ctrl-V methods.
Using Microsoft Excel 2003 or Earlier Versions
This tool uses the XlRR and XNPV functions which are standard functions in Excel 2007 and
later versions. If you are using an earlier version of Excel, Microsoft's Analysis Toolpak must be
installed as follows:
On the Tools menu, click Add-Ins.
In the Add-Ins available box, select the check box next to Analysis Toolpak, and then
click OK. (lf Analysis Toolpak is not listed, click Browse to locate it.)
If you see a message that tells you the Analysis Toolpak is not currently installed on
your computer, click Yes to install it.
Click Tools on the menu bar. When you load the Analysis Toolpak, the Data Analysis
command is added to the Tools menu.
Using the Model
Purpose of the Model. The amount and timing of contract financing has a direct impact on the
cost to the Government and the financial rate of return or Internal Rate of Return (IRR) achieved
by the contractor. The purpose of this model is to demonstrate the financial impact to both the
Government and the Contractor using Perfonnance Based Payments versus Progress Payments.
Using the Government and Contractor perspectives of the time-value of money as represented by
the ''Government 0MB A-94 Rate" and the "Contractor Short Term Borrowing Rate"
respectively, the model will calculate the "Final Cost to Government" and "KTR NPV@ Short
Tcm1 Borrowing Rate" values. "KTR NPV@ Short Term Borrowing Rate" reflects the Net
Present Value (NPV) of the cash flows to the contractor when discounted at the contractor's
Short Tenn Borrowing Rate.
Clearly, it is in the Government's interest to minimize the "Final Cost to Government" and it is in
the Contractor's interest to maximize its.retu1:1 in terms of the IRR and the "KTR NPV@ Short
Term Borrowing Rate". If the only vanable is profit, these two financial interests are directly
and unalterably opposed to one another. However, by introducing the variable of contract
financing into the equation, it is possible to achieve a true Win-Win financial deal because of the
differing perspectives of the time-value of money between the Government and the Contractor.
The Progress Payment scenario is ~sed as the benchmark for d~t~rmining a Win/Win
arrangement for several reasons. First, per DFARS 232.I004, it is the financing method most
likely to be used jf a Performance Based Payment arrangement cannot be agreed to or is
80
l/nit 3, lesson 2, Contract Financing

>.
,,"'- - - ~
1f.:
r
~;t .
<l
ff
I
1
CON 170
,
ze Fundamentals O'
.-r'T1jned to be impractical. Second t .

detei"en the Govemment and Industry' I Ais the fiInancing m th
'J
Co st and Price Analysis
berw:f financing. For these reasons ;h ;d third, it is con;d od dmost commonly utilized
fof111hrnark for a risk/reward analysis' Teh ro!?"ess Payment sccre ?Y. industry to be a low-risk
benc
e obJ
enano 1s th
ario should be the profit rate the Go
ective profit rate utT
e nght financial
sce~ents are the financing method
vemment Would expect t I ized ~or the Progress Payment
0 negotiate if Progress
pay
. ce Win-Win should always be the go I f

a o any b
Sin
indicate when the PBP az;;a,?g_ement is a financial .. :;~~ss deal, the model is set up to visually
I
I
(Internal Rate of Return) , Fm~I Cost to Govt" and "K for both parties. The PBP cells for "IRR
. R ate ,,
w1.11 change color to reflect a Wm
, ' Tie or Lose status. TR NPV@ Short Tenn Borrowmg
Tie
I
I
A red cell means the PBP fi

.
mancrnl outco
expenenced using Progress p

me is worse than what would be
ayments
A yellow cell means PBP and p
same.
rogress Payments financial scenarios are the
A green cell means the PBP fi
.
under Progress Payments.
manc1al outcome is better than the outcome
The goal should be to construct a win-win deal where all three cell s m
the '"Wuh
PBP"
coIumn are green.
Instructions on Use of the PBP Analvsis Tool for a New Award

1. Using Weighted Guidelines as the basis for the negotiation objective, negotiate a fair and
reasonable price assuming customa,yprogress payments, not perfonnance based
payments. Progress payments provide the baseline cash-flow scenario for the calculation
of a win-win Performance Based Payment (PBP) arrangement. The negotiated price
using customary progress payments will be the contract price if agreement cannot be
reached on the amount of consideration due the Government for providing the contractor
better cash flow via PBPs.
2. To begin the analysis, select the "Contract Summar( sheet, en!er the appropria~e values
in the shaded cells, as stated below. The profit rate 1s automatically calcu!ated m ceII
ary page must be completed before proceedmg to the
DI4 . Th e C on t rac t Summ
. an error ad v1smg
"No data has been
er will receive
th
Data Input page, oth erw1se e us
entered on the Contract Summary sheet".
S mary Sheet" $64,000,000. This is the cost that
a. Enter in cell C8 on the "Contract um h DD 154 7
bears profit, typically from Block 20 on t e
ry Sheet" $250,000. This is the COM

b. Enter in cell CI O on the "Contract umma interdivisional transfers at price.
amount from the DD Form 1861 P us any
81
CO.\' J70. the I urtt
1r,111en111I'
,,i\'
p,,ce :1naI~.
l
.o(( ,o.,1 an<
,,
7 680
,ooo.
This is th.e profit
arY Sheet $ ' tically populate with the
ct sumiTl
11 autonia
'Contra
II D14 w1
I
CI 4 on t ie
47 Cc
Enter in ceII
DD f orni JS
c. amount from the
I ? 00% profit rate.
-
At this point, your screen
should loo
I "-ollowing:
kliket1e1,
4C ). f/icro1 oftf, ctl
- -~ ,.
::,oDPBP - , 1c,e11 an
_(f
p.-
r,, ,
: 10
Jn ,~
.(!,
- ---
------rl
,;
F
J.
1
C
fl
-,t .''
)? lt
I Actto'1 Detc
np ,on
Program r1ome , co nttl!C
p05 irion
U,ing r BP
Pos iriOl1
Us!ng Progress Poymen!s
&4.000,000
2,0.000
6',2)0.000
7.680,000
[i
71 .930.00~
6,1 ,000. 0~
E Prol,r Bearing Cost
1~0.000]
11
1J Cost or lloney '

11
64.2~0.000
1l I Olal Cost
13
lJ Profit
1
1; Toial Price
-J_
7,630 000
71 ,930. 000
_s_
17
1~
13
12 00% Pofit Rate ';,
.
111 ~aciliries
Capital Cost of Money plus any
12 GO% p,ofit Rate
sts such as inrerdivi~ional tri!nsrers al price.
other non profit.bearing co
ress payments, not performance
1ft
hied guidelines analy 515 assuming prog
w [ nter the objective profit dollars produced by .e weig 11 be calculated using this profit amount
based payments for this contract action. The prol1t rate w,
2)
11
22
23
2J
21
1;
27
23
21
H
l ,,~, J'. , 1s . "J.;r . e''. 1r,
contract Sunm1ary __ , "l-'; .,
~ a1 ,s
(o T ~.r6v r G -~~.
Cr3
!,::L :
'-'' ,;; : e ...
J. Next, select the "Data Input" tab. The user will see a message identifying data that must
be entered before a conversion analysis may be performed. Click OK.
er
Note You mo~ enter the Contractor Expendit,ure@ Cost,

Oehver,es @ Price .ind Performance Based Payments dat.i bel~: b
Conversion opt,on will become active.
efore
tt,e
CON 170, The Fwu'4

L
amen/as ofCost and Price Analysis
Enter in cell AS "Feb

. 2014" as the tiIrst month th
contract. Pay att~nt10n to the cell so that the fir e con~ractor will incur cost on the
ceils below AS will be automatically populate st _date IS entered only in cell AS. The
d with sequential date values.
After doing so, your screen should look lik
. ~ _;. J
e the following:
,'j,_j ~
DODP8P Tool (V
/If,~ ab
H
~!;"'t- : -=~~~~~=:==F~
~ld~s==D=dtJ=~R~t,:rt:::_w_~~~~-er-,o~n~.O~)_~M
:icr=
os=oft~E=xc~~,---~=~==
--;i9
~- - - o~rm
Vi t,V
--
s - - - -c--
-- A
--~-~
E- - -
~( IO b41
_F_ _
G_
H____
, ------J- - -
,,. , ...
Contractor CUN
llontn
t.xpencm ure @ Cosr
Deliveries
Price
A.pr-ll
!a)- Tl )
Jur-U /
1)
JIJl-1l /
11
Au~- 14 /
oc:-r, '
I
I
fxpen<llture
@Cosr
CumulatiYe
Performance IS.Jsea cumul.ftlve P6P

Payments
Cash Fk1W
1
1
I
I
et- r: /
lar-lS /
1J
13
Apt-15/
I
1
1
J
_,, ,
2)
Ju r-1 ~ I
22 Ju ~ r:/
23 4u~~1 ~.
2J se, .,5:
);
I
I
I
c-. ,~ !
No, - !S L
:/
aec-T
ar .1 , I
Fet -h: !
4 cr-lt
." ' ,
1
I
I
,,,a,.15 II
..
PBPCLINPnce
I
I
J,r I~ {
21
Cumulative
Contr.cto,Wnat If PBPs
L____J
financing prior to first PBP ,vent:
s,,.1,/
1/0, . 1,/
Dec -14 )
JJ
3
EnrEf numt>e, or months conuacto, w1u r , c e l v ~ ~
e
9
13
I
I
M1r- ll
Ftt- lA
Per1ormance Based
Payments
'
---
I
I
Da ta Inp ut
- --
U,no ~~-;- f
4- On the "Data Input" sheet, enter the contractor expenditure profile (forecast of contract
costs to be incurred by month) in Column B. Data will be entered fr?m cell B5 through
840. Exercise EXTREME care in entering the doliar values on the nght, for the tool
does not aIIow for copy, pasting or inserting data! General~y, expenditures occur in the
first month and every month afterward through the final, pnced CLTN delivery.
1
enrols
CON 170. The Furwom
J ( ostand
0
frt Ct: " ... .
wre pro
en da
nditures
Expel ooo.o-=-oo-.-00----.....
Contractor X
----- - - -
L---~- T - ~
~ 3~ - , - - ~
---,~
oatc ~
. l\lonth
1,21 5:::.o~o_o._o-=--o_ _ _~
1,400::.o::...o_o-::
.070_ _ _- .
t.600:,::,o~o_o.-:-:oo::---_ _
175~2.::
,o_oo-:.o-::-o_ _ _'
.
4
~
~ ~ 5 : . . : .~
. 7 .0'
: : . .80_0-;:
. .0~0---,
l--;.--t---J
It~
(00.00
5
1
6
J ~ i------~~10~
0''..:..00-0-:.0-::-0- - - - ,
L__::.-+--1A~u1g~--14-------$__::;,L2 ~1v'~~~--7
L-!.__+-~~114-1
-------2 200.000.00
8
Sep-~
$_ _::::.
~~~----,
9
L[=Jt==~==~O~c~
-$2.550,000.00
10
Nov-14
$
2.600.000.00
ll
Dec-14
$
2.750,000.00
12
Jan-15
$
2.800.000.00
13
Feb-15
$
2.900,000.00
14
Mar-15
$
3,000,000.00
15
Apr-15
$
2,900,000.00
16
May-IS
$
2,700,000.00
17
Jun-15
Jul-l S
$
2~600,000.00
18
19
Aug-IS
$
2,500,000.00
20
Sep-IS
$
2,425,000.00
21
$
2.175,000.00
Oct-15
22
Nov-15
$
2,000,100.00
23
Dec-15
$
1,900,000.00
24
Jan-16
$
1,800,000.00
25
Feb-16
$
1,700,000.00
26
Mar-16
$
1,500,000.00
27
Apr-16
$
28
1,300,000.00
May-16
$
29
1,250,000.00
Jun-16
$
30
1, l 00,000.00
Jul-16
$
31
Aug-16
900,000.00
32
$
Sep-16
875,000.00
33
$
Oct-16
sso,000.00
34
$
Nov-16
650,000.00
35
$
Dec-16
soo,000.00
36
$
Jan-17
soo,000.00
Total
$
300,000.00
$
6
~so,ooo.oo
I
2t-14IG4-=--=----c=--
---
84
CON 170 Th F
,
e undamentals or C .
.
'J a.st and Pnce Analysis
Note: After entering aJI the ex d'
11 h
pen Iture d II
expenditures a t e way down i
ar amount
th
1
otice the "Show/Hide Rows" b~t~i I B3J I. When ve~/: e Sum of the monthly
11
hide the blank rows and make th 11 near C3 J5, and cli~ g ~?u.r Summed amount,
e overall expenditu
on Hide Rows." This wilJ
.
re profile and
.
At this pomt, verify the sum in II
sum easier to view.
.
.
ce B31 I Of h "
entered m cell C 12 m the "Con trac t Summary"
t etab.
Data Input" ta b matches the total cost
After entering the data, your screen sh
ould look like the 1c.oll owrng:

.
(319
----i
Ente, numoo or mnrhs con11;ic10, wiU recew.
L___j
~nancing prior to fnt PBP event

Contractor
Expenditure @ Cost
Mont11
CLIN Oeloverie1
Price
CII
Cumur..live
Con rr.acto,
Penormanc S.
Payme:,, sed
PBPCUN Proce
15
1l
Jun-1i l
f75LCCC
sep..1 .1d
Oct- I<
21;ccc:
2 ;Jo CC:
15 22 900
Dec.141
2 CCC CCC
20
Fel>-1: I
13
2 <~5 CCC
28
31
~ ,;;tv:t
t ~ - ~'"
i )T e':-' li-OCJ
1!li24 <;00 1
,?1i2..i ~o ,
, &0 02, ;oc ,
( 42
12 s
19 , :~ coo ,
, s1 02~ ooc,
i!2 ~LS CCC ,
15~ ~25 occ,
coo
52 82 5 coo
SJ : 25 000
56 02S 000
~7 ~2~ 000
Cc r- a f:i"' G 3_,r
~2, 900)
,u 9-t99C ,
51 025
17
t.pr. 1 s 1- - ' , _-=

3c~
,c
82J900
72 900
'-7 1z, 900

, 9 ,;s ooo
02~ S-00 1
i zo 77.s sec
, 2J 1.: 1 soc
, ~ ~l .s 9CC
,2s e2.s s,oc; J
37 2 900
1 ~ C CCC
29
:74 900
,0,02, 900
,2 :2 900
9,9 900
2 CGOICC
I I}
l 1S :2 .001
1'7 77J s-co,
28 82 900
Sep. I 51
900
25 92 900
"-llr-1: i - - - ~
3
"1 oy-fS I
2 sec CCC
2 C:CG CCC
18 S.2-' CCC 1
23 z goo
31
~oc ,
coo
,oo ,,. ,oc ,
11n4900
22C OCCC
CCC
1 5 cco,
(52tS COO t
.~ 97 occ ,
8 92
Ju~ IS
(1
,2 215
r)
6 967
l9
coo
3221500
,6150000
52TS coo000
10o;,,2 .cosoo
10
1121
Cnh Flow
Payments
1 oco
M
ay-1[====+1~
6c~:;c~oc+===============:J
JuJ. 1~====~1~5:'p~s~c~+================-1J
Au~-t
,"""====+2~CC~C;c:t========t========1
1J
14 r10,.1t====~
2-~,spcc~c:+========t========1
16 J
on-1st====+2~s~cc~cct========t========J
18
or-1,~====12;cc;s:;ctc-;ccc~
~ccoc;t===============:=J
-----+---_J
zo
2
Jun-1,~====~2~,cpcc~c,t================i
22
2J A
u11-1st====~2~,c:-:;-;:;cc~ct===============j
2J
25 J/o,ocr.1st====t
2~17fsc~cct===============j
26
s'
27
D
1~sct:ctc,t========t=======j
Jeiaen-,c-1,t====~
1161
F
.
1 --:--=:~c ,: : c:+ -----1------1
30 1,.,.1e1--:-: ,c~cc
-----+---__J
c~cc~cc+
+ -----1----__j
Perfonnance Bued Cumu~tlY .. P!IP
@Cost
56 - Llarfec,. 1,1,'1. . ._-_-_-_--;-11;-;1sccc

cc
ocfcc+-=-=
-_-_---=-==-=-t----=-=-=-=----=--: J- --Apr- I< 1
I o:c CCC
8
9
Cumul6fl'Ve
fxpeno~u,e
Wh1t rf P8Ps
,~ c~: coa1
1.57 3_;5 COC ,
Datc:1 rnpot
');.,'J ~- , -
P ~J J ;
S. Next, in the "Data Input" tab, enter the CLfN Prices (assuming progress pay ments) in the
month of scheduled delivery in Column C. Assume 4 CUN payments of $17,982,500
each. Payments will be made in Oct, Nov, Dec 2016, and Jan 2017 (cells C37-C40). The
CLTN payment total is $71,930,000. The sum of the CLIN prices must equal the total
price reflected in cell C 16 on the "Contract Summary" sheet.
Note: If more than one CLIN is scheduled for delivery in a month, the value entered
should be the sum of those CLIN prices.
When complete, your screen should look like the following:
CON 170
.
' Unu 3, l esson 2, Contract Financing
85
p ( i!
rel ,~, c.111d fl
<)
A 11
,t1sis
' .
,.
CV.V / 70. The Fundamt"llfilL
..,_, e~. . .
.. .
.,
,,
1't
- ,
,.. . ,.a.f"
W1>1n cuw
cun,ulalt.,,.
0e,..... ,
cori t r;tt: f\1f
., ....
f,.pen d1N
,, , ::j 90 0
pt!P ( Lill p, ,ce
F <ll i 9 0 )
1, .. : .a iJJ
) , : , 90-..)
, J02 9.
... 2 ~ " i;-o
u ~,. 9 iOO
D ;, 9-0 J
!'<'J.i~~----_:----+.t----_-_!-,_-_-_-_-_-_+~-=--=--=--=
.li(J._
;'
u.-.,~ _ __: ._?...
:,
.M"-1 <
,.. , ,
. ; t.,:, c;
,1 .a
: "'.'\'_:::,
"
"
~~
:,
':c::'
..
[Ao
i'd
. II;
I .....
~ 1 J;' COil
.~.,_-_-_-_-_---,i----_-_-_-_-i"l
~" ~ :~ ~O)
\~ ~
::::::::::=.t======
J&11- I
', : :.,
:JO,
""
....
i,r.,.:.
' '-"'"'~
)2
... , .t,_ __ , ___

. ,
,,.,,..,e'
...
~~
~8
~ ~7~
i.,_-_-_-_-_-_-...jt_-_-_-_-_
-_-,1
: :::=====~~=
:~,.::---.
;5.~==--=--=-:._-:-~~.::-:,~,c;;~t ::::::::::-=1-1
~,i;,.j
'<
.:':.,:-': '.'.j
' _
_:.
" ;.2'
1!-!~::-:~,:,t-,_-_-_-_-_-,_
oou
17 i 5:' ~(l.J
1- ~~=~c~
; ,;vscc
,~ ~2 ~
~} ?00
~cc coJ
ei ;;c ,o.
co
!7' ca
1"'1 - ~ C,V
EJ ~i~OJ0 1
,E: I 4~0 000 '
~
1.: 0 ~ i~ CO J
, , ,, c C J
t:.
02~ CQC
.51 3;i.
!, :c:J
..~. ' ~
;: .::.~:--~~_
!,2.:~:').------_ -----+f--_-_-_-_-::_--1
, !~Pl' CO
! !}5- CO
,to;! ON
~ .. ?~~ c;J
!==~--~~
======~t=======l
t:.t.- E
'
!: '-=~~ 0
~.',,
1
,:, .
'.-.-+
;'11
Jl
,,c: cuJ
-=-----_-_--++_--_-_-_-_
"" ! ,_____:.5:::_:
,:.:.:~
;.no,
,~ 1:~ OOJ
1!1c::~ coo
u.,i:; 9~J
4;- 1: iJJ
. : ' "i
' t'
Va ,( _ _~- _ _.~,..
,., 1,;.,.
coo
,6: 9~0 C 0 >
6 ~ .:~ OCCO
fJ ~ C CJ)
,jJ 9~0 C 0
~J 7-:C C~J
,6 2~0 CG
~ ~~c coo
17 962 ~Ot
I 9e !~
11
we~ ~co
179!2~~
:~ :::;======"';=
~~;5
-:t===:=::=~
~:=~:~~=====:=j
:} U1-1'~--____.---+-----1
!;
J -..
:;.: =======jt======~=====~
31 '
lotail
J-ur', ' ~ - - - - i - - - - + - - - - - - ' .

f ~:~ Y.:
(",
11
s?e.:cJ
. ,
I j - .::,_,1 t'!J)
'
6. On the "Data Input" sheet, in Column D, enter the value of each PBP Event Value stated
below in the month the event is scheduled to be completed. If more than one PBP event
is scheduled for completion in a month, the value entered should be the sum of those PBP
event values.
Event#
I
2
3
4
5
6
7
8
9
10
IJ
12
13
14
Anticipated Event
Date
Mar-14
Ma -14
Au -14
Oct-14
Dec-14
Mar-15
PBP Event Value

$
$
$
$
$
Jun-15
Se -15
Dec-15
Total
86
, .. .,,, ,, . " .P
CON 17()
, Unit 3 , le.,,11,,, .,
r .... . .. .. ,.,
,.~;,,ancin:,?.
CON 170 Th
.
e Fundamentals oC
'J
ost and Price Analysis
. the sum of the PBPs cannot ex d

~10re.
cee 903/r f
$62,990,000.
o o the contract price.
Atrer entering the PBP Event Values , your screen h

s ould look I'k
1
; : ...:. J J-
..; ,i
!
,1.,. 1j C
~l~it l ~, ,r., ..... t
,.-..e 1
c, ,i,
;
/1
conversion Some financing (e g. progress paymenta) provi<Jtd
fme, num!MM of
. pnor to the f1r11 PBP evenr
EP"nd>ture @ Cost
~- ,,y.i;I
7 1J.,,_1 5
21
2 f C~ CCC
23 Ou9" (
2 ,o; CC C
i2S CCC
2 17: CCC
24
25
.b
27
2a
- --
2 :oa CCC
;ul: I
22
Paymenta
-- - 2;ca ccc ------- -
StP- 1\
Oct- 15
Whit If P8Pa
----~-
3 00.CCO
IIIO/lth1contr.t01 ....,
Cont rec.1or
Upend1 rure
PBPCLIN Pr,ce
---. . - -
fj() 'o - f!
~co QGC
... ,,~;oo
, ,coccc
29 feo-15,
6075000
eooccc
1 : OJ CCC
)}CO CCC
JO ~,,.11;/
31 ,..,,.1, _ _--;1-:-;,o-;-;oc;;::
cc: t - - - - - + - - - - - 1
.o::::
ccc;' t_ _ ___,_ _ _;~~:q_:o~ooot
32 uay-16.1> --_~1~,:::JJ w,. 10 _ _. . . c'-:-:1:::--:
cc::::cc: + - - - - - + - - - - I
3-! Ju~,s- - - ; ;
;c~ac:;';
cct -_ _ _
_j
.:sscooo
JS
,9.1e _ _-;;t7~:c;;;cct -_ _ _+ - - - '2~

.e~n~ccc
2615000
JG
Sei,-11',
oc1. t6
3200000
2COCOOO
u11.11 l
!l
43 A
.pr.171
[ =======t=======j=======~
M
~
.y-1\.17r:===;~~~t===~===j:======~J_
:ao
45
JJ
::j c: :
J11 Tor.I
14 4 t 1
ir ;::,.c.._, ,, - f>t'h
71 930
e;? sSC CCO
tris~fLt,.rs - Ci:i., ,.. ':" .:0:1,...
62 'r.O '.)OD '
:00
'
SJ SC ~00
17962.~00
"
63 !ISO 000
6-0,: 0000
17 982 :00
:cc-t
cT _-_-_-__.:1~
; ,~~2~,c~c
Jae-17~
1
17.982
'
e2 990 000 '
(Ul~'f'1...' t :L.nY-~
--
coo
, <1<)
'~~,va
oc~ ,
l) l5".l ClC 1
"<1 CCC
sa s15 ooo
17.982 ~00
_- -
s,co
50 ~! ~00 -
lo 025 000
61 ,so cco
e2 300 JOO
~~ SiOC
rii! ~
,, El~ !CO
~ }I.!
,1
~ II ~ CQ.O "
eo cco,
...;,, r.oo
11 X~ 0-CC
,2 Ai'.A CGO
60 !75 000 "
=======j
F~li: ====~'-c:.o:.
,o
ns ooo "
GOO "
~? 3~~. ~00 "
?,: OCCC
Otc-1~.lr _ _'7,,C;:;-:
0C
; ;;
CC:t-_...:.1~1
.S-3
~:...:..'
:C:.:+
: C _ _ ___J
jJ
'49
~, 7:. coo
c:occc
11 ~32 ~cc
JS No,-16- - - - ; ;
;o;:;-:oc;;;r,t ---.:.1-~
, ,::'.!
e2~:c:.:+
c - - -2- 00-0_J
cco
39
12, .co
~2 E. ~ coo
+ ___
47
$.rl S,~ ~
1$ ; ~~
4 4 li0
!1 025 000 "
1800000
(6 !~ 900
IH:9'.00
2 Si ;oo "
7~2~0CO
l 07S COO
1
14%SC-C
, o02, r.oo
1 !OJ GCC
Jal'-16
?a-n., ~o ..- - - - . .,,

31,2, ',()(I
2cc; 1cc
oec.- 1~1
reu,,o
Cumui.ttv~
Perl()fm.nce 8Hod Cumu""- P8P
Pa.,.,....,.t
Ca1h fliowir
Q Co01
600000
1 ~2~ CCC
;.
-~------
Cum1.11,t~ e
CUN OeU1<erieo Q Performance llued
Pnce
N"' AW'lld . Ho p1ogress payments will In paid p1ior to th first PBP event
c ontra< or
Montll
Tota] of PBPs should equal
e the following:
finiillCing prio, to rut PBP ,.,..,,
..
oco PBP r'_ __

Qw
'91a~ h.oot
, i::.,,,onn"iiojoJ~M
. ~:iii~
Uo'-'J!t . ,.,1
F"'"'' 135
~
--i 031S
rt Cn" ~
ell:SOCOO '
f1 l1 0
(JC
,,~cco
,..;o C 0
,,;;;o CCO
11
:so CCO
, 9l2
~ ~a
962
~~
1 gai~oa
17 r.t.2 :-0-0
7, 930 coo
Con--:,,"': ' (r,,:o
Da ta Input
l.,.
J t- e
R!lj,
7. After the Contractor. Expendi~re profile, CLIN prices, and PBP payment schedule are
ent.ered, se:ect the ra.d1~ button m cell B1 or B2 to mark appropriate contract situation.
This exercise scenario 1s for a new contract that will be awarded based on PBPs.
Therefore, select the "New Award" button.
Verify the totals on the Data Input sheet are equal the totals entered on the Contract
Summary sheet for the tool to activate the "New Award" and "Conversion" buttons.
For contracts where the contractor will have been paid some financing prior to receiving
PBPs, select the "Conversion" button. This will most often occur when the contractor
has been working under an Undefinitized Contract Action (UCA) or was awarded a
contract based on using progress payments and is no~ seeking to convert to PBPs. See
Instructions - Conversion tab for additional information.
8. Next, click on the "Win-Win Analysis" ~heel. T~e information on the .:using the Model"
and "Assumption Explanations" sheets will explai~ the fcarures of the Wm-Wm
Analy " h
U
ouraged to read the mformat10n on these sheets and
sis s eet. sers are enc
reference them when using this tool.
87
CON I
l(),
Unit 3 !.{'sson 2, Contract Financing
' 1
cov,~
'
t i/,
{/I(' / 1111,/,1111,11/,1/\
r,/ ( .I/\ /
11>,
,, -111uf1 ,,,
I l '
Ill/
ata that v. ii I be u, t:d for the Int
1kt'0 .
h
er rnu<,l enter d f the prcad)h;:ct on the Win H ' :l 11' ~ 1
" 1c n111111ng a PBP anJ 1y,,-.. 1 c u:.
-" 1
,I'\Clurn (IRR) ;:i n:ily-.1. 1 lw; data" cntcrr d in the top o

AnJl ys1:- h"ct.
"
'J
1,,.m ..u 1 1J,~r

" "'i" ,r1t ~ ,1~
,,,v1 ,t.11 i1 JI I< h l J
'\I
2 11
_ ,
7
8
g
p ,,g,,., Poymt nt,
10
11
12
14
I~
1
With 1
l71 931J 000

12 001.
1
t- 2828'1.
Total Pr1c,
ProlltP.eto
IRR 11n1ornoi Rote ol llolurn)
P'1no1 Cott to Govt
KTR NP\/ C lhon Term eorrowlrig Rite
TC/Ill Pr;c,,
.- '
Pro11t,.P.R llntNno, ,,..
$72.111.23~
, 1n1,1c:,,., \O t;o,
\ & 7&\ .~~
KTII NP'V I Siler

~
17
18
19
1<.TR Cuh
:'I)
E; pen(11tur1
P,09 P1 /
Pr,;,;i Pa,
Pru, P11
c...,
CA,im i:av,
Fl.,..
F:o,.
DD 2~0
... ~;,,,,..
'
~,
1((:ustomary_.Pro res~ P~ mcnt R~tc: The tool assumes a progress payment rate of 81f/o for
large business, but the user can change this entry a!!> needed, i.e., to 90% for small business.
Note: In October 2014, !>FARS eliminated the unique progress payment rate for Small
DisaJvantagcd Busincss1:s. Do not use the Small Disadvantaged Bu incss progress paymeotralf
in this tool.
AA0~crnm_<;nt OMO A-94 Rats (expressed as a percentage): This value represents the
"Tnnc-Value" of money to the Government. The percentage is the cost of borrowin g to the
Government as n:llcctcd in the 3-ycar nominal rates ~pecilied in 0MB Circular A-94, App.:ndi\
C. The mockl v.ill automatically insert the current rate, and dctcm1inc the applicable rate b~-'11
on the contract length. For contract length periods that fall between the period identified in
J\ppcnJix C. the model will cxtrapolat' as instructed in Appendix C. A \ink to the or-.rn wc~ite
is shown below, but the model automalically uses and update itself with the latest rate .
!1.1111 ~-~~~~\:; \: )1 ~11:l1_1_11_1_', _ ..'.!~!.~ 1)_h \ 1~s )!.l:Jr" a094 ';11J.~
:.i~~
This value cannot be changed by the user.
(uN I 70, Unit 3, Leswn 2. Contract F1,ia11l111g
'\"C:/.J~
,~~~
CON I lo, Ti,, F1mda1<111u/s 0/Co.<1 and Price Analrsis
Contractor Sl1ort Tcnn 8orrowm

. R,it,.
the, "Time-Value''
of ,.,on
,. T111s value represents
.
.
ie ~
. Prior versions of this model rcnected a Weighted Avcrage CoSt of CapitaJ 'l
(WAC(')
for
this
entry. Howev,r,
., OPAP d,tennined
f> , _ , . .
. the. short
, term, borrowing
b
. rate to be a b'It
eprescnt.it1ve of the cost of funding working capital. Smee short t,m1 orrow1ng cost WilJ v er
by contractor, DPAP detennined this rate will be represented by th e published Pnme Rate ary
~ftcr-tax basis. s.ince the corporate tax rate is 35%, this rate will be the Prime ~ate x 6s.J.'
O.an
he tool by
automatically
changed
the user. uses and updates itself with the latest Pnme Rate. This value cannot be
ti
h-,
,.,
l!'l f
-~
't
In,,.
t \
If
.t
,;I
I ... .
~ J,
J' }
, .,
, ..
f.
3
4
5
J'
Internal Rate or Return IRR Anal sis
SO%
1.00 %
2.11 %
~ ontractor Short Te rm Borrowrng Rate f~o.}
Assumptions :
Custornary Progress Payment Rate

Q_ovt 0MB A-94 Rate {01
Proqr~ss Paym13nr Lag D~

PBP I DD 250 Lag Davs
10
11
12
13
14
15
16
17
With Progress Payments
J ~
Total Prtce
Profit Rate
$71 ,930,000
12.0-0%
IRR (Internal Rate or Return)

Final Cost to Govt
Total Price
Pront Rate
28.28%
KTR NPV@ Short Term Borrowing Rate
IRR (Internal Rate c
$72.713,235
Final Cost to Govt
$6.761.949
KTR NPV@ Shon
18
19
20
PSP olPrice
__
'H
Jr1 ,
KTR Cash
Expenditure
r ,.,. , .... - ., ~,
Prog Pay _ DD 250
Prog Pay
Prog Pay
Cash
Cum Cash
Flow
Flow
--
PBP
*Progress Pavment Lag Days: This entry recognizes the period of time from when the
contractor incurs cost to when it receives the progress payment from the Government. This has
been detennined to be 22 days on average. This value cannot be changed by the user.
"AA PBP/DD250 Lag Days: This entry recognizes the period of time from when a contractor
submits a PBP request (upon successfully completing a PBP event) and when it actually receives
paymentbefrom
the Government.
This has been detennined to be 20 days on average. This value
cannot
changed
by the user.
PBP Cost Limitation: The model will reflect enforcement of the mandatory DFARS language
that limits cumulative PBP financing payments to no more than cumulative cost incurred dunng
contract perfonnance. Therefore, in the PBP column (Column H) on the Win-Win Analysis
sheet PBP values are adjusted as necessary to ensure that PBPs do not exceed cost incurred as
reflected by the expenditure profile. Therefore the Win-Win position is calculated using the
adjusted PBP cash flows. In pnor versions of the model this limitation was only reflected when
tlie user clicked a check box md1catmg the contract would contain cost limitation language.
90
CON 170, Unit 3, Lesson 2, Contract Financi11g
-";:,\ff
. t:-;,;p .'-'
------ ----CON I 70, The F.
undamem I 0
a .f / Co.rt and P. .
rtc e Analysiv
andatory DFARS language will en .

:h chc m
d
h
.
sure that PBP
icfivllg 1 ost incurrc , care s ould st,JJ be taken
financing pa
~,.ced cota tc/oadcd PBP schedule is included in th not to establish a front-loyamd cdnPtsBdu not
,,
fr011 .
e contra t
c
P sch d J
a rV {or the contractor even ,f ll does not a
. c, rt can result in JOO fi
. e u e.
\.~cfl
'
.
.
ccomphsh th p
o mancing
0 ve,;1
05 t rec hould expect to expcncnce improved cash fl
. e BP events on sch d
~ tractor:,
ow with PBPs b t I
e u1e. The
fOfl
' u on y when it perfonns
1vd1
e of contract financing is to assist the cont . .
urpo:,
.
.
ractor in the
fhC P ct FAR 32.104 states contractmg officers m t,,
. payment of costs incurred on
ontra
d
us provide G
tficc tent actually nccdc to ensure prompt and cffi1c1.. t
ovemment financing only
en perfonna " F
he ex
roc .4(b)(2)(ii) states PBPs are not to exceed 90% of th

~ce . AR
3;. fOOt the contractor can never "need" financing that e e contract pnce . .At any point in the
contr~c ;e FAR 32.1004(b)(3)(ii) further states PBPs sho:~;eds ~ta/ cost mcurred at that time.
fhe:::nably Jow or negative level of contractor investment i;~;e e expected to ~esu/.t in an
tJJlfGe vemmcnt docs not have a high degree of confidence . th
contra.ct. In s1tuat10ns where
chc O
m e expenditure profi/ th

mment has used a cost l1mltat10n provision in Perfonnan B d p

e, e
Gove .
b 1 f "
ce ase ayment contracts. This

.. to eliminate the poss1 1 1ty o a negative level of contractor investm t" fl
.
J)
f
,,
en rom occumng. A
rative level o contractor mvcstment 1s another way ofsaying"advance payment".
"neg
ln the absence ?fa consistent expenditure hist~ry for the item being procured, determining a
reliable expenditure profile can. be extremely d~ffi~ult. Therefore, both sides, while agreeing on
the total cost of the contract actwn, may have significant differences on how that cost will be
incurred over time. In fact, it is significantly more difficult to predict the monthly expenditures
than it is to predict the total cost of a contract. When using progress payments, this difficulty is
irrelevant since the Government will pay a percentage of the actual cost incurred each month, not
the forecasted costs. However, when using PBPs, the accuracy of that expenditure profile can
have asignificant effect on the financial outcome to both parties.
Including PBP Cost Limitation language in the contract may be the simplest and most equitable
solution to this problem. If a PBP cost limitation is used, cumulative payments to the contractor
will never be allowed to exceed cumulative cost incurred. This can allow the Government to be
more flexible relative to the expenditure proflle and the resulting PBP event values since the
possibility of a "negative contractor investment" is eliminated. While this will preclude an
"advance payment" or windfall cash flow scenario to the contractor, it does not relieve the
Government from analyzing the expenditure profile and ~v~1!t v~Jue: for reasonableness. It does
however provide the Government considerably more fl.ex1b1llly in this area.
_While the use of a PBP cost limitation eliminates the possibility of a ''negative contractor
,~ves~ment", or "advance payments", it is important for the use~ to understand h~;v s~~o~ino
snuar1on can arise when a PBP cost limitation is not included m th~ contra~t. Jed o
o
scenarios are likely
.
.
d'
g
cumulative
cost
mcurre
.
to result in cumulative PBPs excee m
,
. ted expenditure profile that was not

The PBP payment schedule was based on a pro1ec
' d f!Ilificant costs would be
a
d'tI
profile assume Sic
. ccurate .. Specifically, if the expen ure
t loaded) but actual cost turned out to be
Incurred m the early phase of the contract (fron
()/
C'ON 170 U. .
nil 1. l esson 2, Conrrac! Financing
,:. ,
-!<-'
_..:
~.. .:.".: :~ js
.,
.,.:
. I p,-;ce Ana(rsis
ayments in the early phase of th

t
I dcd pBP even P
e
ON J70. The Fundamentals o/Cusl (]Ill
more evenly spread or back oa d'actual cost.

t were not accurate. For instance r
contrJct could significantlY excec
for pBP even s
.
t
r..
' , PBp
The assurned completion atesumed to hapP en later in the contrac
th an 1.
t 1 pcrionnance
.
I
d
event completion dates are as>
hedulc and t 1e con rac or expenditure
s
warranted based. on the master
program sled result in cumulative payments
that ex ceect
t earlier coll
I I
profile, pcrfomung the evens
t mismatch between t 1e Panned
t
actual cost. This example wouldt iilUS ra ea
f erforrning the contract Depending on th
expenditure profile and the 111aS er schedule ~he contractor 111aY under run the coS t O / rovidcd (% of total price), this is lik I e
size of the under run and the level of PB s p ome oint in contract pcrfonnance e y to
t nts in excess of cost represent the pay
; .
. .
result 111 pavinents that exceed actual ,coS
"at s ng''Pvia the un er run The cont The
contrJctor's v,cw of tins srtuatron is paynte 011.
.
d
ment
of
thedescribe
additional
contractors
ractor
may
thisprofit
as an the
added
incentiveisto ea
under run the contract. However,
PBPs
are
financing, not incentive pay111ents. Additional profit earned through cost under runs
are proper! y paid to the contractor at the ti me of DD 25 0, Just as lt is under a contract
that uses progress payment financing.
!!ow the Model Wor~- The "Win-Win Analysis" worksheet uses a Discounted Cash Flow
analysis technique to measure the financial impact of various contract financing scenarios. The
model uses a customary progress payment rate scenario as the baseline against which to measure
the financial cost/benefits of a PBP financing arrangement
,.,,. ., .
..,
It-
..... f"
T.sO
U, ! '
';
,..
----- ------- -
- ,...
. . ...
., ,
"
,, '
l
I\
22
.,___~ - L'~~~1L~J.!1'6
,___:.:----i
r;u:,N'!'J!.t I~ciJ!"-J.' ,_,d)'.'.L':'1 I:'~
20
rJlJP OD 2:iv L~'~
--
-;;;Re,e~
J
.t
Ap~rox10"0Te
,,v,11W1n so,u :,n
--
(,-1 )'/t~~,.~d A ~.1 j) .Jft~ ~~J)
(:.< l'lfrl'
GO t 8 eaJd c1 en
RESET ~
IOI ,h<:fl f ij'l " fJnt<OWi rl<J l'A!' ,...,J
II
w,tn PBP
c.~:.c. . 1'1:,.;.Ym
;.:.;.
"::.:.
I - - - - - -- ]_
9
10
11
17
1J
1111111n1orn1111-11 or ~,turn)
1)
FJ"'' Cott 10 oovt

I< 11'1 NPV @
$71.930,000
12 00'-
Total P"..
28.31 ..
,.,om11,1
S72.71J.2J5
,2.00,.
IRR 11ntrn1J Rat of RturnJ
54.6%"
Final Colt 10 Govt

KTR NPV @ snort Term sorrowing Rat
$6,761 ,911
KT'< Castl
Prog Pay
Pr)9 Pay
Prog Pay
casn
Cash
Cum Casn
FIOlf
FIOH
FIOW
09250
PBP
71
,, 000 000)
2'1 333
( ?'5 0001
845 867
11 , 00000,
(1 soo 000)
1 ~-1467
1 16< 567
11 7520001
, 3,2 121
( I 957 8001
: 4J 5 5i)J
'" .. !...,.. ,,. , ..,.
73
"
~1;11-14
?4
Jun-1J
, ',
JUf 1J
AJJ!J "
StP- 1J
0cr, 1J
;t
.;=;.:,
...,,,., __________
- .. I.~~~
c4 _ _
r. , _ __
1
,.
ty-
J o200
cumcasn
FIOlf
Pr09re5S F1l
(1 000000 1 (1 CJ()() ()()OJ
e~penc1rure
/ 1)
97.57'
PBP
PBP
1,}
18
s 1.054,i8B
PBP \ of PriCI
'"011 T'"' sorrowing RII
,r
?I\
27
S7 1,tJo.000
Total Prie
Pror,t Rat
. . ..
\Yifl Wtn
(476667) l' J 765<i7\
'reG 6E 7)
(786 667)
iJ6g 13Ji
(1 155 BOO)
i'lSS 5331
r s.i.J 3331
1 47~ 667
000 000
2 000000
rJ 37 J~J)
(' 95 t 671
(J39 573,
(2 J2' 2J0t
1512 :%)
(2 9)3 ~'.)l; I
f\,',~~;',., (_,.,~" . ,. ~,. .. .(.. "- '
76 667
738 333
(1 957 800 ) (J 709 500 1

,
I.~,. !
11 JOO OOOl
(690 000! (Z oOO 0()0 )

2J8 CJ()() l1 752 0()0)
.............
, ...
,.. ....
. . .......
\ .-.r,~ f', 'f
----- 11
CON / 70 r r
umt 3. Lesson 2, Contract
92
111
f (l!lci g
CON 170, Th e Fundamentals oifCost and Price An aIys1s.
ost to Govt" is the sole measure of finan .. 1.

,,fna
. 1ay_s two ways Contractors looketaat impact
1'n~ '"l'"he CJllodcl d1sp
fi
. from the Government point of
,
i 1
f
R
)"
h"
h
manctal
..
(ii'' refllal Rate o eturn w ic_ represents the annual r - op po rt umhes.
The first is the
,iF (!~act cash flows. The second is the "KTR NPV @ shtrte tax rate of rc'.um represented by
~ecOnt
Borrowing Rate"
which
epresents the
. present value of the cash flows when disco unted atTerm
the Contractor's
short term
r
uorro
wing rate.
c,ovt sreak Even
t.s point, the buyer has entered the progress payment expenditure profile as well as the PBP
Attent schedule, with

. db orrowmg
. ~ates: Now, the tool will compare
'
fv
tI1e associate
the two
h1 payment cash flows, and calculate a wm-wm objective. Clicking the "Govt Break
different
fven" button will cause the model to search for the PBP Profit Rate that results in the "Final
cost to Govt" to be equal under both Progress Payments and PBPs.
.,,m,.."' '""''""' so"'."'"'"' ,m
""'""'""'"'"' ,.,.,.
'" "",,. , "" w",

.<,,. " ,...,,.
, "''"",
.r.B , ..,,.,,, "' "c'.:'.'.'-'~
- G, ,,_:::.
_O ....c:.__-------=~
E
G
-
r-:ii_:
, JI -
-"
,o,.""" ~.,.,-' , ,~
<
J
.,w <> "' , ,c:

K
-1
:
<'
l/l tr1
c;,_F.a"il?
Wil/lPSP
8
l
with pro rOi Pa mt115
Total p,ic
prolrt Rat
1RFI (Internal Rat ot
sr1 .t3o.ooo
12.00"
t<TR r,PII @ snort T'"' SO"'"'"g iw-
'I
$7:Z.7tJ,235
Total Pnc
Proh1 Rai.
!RR (Internal Rat ot Flturn)
'1
'3
'4
casn
..
....:
~~=---===-~:.~\
'8
KTR c asn
'9
zo
"'"'
E,-pendi!U'e - - -
"
f i0'11
-~~-~
s.,,'
" oo<> " ""
o_o ~~
"" "'" ""'''

' ""' """ "" "'
' ' "" oo<>> " " ''
.,.,
I I I' ' "
2
In"'
.
' " "''
~ '
,,
) ,. ~ ' ~
1
curn casn
~
,"'"'' ,,~"''
,,.,, ,~, '"" '""
'"'
"" "''...~' ""
,.,,"''
""
<
" ""- <""- '''
,,,,
0
V,
peP 'l, Of p,ic
s&.1&1 ,911
Final tot to Govt

KlR NPV ~ snort Term sorrowing Rat
'6
11
il
R"''
Final cost 10 Govt
___
..,
cumcasn
FJo;t
r ooc o(1()1 l cm ooo>

J ,; &en
17
"----
, , 10 &e ll
7 E57 l . J OO 0001
0
i;&J !)JO\ i2 c,00 ()()l.)l
735 3~-J
\ ,116 5c 7
t Ql)OOOO
--Pf?,ro>SS payn
~.,0-00
l ' 75,? 00ol
95 .. ~--"
,,.,..
... ...
~ s))' 1J 1~ ioo 1
, ~ ,..,. . '
~~~- :_;.~-.~-=~==
13 12 427
zru:. ) (2""3S36l
.- " "
4:::.::::_:(:.J"1:;J"~.'~"~~[.:r:"~,O~c~1:,:1~:-.,=~>_:., .,~\'~
~95~7:800~
1
.,~~'~~~
~i,J~!c-~-~-'"'.'.:: __.[~-1.,~~-~->'.:.:,~~ .,~ J
. I I 77o/,. the point at which the final cost
. ... c- '. .. _,.,,.:c;c ,,,.,.;; -- ... ,.,. ~-~
- 7.zOOo)
"
11
:,~.w~5l>~
t~is instance the profit rate at the Govt Break Even is 1 ity t;~ sarne under progress Payments
1
u11ng d'
'
nt s essen ta
(
ad
iscounted cash flows) to the governmc
83 797
n Perfonnance Based Payments ($71 ,7 , )
93
.., ,u,
- -
/rsis
rice Al1a.
IP
,fem/ of/l
I
CON I 70. The Fundarnl:'nto so
.,
l t search
KTRBreakEveJ
[or
the PBP Profit Rate n

1111 der bot h Progr iat
11 cause theniodc o" to be equa I

" button w1
. 1 g Rate
- - - - -
css
Clicking the "Ktr Break Even

T r!11 Borrow n
results in the "KTR NPV @ Short e
Payments and PBPs .
l .
.-
,.J
ST1 619 130
7
8
9
;O
Final
Tot.al Prrc
Pro Ill Ratt
111R (Intern~! ~t cf Return)
,2
13
14
F,nal cost to oovt

,KTR NPV ~ s"crt T"" sorrowing
;5
~ .761 ,911
cost 10 oovt
r,rm eorrowin; Rate
18
g
,ut
Pr09 Pay
Pro<J pay
p,og Pay
casn
cumcasn
FIO>'
FIO>N
FSP
7~8 .33 l
{3691331
11 556001
1 476 667
(600 GIJ-0. ,2 000 (jl)/) 1
1J8S 533)
I 1 5JJ 33.3 )
1 000 ooo
2 000 000
1786
667 !
,1s6 6671
(1 000 000)
21J 333
(12 15 000 1
/1 ~00000 )
8J567
101 1 J 67
Jun-4
M-' 4
, 1 600 ooo,
(1 752 000)
1 ,,;2 667
143' 333 1 (19816671

JJ9 ~73J (2 J 21 2JO)
1
1 31 2 J27
(5 '2 2961 12 93.3 5361
, 1 951 eoo 1
1 JJ5 50J
,1t n.l'" " " "'

...
...,r ,
AUg- '. 4
sep-J
: :~, . .. 'Cl"
ooz,o
1470 E.67 ! 1<4 7667 1
75 f/27 I ~00 C-00.
Ma;. J
21
cum cash
, .., , n " r
" .,; ,. ., .. .,
( ,..;'I
i"Y"'
{; J', ' J
eu,
<. cooc,oo , ooii ooo)
OD 2:,/J
,peno11ue
.,_ ,
P8P
PSP
casn
k'TRCasn
0c1- J
17.95'
pBP 'il of pnc
i6
7
")t"'I
,:.c:
i<TR Nf'II @ snort
11
u
2-J
7~
75
26
27
28
11~-;J
Total pnc
profit Rat
{RR (Internal Ralf of RoturM
;::! 5 COO
7!2 0()0
(" 95,e OO 13 709 800 '

,,.. .... ~ ,,..,.. ... ,,. ,... ,........,
a&',
i,j\
60'
1))'..
80'
'f/ffl '1/tJ' Ar ~I'(_,..,
! ' ~ ; ?~I(
41
In this instance, the profit rate at the KTR Break Even is J J.51 %, the point at which the "KTR
NPV@ Short Tenn Borrowing Rate" is the same under Progress Payments and Perfonnance
Based Payments ($6,761,911). At this profit rate, the price would be $71,619,130 or
$17,904,782.50 per ai re rail). Notice, at this po int, the profit rate is actually a bit Iower than the
progress payment profit rate, and the NPV of the cash flows is the same; however, with the
additional cash flow early in the project, the contractor's internal rate of return is significantly
higher than with progress payments.
. (1
11
CON J70 , , .
vmt 3. lesson 2. Contract
'J4
11
c 11
anci
.'-
, "f\ppn>ximate Win~'Nin ~olution" button will cause the model to find the
11
. king \ . ;Win St>lution wlm:h will be the approximate midpoint between the "Govt
1
\ ~~lstl'~t
KTR Bn:akc.ven" valu~s .. However, this suggested Win-Win solution
1
11
~ :,:1~~\'1. , tht:
illl!Jal solution. The tunmg and amount of the PBP events will dctcnninc
0
1
1
,id]! 1H ~ t,~l Win/\i\'in solution lies closer to one of the break-even values than the other.
t... . . 01,1un,,
.
. . I f' II .
ifch~ . "\Vh~it if' d1scuss101~ on t_ tc O ~wmg p,1gc to see how to experiment with the
(~l'l' thi,, . -.i>cds of the Wm/Wm solution.)
~\:::J
.'t,1.'tl~ 11 l ,\,
. .1
n~ ~
C' C>CPOP Tool/Vf( ,ron4 ')) U1c,!), tif1 ,rtl'

? t I'
/i,
1, ",t
f ''"' I l
r' I ' t
r , ( 11
.\,
.,.~
, 1 1~1'D((O II _Ll .,,,I L. ~1 r >OP _( p _.,a.$.\.}l'Sl 11S0$il Sll/J, J "4A ~I ~U \l(SSS") sen ; I W J$;,S/ !
LI
l)
[.
;~nJ c; ~
c, o
~noao
4d '>A .'J -;_, , :; s::i $>:) ,,
ao,
1 00\
2 , . ...
With MIP
,11 70! ~
Toul !'nee
1'ron11t1te
ro111,r1c
r - ,!'i.i,1
~roln Rall
JI!" fln!rnal 1t11e of ltt\lrnl
~R fln1tmll ll11, ol ltolurn)
F1n11 coat 10 001.1
a &nort rem, 80ffl)wlng ~
,ooal Cool 10 Qolrt
K T'A Nl'V
~111 Nl"I @ Shon Ttffll Borrowing Rile
PBI'' OI Price
PIOQ Pav
~og P3y
CAsn
Cun1 Ca1n
FIQw
F1ow
~rn casn
P10Q Pay
t,pen.111ue
ro
00 50
,,
!:.'-."
,: U \ j
/I
! 000 C'lO
13 u,, .J
21 Ml"
(1000000 )
211 lJJ
(78-S 6671
(166661)
(1:,5000)
M 5 a61
( I '~5 800)
, 0 1, 46 1
1 47 . 661
\ 1 400 000)
11 544 J.')J l
16~ ,
1) J.,, j
If, ..,,. ,
f:160 IJJJ
(3M 53J1
( I Q8 1 6f; /)
(WO GOO
(' 600 000)
(01 JJJI
1 ()()() 00, /
I '62 r,6 1
1 312 427
(439 5m
(2 421 240)
24.H"
I 15: 000)
2 000 O()IJ
I JJ 5 504
f51 2 :Q1
12 OJJ ~36 )
11
1!
s.i,. ,i
'l'I
"
()(l' j
1111
....,
(1
.
lr ' o ,n
..
9 ~1 800)
,, ~c ""' '
r1<;
, .
\Yifl W1t> J\fl -i,Y'-"
, , " . ... ... .
,,
1"'11
' 1 "
/ 416 67
13a , ~ 1
\ 'Q~ l e'JO
,,,,. ,. . . .....
I,,
it,,
.... 11~, \\_,.,.
r'* r~
'
(,, .,,, .1
s~:.s:~.3:'.
s, u, ,; t
..
., ..,
11 COO OOOI
50
,, 4 ,,S~l,7
a cooroo
''.
52
ooo,
\'
1'
,l ' e?<l
.
.
....
~~re, th e approximate Win/Win Solution is a profit rate of 11.64% which is bct\vccn the KTR
reak Ev t'n Of l l 5 l % and the Govt Break Even of 11. 77%.
4. _
REsET FBP3
C!i k.
C Jno the "R

~nniog"\vhat
_E~ET" butt~n will restore the PBP e_vent timing to the profile a_s it existed b~fore
ilftern,n .
ifs on the shJlpmg or accclcntmg ot PBP events. This button should be clicked
ning h '
w at-ifs" pertaining to event slippage or accclcrat10n.
'U
II
'
C'(),\11
. 7o
, Un;, 3
lesson?-. Con/met F11wncml!
.
.
95
CON 170 Tl1 , p 11

t
/ ,
11dame11tals ,>f Cost and Price Ano _\3 LS
~he 111odcl checks to make sure total PBP amounts do not e~cccd JOto ~~t~l~ c_ont~act Price PC!
t 1e FAR. As the modd searches for a PBP profit rate solution an ..t le \ wnce i_s reduced r
downw d ,, .
l PBP amounts on t 1e m-Win A
'
ar auJustments if necessary arc made to t ,e
.
na\ysis
. b ,1
1
Work 'h
'
'
1 t It docs t 11s y rcuucmg the pt)
s ect m order to remain at or below the 90% nm
.
.
. nP eve
amounts proportionally. Therefore in order to be consistent with the final Wm-Wm solutionn\
contract values for the events should reflect the reduced values.
't c
A Win-Win deal should result in a better financial outcome for th e contractor with PBPs ver~u
progress payments, when the contractor performs well. lt should not be structured so the s
contractor is financially better off regardless of how the contractor pcrfonns.
Contractors may consider PBPs to be inherently more risky than progress payments. In PBPs
an event payment is made only upon successful completion of the event. 1f an event is not '
~ompletcd by the date anticipated, the payment is delayed accordingly .. Convcrs~ly, if an event
is completed earlier than anticipated, the payment is accelerated accor<lm1y. This model will
calculate the financial impact of delays and acceleration in event completion and payment. This
allows for an objective versus notional discussion of risk.
"\Vhat ir' Analysis
The model allows for "what if' exercises regarding the early or late completion of PBP events.
;)
/.
; 1' 1~,
,C 'J~- - ""' ;1 ~ iJ:l ~::i _, .~ _l e S-.l.. ~::. ~- s .. " s a:,: 1
sa:J: \ '~,(1 ":iu: 1sssz3 ~ei.i, ~J v 1s,-s~2 si-11> . ~
S,.\- ~.l;;30 _Ca'.l _:. j -S,l... :i. ~..,,.~ s..-~
:,.~ . - -
Ge": s -cak E-,e

22
~<_:~
20
A(>l: rJ7 0f!0
Wnt-;, n 5o.ut
f\
_ ~_::~~
,,
w,t.n ,,09re11 P1~ment1
,(!
W1thPeP
$71930000
12.00,
'3
TOUI Pnc
Prat~ Rate
14
!RR (Internal Rate of Return)
Toto! Pnce
Prollt Ra1e
IRR (Internal ~1 of Return)
$72.713.235
F1n11 Cot to Govt

K TII NPII @ Short Term Borrowing Rate
F1no1 COIi 10 Govt
'4761 ,911
KTR NPV @l $hart Term Sl>rrow,ng Rat

PBP, of Pnce
Prug Pay
l!J
k.~R Ca! ri
' '?
?\'
21
E,pt''IC~ue
"2i
,.ta,,
2J
Jun- ' J
2"
Jo). !
J.t:
Ao?- J
?I
7~
Cd J
..,,
...
Prog Pay
a-
''.
....
1,
'
,,
Ca>fl
Cum CaSh
F~..r
F""
PSP
2' 3 333
(78 o\671
178,; t.6 7J
, . 21 'i000
BJ 5 i s,
\369 33)
(1 '558(.,l'J\
\1 JOO 000!
1 01 1 .167
11U-=i)J1
11 '14J :lJJ \
( ' f; l)i)C,00
1'6 2667
\.137 33J)
\19 1 667\
" Q57
t>a1
11 000 000
,1 1~2 000 ,
-U
002: 0
Prog
.., ,.,,,.
ec.r,i
... . .
1 )12 427
1 JJo 50J
~I"'
VITI Vhr 4 11 ...~f'\,CI
Fto,,
FIOw
\.6 ' f;,i7
12 21 2401
,s:: 296> (293) 5- ,
,;
PSP
CU1t'C a5!1
I' C-00 COO

, . 21 5 000
1J )9 ~71 )
... . .,..... ., . .
J J 2'.>0
FSP
casn
.o, .,
2 .H S.-.h7
51.; !;61
2 C.00000
2 J S C:JO
~r r
,.r.,
1 957600
ft',
coo 000
50"
12 215 000 1
fl',
,2e1s &e1 ,
50..
,2 000 000
,,1~000
if/',
,11:>9 600
-;
.-..... ...... . ..... ............

; J
' ()(J"'SCF1'
FJJ'o .
......
\Vhat if the contractor does not complete a PBP event on time? Double\ ft-clicking on a
PBP event payment in the "PBP" column on the "Win-Win Analysis" works:cct wi\l 1110\'e th~
96
CO
. .
. f inc111ci11g
N 170, Ln11 3. Lesson 2. Contra([
CON Il fJ, The Fundamentals of CfJst and Pn e Ana(
HS
, onth (down one row) and the financial impact of that lip...., ill be di pfaved in
ut one 01
)" "F. IC t t G '' d"
.,
ay111cnt o tcrnal Rate of Return ', . ina. os o. ovt_ a~ KTR NPV ~ Sho~ Term
P, "JRR (In "values. The PBP cell will turn red to mdrcatc completion of th,., cvcnr h
tJi, ,.1001 Rate
11 II b th d~ d
00rrow ed (slipped). Tl11S w i a O\\ ~ SJ. i.:s to etcnnrnc how delay~in event compktron
pact the contractor and at what point event lippages would yreld a !clis rcwardrrig
be~n delay.
11~1 1m " to the contractor than progress payments. The outcome under PBP i ! . ,
in
ncta
t 3
. l outco1m:
h ''KTR N c;
financta
. to the contractor when t e
PV ,!!:, Short Term Borro\\ ing Rate" block for
advanwgeou~ . red. The user should try several event slippage scenario" inrnh ing later e-. n~
of the PBP arrangement
. events to gauge t he true ns k sens1t1v1ty
PBP5bccom1.:s
1
. ,ell as car )
a,\,
'f h contractor completes a PBP C\'cnt ahead of schedule? Right-clicking on a PBP
What ~rnecnt in the "PBP" column of the "Win-Win Analysis" sheet will mo\'e the paym ~t up
e\':n~~~~h (up one row). The ~~II will tu~ green to indicate the event is compUed ah~ad o~
on ,d I This will have a positive financial impact on the contractor TRR and "KTR ~PV 4
sche
r
. h 1 k' .
r
Hurdleuc.Rate". You must select the ce II be,ore
ng
t-c 1c mg in order ,or
thr. feature to \\ Ork.
--
.. ~ . '
;- .l
..
.~
ir' ,,.
q ,
,J
.,_
,oJ! I
l l
t.,
.,___.,:
Zl__, _,-_
. _.... :.~
.
,.
'"" .....
~
..J
,_
' - - - - -- - - - - - - - - - - - - - -- -
.,
'I
Tot.al ~
.,
Tot111~
ltrot11Aa?t
,~totttt'O....
l(ffll lj~ ~....,,..,...,.,_.,.... .. ... .
,..,_""'a
a
~
!.
l\'T~Y, l'I
11
E\f,r:"311.ue
...,.,
2,
U\.,1
,1
n ~ ~
I~! J
....
Pot>)ay
, '(j/))000)
215000,
'l' "-~' J
If Av;.,
!, ,,
r ~~-

'
~"f~-...-~
Fi,111Co1t 10 Oovt
t<TR NP'V@ Sno" Ttrm Borrowmg Rm
"'
lJ
_J
"tofllt
Jlq_fl flP1t1m11 A111 Of Rtturnl
.!,
--
__"E:C _
.,
""'l""'
Ci>I'
D.,,l ( Wi
'""
:,,,~,
17att,071
6<5
t ~Al' I~
~' .JOO OOOJ
1 1)1 1 J ti7
'
1 19:,i ,it,1
'VCW
00 :-.,0
""'1'"'
' ,1
1,
~,,
,.
\ 1 '1~2 t:,00 ,
1 ,, ~ j:7
, , ,i)'!l '""t
9.-.-. t,l)J
...
1' .
1r!t ,1\
1 ~ -\.11
..
.... ,
' - J
....
.""'
..,
.... ,.,
I \,Ml r\~
'
?
, ,
. ..
l.'4!./ 1
',
..
..
-------=-- - --------------------------1 J..t<; 4
'
l"r9 '1Vlr4."~
Th15 .
. abilit t
. .
.
. ,
obJecti ,. 1Y O analyze the financial impact of various "whJt 1f scen:mo \\ rll allow the ~~r to
PBPs. \e Yst ructure a PBP arrangement that appropriatdy bJbnc('s the risk and lx-netir~ of
\
Olt: Wh
.
.
~ased 011 Wh:tn running a "what if' on a PBP event, the ~ell color\\ 111 ch:mge to gr~en or red
eft-clicked her the user has right-clicked or double-cl1cked the cclL If an e\'ent LS double1
thrn right ~e value will mov; down one row and the cell \\ill turn red. If the red cell is
C1ICked h
t e event value will move up one row and the cell color \\ 111 bccomr
I
('
O.tv t 10
. U,11,3 L
ev1
. on ",
.~" .c'"
.
'~
..
C""'"" Fm,m,mg
_,'
1.
" ,:
'
CU. I 70. The Fu11,lu111c11tals o((ost ,mil Price Ana(1'sis
green even though the e\'ent has been restored to its original position. To reset the POp
evtnts to the original position and colors, click the "Reset" button.
This worksheet contains a graphic comparison of the fin:mcing cash flows re~ulting from PBp
versus Progress Payments. Within the gra11h is also a summary of the financial returns ach s
,
..
...
.
.
.
.
1evect
~lll~~r ead1 scen:rn_o. The chart wtll rcnec~ the latest data cor~tarncJ ~n the Wm-~m Analysis
:sl~l:l:t.' Thcreforc, 1f you go to the Comparison Chart sheet alter runnmg a what-if' on the
shppmg of an event or changing the lag times for instance, the chart will reflect the changed
data.
11
11
,t
,,.
.c' t .,.,
,.,!
r.,'11.,
t,
('l' l
f.
Financing Cash Flow Comparison
s,o 000 000
-----
Financial Returns
S60 000 000
sso 000 000
Prog Pay
Profit
12.00,1,
IRR
2831'1,
NPV
I 6,761.911
PBP
11 ." '/,
$3.4~'1,
S 6,8JU79
S40 000 000
S30 000 000
Conclusion
The PBP Tool is a powerful application that will make it easie

.
final cost and IRR positions for both the cont a t .
d h
r to compare and contrast vanous
.
r c orAan t c govern mt:nt. ecause
.
automatically
uses the current Government 0MB
the Tool
8
94
. Rate, be sure to use the latest tool foL d rate
Borrowrng
f and the c 01~t ractor Sh ort T enn
. ''Wm-Wm"
.
. analysis.
'
m on tie OPAP W"'b
' te, eal:' h time
. you
conduct thrs
l: si
3
Now it's time to applv what we have learned so far bv co
"
1
mp ctmg Part 3 of this Exercise.
98
CON 170. Unit J . l essun 2, Contract Financing
.. Analys1s.
CON 170, The Fundamentals ofCost andPrice
part 3-Individual PBP Exercise
.
4
c1se ' ave [earned to develop acceptable PBP event 1

(

s, eva uate a
c)e t votl
d
1d se the pBP Too, 1t 1s 11me to complete Part 3 ofth.
. propose expenditure
an u h
. .1
1s exercise u h
p\e,
ed your obJec1tve
1s to compare a progress paym t h srng w at you have
~0eadY lea:d deterTlline if there is a "win-win" solution whe:en
flow to a proposed PBP
Sh
10 t1"' .,,ents for both the Government and the Contract
s provide a better deal than
. ~vtha
p~:
ess paY"
or.
rrogr
wio-win
solution:
001
1o~'~~ter
the contract
cost sum.mary data in. the "Contract Summary" tab of
the tool
~nter the approved exp~nd1ture profile rn the "Data Input" tab of th t
J:.,
r l
th "D t I "
e
Enter the CLu, va ues in e a a nput tab of the tool
2: f:nter the pBP Event Values in the "Data Input" tab of the tool.
S: vse the iool' s "Win-Win Analysis" tab to compare Progress Payment and PBP cash
r11.
. oeve\op a negotiation position to convert financing from Progress Payments to

flows;
6 perfoonance Based Payments.
1. contract sununarJ tab (Column C): Contract cost summary data
In the foJlowing scenario, you are preparing to award an FFP contract with Stellar Trainers for
IO Remotely Piloted Vehicle Trainers (RP VTs) at an average uni l price of $IO,510,000 each.
based on a negotiated total cost of $9 5, I00, 000 (which, in this tool, in cl udes FCC OM-<lo not
insert a value in the "Cost of Money" box), pl us profit of$ I0, 000,000 (a profit rate of IO 52%
for progress payment and PB P purposes), for a total price of $IO 5, I00,000 After entering
the data above, your "Contract Summary" tab should look like this: positiO"
\JSl'l9 peP
Position
Using Progress Payments
95.100.000
Profit Bearing Cost
95.100.000
Cost of r/oney111
10.000.000
To~I Cost
95,100,000
105.100.000
1 s2o.i. ?r'.JI
~e
~ ,o ,,~ p,ofd ""' '
A roved ,,penditure profile

nput tab (Column A (date) and B ($ value)): PP fil and has aoreed to the one
I
bet"' team
has already evaluated the proposed expenditure pro, e.
"
Data
Yo
ow as th e bas1s
. for progress payments.
99
CON 17O, Unit 3 l~esson

. . 2,
- ..
.
Conrract financing
. ..-
CO."! 170. The FunJamimtals of Cost am
J Price Analrsis
- PTT Cost Expenditure Profile

. h
\ Expenditures @ Cost
l\lonth I
l\lont
000 000.00
$
... ,
'
'
-,
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Total
Febrnary-14
March-14
April-14
I
May-14
June-14
July 201
August-14
September-14
October-14
November-14
December-14
Januarv-15
February-15
March-15
April-1 S
Mav-15
I
June-15
Julv-15
I
$
$
$
$
I$
$
$
$
$
1$
$
$
$
$
\$
\$
$
$$
5,000,000.00
7,000,000.00
9,000,000.00
l 0,000,000.00
9,000,000.00
8,000,000.00
8,000,000.00
17,000,000.00
4,000,000.00
5,000,000.00
4,000,000.00
2,000,000.00
1.000,000.00
3,000,000.00
800,000.00
100,000.00
200,000.00
95, 100,000.0(
-
3. Data Input tab (Column C): CLIN values.

Finally, there are three CLINs proposed for this contract, as noted in the schedule below:
Item
0001
0002
0003
Supplies/Services
RPVTs
RPVTs
RPVTs
Qty
2
6
2
U/I
EA
EA
EA
Unit Price
$10,510,000
$10,510,000
$ I 0,510,000
Amount
$21 ,020,000
$63 ,060,000
$21 ,020,000
Del Date
May 2015
June 2015
July 2015
4. Data Input tab (Column D): PBP Event Values.

After careful evaluation, the Government and contractor teams have agreed to the following
schedule of PBP Events and values.
JO()
..
, ..
\~

.. Ana~rsis
CON 170, Th e Fundamentals of Cost and pnee
Completion Criteria
abrication Subcontract
ward. Award of definitized
subcontract
relirninaI)'
Engineering
evieW (PER)
Deliver briefing package for

relitninar)' engineering review.
0111plction of Pre- execution
program Plan, site survey and
rcli111inar)' engineering design.
pletion of AV Technologies
0111
engineering design, Subcontractor
ngineering drawings released to
Sub PER
roduction.
completion of engineering design,

Final
ng1ineering drawings released to

E
Engineering
Review (FER) Production. Material ordered.
Subcontractor
Material
Subcontract items have been

elivered, defect free, accepted
y prime.
successful assembly of RPV'f

Work Stations IA W enginee~ng
6
Work Station
PTT Test
esign.
In-house Test of RPVfs
00 of InSuccessful cornplett ved test
ouse test IA W appro
Final Data
Package
CoN 170, Un 3. Lesson 2, Contract Fina11clflg

.
11
JOI
~-- '
--'.
,,
,''
..,
'
CON J70, The Fundamen tals(~
revst amI Price ,lnafrsis
,, b the screen should look like this:
After entering the data into the HData Input ta ,
Contractor
Expenditure @ Cost
Month
'1
CUN Deliveries @
Price
Performance Based
Payments
Feb-14
2,000,000
Mar-14
5,000 ,000
Apr-14
7,000,000
7500000
May-14
9,000,000
7000000
Jun-14
10,000,000
Jul-14
9,000,000
16000000
Aug-14
8,000,000
12000000
Sep-14
8,000,000
15000000
Oct-14
17,000,000
Nov-14
4,000,000
17500000
Dec-14
5,000,000
10000000
Jan-15
4,000,000
Feb-15
2,000,000
Mar-15
1,000,000
Apr-15
3,000,000
May- 15
800,000
21 ,020,000
Jun-15
100,000
63,060,000
Jul-15
200,000
21,020,000
8000000
5. Win-Win Analysis tab. After entering the above data, click on the Win/Win Analysis tab in
the PBP tool. At the top of the Win-Win Analysis tab, ensure the following items are entered:
a. Customary Progress Payment Rate: enter the appropriate percentage rate for a Large
Business: _ __
b. Gov't OMB A-94 Rate(%): Automatically entered by the DPAP tool based on the
contract length. The user can not change this value.

c. Contractor Short-term Borrowing Rate: Automatically entered by the DP AP tool as
65% of the U.S. Prime Rate. The user can not change this value.
d. Progress Payment Lag Days: Entered bydf?P ~p bas~d on DoD sampled data. Notice,
the progress payment lag days are refle~te 10 t e cas flow tool by breaking the payment
dollar amount in to two parts: one part m the current month, and the balance of the
payment in the subsequent month. The user can not change this value.
J()2
-----
CON 170 Th
, e Fundamentals ofCost and P. .
nee Ana~ sis
La" Days: Entered by DPAP based
ofl)D 250 ~
fl
d
on oD samn/ dd
p81 r. r payments 1s re cctc m the tool by break. h r c. ata. Thisaveraae
e, me ,o
.
mg t epaym t d I
"
Ja.g tI . one part m the current month, and the balan f h en o far amount in to
. "what-1f
. ' scenarios whce op t epaym en t.mt
. h
n~,0 parts.
Thus, when deve1oprng
e subsequent
month. tcd the tool will show a slip or accclcration'ofthen BP events s/Jp, or arc
eJera ,
ese twopaym
h
ac~
payment. The user can not change this value
ents, rat er than for
1
asinge
.
Internal Rate of Return /RR Anal sis
Assumptions :
80%
1.00%
2.11%
l With all this data entered, click on "Approximate Win-Win Solution" button, and
compare the "With Progress Payments" elements to the "\l ith PBP., elements. The
tool is designed to dctcnnine if a "win-win solution" can be achieved with PBP5. The
"win-win solution" is the financing arrangement where:
1) the contractor's net present value of the PBP cash flows is higher than that of
progress payments; and,
2) the Government still pays an overall lower final cost with PBPs.
In this example, fill in the blanks in the PBP column. Does a win/win solution appcJI to
be achievable?
With Progress Payments

Total Price
Profit Rate
IRR {Inter I
na Rate of Return)
.
Ftnal c
KT ost to Gov't
RNPV@
Short Term Borrowing Rate
t
I
GJ~ Break Ever.
Progress Pawmnt Lag Da;s

22
KTR Breaic t'lefl
PBPI DD 250 Lag Oazs r----20---J
With PBPs (and color}
105,100,000
10.52%
46.28%
105,712,324
9,280,904
PBP %of Price
.,,e cash nons for both progress

Payme t provides visibility in to the cumul~tl\V' Anah'sis" spreadsheet ro the
n s and PBPs. sl1de

the view
of the "Wm- ,n ti do PBPs prolide more
right
cash n' and compare columns p Q and R. In what nwn J
ow to the contractor than' progress
'
payments.?
g, l'he tool
!03

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--~1

Required Student Preparation

Terminal Learning Objective

1.1 Given an acquisition situation, successfully

Enabling Learning Objectives

1.101 Explain the unique aspects of Government contracting

1.102 Recognize the diffcront market structures

1.103 Differentiate between seller pricing stmtegies

CONJ 70, Unit } lesson 1 - Comracting With The C

Heberling and Kinsella Article

CO,V! 70, Unit I le.\:mn 1 - Contracting With lhe

3. \Vhat ~re a few common differences in products sold to DoD compared to th

d th review of the Heberling and Kinsella article, it is important to recognize there

CON/ 70, Unit I lesson I - Contracting With The Coven

nf).:u Unique Aspect~ of Governme_nt Contracting

Heber/mg and Kmsella Article

Thoughts on Acquisition Reform

- Commercial-like acquisition system?

Steps we can take to move in that direction?

Different Market Structures

Dr.'.nst AcquisitiCHI Un,vl!fSlty

There is a range of market structures:

CONJ 70. Unit 1 l esson 1 - Conrrac1ing JI "irl, The G o v

o,I~ w.,::~" !).-,~c,-sf:'/

CONJ 70, Cnil 1 Lesson 1- Cvt11ract1ng /l'flh The Gm'i!rn1t1ent- Page / 7

seller Pricing Strategies

Cost-plus (market penetration)

Challenges for buyer

Seller Pricing Strategies

- Encourages other firms to enter market

Challenges for buyer

' / 70, (;nit

Seller Pricing Strategies

Lamm & Vose Article

Challenges for buyer

- lvfinimal--simple to understand, few barriers to

Seller Pricing Strategies

Challenges for buyer

- Gaining understanding of "certain" conditions

COkJ 70, Cnit J Lesson I - Comractlllg II ith The Gm ernmmt - Page 1 9

Seller Pricing Strategies

External market variables also influence seller

_ Buyer's control variables

I Lesson I - Com mering H irh :h e ( ioiemmenr . Page i J(}

Seller Pricing Strat

Seller's internal variables

- Explain the term "caveat emptor" (let the buyer beware):

Seller Pricing Strategies

CO:VJ 70. C11i 1 I l , ..

xercise: Assess tlte Seifer 's Strategy

a self-employed craftsman started his own business, and hired 5 students.

he priced bids as "labor and material pIus 4 5%." What strategy?

short tenn. What strategy?

mpressively lo puter prrnter manufacturer is practically "giving away" printers with an

ner cartrid gcs. What strategy is this closest to?

CON/70, Unit I Lesson I - Contracting /Vith The Gmernrnenl - page/ IJ

. ,en an acquisition situation, successfu\\y distinguish v .

f:J<pJain the unique aspects of Government conttactino c

nv MICl--lAEL E. l--l[BERLING, PH.D ., CPCM,

o an era of decr(>asing military

ing defense indu~trial ba~ become

threats, there has been a change

ing commercial base on which to

tlcknsc acqub.ilion. Dmin.J.!" the co.:.d