The Basics of Cost Analysis

Presented by Edmund K. Kowalski

Financial Services Office (FSO) Updated January 15, 2008

Contents of this Module

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

Definition

Definition of Cost Analysis

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

Price and Cost Analysis Compared

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

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

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

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Cost Analysis: When to apply it.

It is performed if certified cost or pricing data are required. required It may be used to evaluate information other than cost or pricing data, e.g., non-certified cost data. Normally, it is not needed if adequate price competition exists. In this case, it still may be used if the price is determined to be unreasonable or you are considering a cost realism evaluation [see FAR 15.305(a)(1)]. Cost analysis is one of the approaches that should be used when a cost realism evaluation is required. When you perform a cost analysis, you should also include a price analysis to verify price reasonableness. reasonableness
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Section 2 Defining Costs Performing a Cost Analysis Examples: Proposed Price by Major Cost Element

Contract Price = Cost + Profit

C
c o
d d i r e c t c o s t d i r e c t m

n
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t r a c t
p r o

P
f i t

r i c e

i n d

i r e c t

c o s t M

i r e c t

l a ob do cr

a t e b r u i ar d e n l
l e n g i n e e a m r ta s n u f a m f im e le d r c s i e a I L S s m a t e r i a h a n d l i n

G ( O & / FAH C ) C
r i n g e n g c t u r i nm g a rl v i c e f i e l I L S l m a g h a n G & 9

e n g i n e e r i tn r g v e l r a w a m a n u f a c t vu er in n d g o r p u r c f i e l d s e r v ti oc o l i n g s t a n e I L S i t e m s u b c

m a t e r i a h a s e d p d a r d c o s o n t r a c t

i n e e n u f a d s e t e r i a d l i n A

Total Contract Cost (FAR 31.201-1)

is

the sum of the direct & indirect costs allocable to the contract, incurred or to be incurred, less any allocable credits, plus any applicable cost of money (Cost Accounting Standard 414).
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Direct Costs (FAR 31.202)

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

All costs identified specifically with a contract are direct costs for that contract and shall not be charged to another contract directly, or indirectly. No cost shall be charged to a contract as a direct cost, if other costs incurred for the same purpose in like circumstances have been charged as an indirect cost.
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Indirect Costs (FAR 31.203)

Definition: Indirect costs are not directly Definition identifiable with a final cost objective (e.g. a particular contract), but identified with two or more final cost objectives. The distribution of indirect costs to various contracts should roughly be based on the benefits received on each contract. No cost shall be charged to a contract as an indirect cost if other costs incurred for the same purpose in like circumstances have been charged as a direct cost to that contract or any other contract.
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Alternative Direct Cost Treatment (FAR 31.202)

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

Produces substantially the same results as treating the cost as a direct cost
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Proposal Major Cost Elements

Direct Labor Cost
Labor Categories Labor Rates Labor Hours

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

Direct Material Cost

The Actual Materials
Raw material Purchased parts and/or assemblies

Other Direct Costs

Nonrecurring costs Subcontracts Travel

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

Profit or Fee Cost of Money Escalation

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Cost Analysis: First Step

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

Engineering and price/cost input

SOW/PWS

Read the solicitation, section B, and SOW/PWS

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

What are the solicitation requirements for the contractor and the government?
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Cost Analysis: Second Step

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

Study/know the proposal set-up Check the math:

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

What is the basis of the proposed cost?
How did you come up with this number? What is your rationale? What are your assumptions? What are the calculations you used?

The contractors responses provide the answer to the question:

Why is this price and/or cost reasonable?
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Cost Estimating Methods Used by the Contractor

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

Propos Price B C t E ed y os lem ent Item /Serv ice: R FP: C : LIN SLIN : D ate/T e: im File N e: am C Elem ost ent: M aterial: D irect M aterial Scrap/D iscount/M iscellaneous M aterial H andling T otal M aterial D irect Labor: Labor C ategory 1 Labor C ategory 2 T otal Fringe Benefits O erhead v O ther D irect C osts (O C D 's) Subcontracts T el rav T otal O C D 's Subtotal G Expenses &A T otal C osts Profit U Price nit Q uantity T otal Price 4/21/2006 13:43 B e Period as H ours R ate Base Am ount 100 1 2 103 25 12 37 1 2 100 50 150 193 10 202 2 204 2 409

1% 2%

100 101

5 6 11

5.00 2.00 3.36 3% 4%

37 38

5% 1%

193 202

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Basic Cost Element Breakdown

C s E mn o t le e t: M teia a r l: D e t M teia ir c a r l S r p is o n is e n o s c a /D c u t/M c lla e u M teia H n lin a r l ad g T ta M teia o l a r l De t L b r ir c a o: L b r C te oy 1 ao a gr L b r C te oy 2 ao a gr T ta o l Fin eB n f r g e eits Oeh a vr e d O e D e t C s ( D 's : th r ir c o ts O C ) S b o tr c u c n a ts Tae r vl Ta s ota n r n p r tio T ta O C o l D 's S b ta u to l G AE p n e & x es s T ta C s o l o ts Poit rf U it Pic n r e Q a tity un T ta Pic o l r e H us or R te a Bs ae A on mu t 10 0 1 2 13 0 2 5 1 2 3 7 1 2 10 0 10 5 5 0 30 0 13 9 1 0 22 0 2 24 0 2 49 0 1 % 2 % 10 0 11 0

5 6 1 1

5 0 .0 2 0 .0 3 6 .3 3 % 4 %

3 7 3 8

5 % 1 %

13 9 22 0

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Example: Loaded Labor Rate Cost Element Breakdown

L o a d e d L a b o r R a te C a l c u l a ti o n T e m p l a te It e m / S e rvic e : RFP: C L IN : S L IN : D a t e / T im2 e 2 8 / 2 0 0 6 1 1 : 0 8 /: F ile N a m e : (1 ) (2 ) (3 ) (4 ) (5 ) (6 ) (7 ) (8 ) (9 ) (1 0 ) (1 1 ) (1 2 ) (1 3 ) (1 4 ) (1 5 ) (1 6 ) (1 7 ) (1 5 )* (1 6 )

(3 )* (4 ) (5 )* (6 ()5 )+ (6(7 )* (8(7 )+ (8(8 )* (9(8 )+ (9(1 1 )* (1 2 ) 1 )+ (1 (1)3 )* (1 4 ) 3 )+ (1 4 ) ) ) ) ) ) (1 2 (1 1.00% 2 .0 0 % 3.00% B a s e C o m p o s it e A dj C L IN / S L IN L a b o r C a t e g o ryW G T b r R a t eL R a t e E s c L R F B S T O / H S T L A u t o m o t ive M e c h a n ic % 1 . 0 0 0 . 4 0 40 M e t a l B o d y R e p a irm 0 % 2 . 0 0 0 . 3 0 2 an E le c T e c h / M e c h a n ic 0 % 3 . 0 0 0 . 2 0 3 F u e l/ E le c S y s M e c 1 0 % ic . 0 0 0 . 1 0 han 4 0 0 0 1 A AC o m p o s it e 100% R a te s: 4.00% G&A TC 1%

Est Est L a b o r To ta l P ro fit L L R H o u rs P ric e

1 . 0 0 0 . 0 1 1 . 0 1 . 0 2 . 0 3 . 0 3 . 0 6 0 . 0 4 1 . 1 0 0 . 0 1 1 . 1 1 1 0 0 1 1 1 . 4 6 0 1 0 1

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SAMPLE COST BREAKDOWN

2001 2002 90 5 2 3 2003 108 6 3 3 Total

Material

Direct Material Handling Shrinkage Shop Supplies Scrap

90 5 2 3

Total Matl Labor

Labor Rate Labor Hours

100

100

120

320

25 4

30 4

35 4

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

100 10 5 215 20 15 5 255

120 10 5 235 20 15 5 275

140 10 5 275 20 15 5 315

360 30 15 725 60 45 15
22 845

Cost Analysis: Profit/Fee

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FAR 15.404-4(c) Contracting Officer Responsibilities: Profit

Contracting officer responsibilities.
(1) When the price negotiation is not based on cost analysis, contracting officers are not required to analyze profit. (2) When the price negotiation is based on cost analysis, contracting officers in agencies that have a structured approach shall use it to analyze profit.
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DFARS 215.404-4(b)(1) Profit

Departments and agencies must use a structured approach for developing a prenegotiation profit or fee objective on any negotiated contract action when cost or pricing data is obtained, except for cost-plusaward-fee contracts or contracts with Federally Funded Research and Development Centers.
DFARS 215.404-70 DD FORM 1547 DFARS 215.404-71 Weighted Guidelines Method
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FAR 15.404-4(c)(4):

Fee - Statutory Limitations

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

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

PGI 215.404-76(1):
send completed DD Forms 1547 on actions that exceed the cost or pricing data threshold, where the contracting officer used the weighted guidelines method, an alternate structured approach, or the modified weighted guidelines method, to designated office within 30 days after contract award.

PGI 215.404-76(2):
use Army Weighted Guidelines Software for reporting DD Form 1547 data.

PGI 215.404-76(4):
Contracting offices outside the United States and its outlying areas are exempt from reporting.
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Section 3 Source Selection: - Price Reasonableness - Cost Realism - Completeness Cost Realism Analysis

(Best Value) Source Selection: Sect M Cost/Price Evaluation Criteria

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

Cost Realism
Defined in the FAR

Completeness
No FAR definition

Also Unbalanced Pricing

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Source Selection Sect M: Cost/Price Evaluation Criteria

Price Reasonableness: No FAR definition see next slide Cost Realism: Measure of the appropriateness of a cost to its corresponding work element. The Government will determine if the proposed costs/price(s) are realistic for the work to be performed, reflect a clear understanding of the solicitations requirements, and are consistent with the various elements of the Offerors technical proposal (FAR 15.404-1(d)). Completeness (non-FAR definition): An accurate reflection, within the cost/price proposal, of all aspects of the technical proposal; compliance with the cost/price preparation instructions in the RFP Section L Instructions, Conditions, and Notices to Offerors; and compliance with any other applicable directions.
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How to Define Price Reasonableness?

A cost (substitute price for cost) is reasonable if, in its nature and amount, it does not exceed what a prudent person would pay in the conduct of competitive business [FAR 31.201-3(a)]. Price reasonableness will be determined based on:
the results of a price/cost analysis the results of the application of the price analysis techniques detailed in the FAR a comparison to the IGCE a comparison of the competing offers

A combination of any of the above

Price reasonableness will be determined based on the results of a price/cost analysis, including a comparison to the IGCE and 32 comparisons of the competing offers.

Reasonableness Per ESIs Advanced Source Selection

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

Are the offerors cost metrics and methods logical and appropriate for the product?
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Completeness Per ESIs Advanced Source Selection

Has the offeror captured all proposed effort in the cost estimates? Did the offeror provide all information required by the RFP? Did the offeror claim some performance in technical or management not included in the cost? Are the technical assumptions used in the cost proposal traceable to the technical volume and vice versa?
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Cost Realism Analysis: General FAR 15.404-1(d)

Review the specific elements of each offerors cost estimate to determine:
If its realistic for the work to be done If the offeror clearly understands the requirements If its consistent with the unique aspects of their technical proposal
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Cost Realism Analysis FAR 15.404-1(d)(2)

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

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

Probable cost is used in deciding best value. (Competitive value 36 environment only).

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

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

You cannot adjust offered prices as a result of the cost realism analysis. Results of the analysis may be used in performance risk assessments and responsibility determinations.
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Cost Realism Analysis and Cost Analysis

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

Cost Realism Analysis applies to source selections

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

Cost Analysis methods/procedures are used to determine Cost Realism.

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Section 4 - Cost Data Requirements

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

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

Do not obtain more info than necessary

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

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Introduction to Cost Data

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

Both can be the exact same information What is the difference between the two?
For the first, the contractor certifies that the data is current, accurate, and complete. For the second, the contractor does not certify that the data is current, accurate, and complete.
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(Certified) Cost or Pricing Data Defined [FAR 2.101]

All facts that, as of the date of price agreement or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price, prudent buyers and sellers would reasonably expect to affect price negotiations significantly.
Are factual, not judgmental, and are verifiable. Includes data forming bases of judgements. More than historic accounting data. All facts contributing to soundness of estimates.

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Certification of Cost or Pricing Data [FAR 15.406-2]

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

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Certification Implications for the Contractor

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

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

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Defective Cost or Pricing Data (FAR 15.407-1)

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

Audit Tracking
Contract Audit Follow Up (CAFU)

Resolving the issue may involve repayment of disputed amount plus penalty and interest.
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Thresholds/Awards Where Certified Cost or Pricing Data Are Required

Per 15.403-4(a)(1):
Award of any negotiated contract over $650K Award of a subcontract over $650K at any tier, if contractor and each higher-tier subcontractor also have to submit certified data Modification worth over $650K, of any sealed bid or negotiated contract (consider absolute value of both cost increases and decreases)
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Subcontract Cost or Pricing Data FAR 15.404-3 (1 of 2)

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

The PCO may require the contractor or subcontractor to submit to the Government subcontractor cost or pricing data below the thresholds that the PCO considers necessary for adequately pricing the prime contract. The subcontractor cost or pricing data shall be current, accurate, and complete as of the date of price agreement, or, if applicable, an earlier date agreed upon by the parties and specified on the contractors Certificate of Current Cost or Pricing Data. The contractor shall update subcontractors data, as appropriate, during negotiations.
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Certified Cost or Pricing Data for Actions Under $650,000

FAR 15.403-4(2): The head of the contracting activity, without the power of delegation, may authorize the PCO to obtain cost or pricing data for pricing actions below the pertinent threshold.
Shall justify the requirement with written documentation and supporting facts, that cost or pricing data are necessary to determine price is fair and reasonable.
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Exemptions from (Certified) Cost or Pricing Data Requirements

1 2 3 4 Per FAR 15.403-1(b), five exemptions: Adequate price competition Prices set by law or regulation Commercial items Waivers (HCA approval, documentation with support)
DFARS: Canadian Commercial Corp (CCC) & Nonprofit organizations with cost reimbursement/no fee contracts

5 Modifying commercial item contract or subcontract FAR 15.403-2 adds the exercise of options if the price was established at contract award or initial negotiation.
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Information Other than Cost or Pricing Data Defined [FAR 15.402]

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

Information Other than Cost or Pricing Data, with Adequate Price Competition FAR 15.403-3(b) Generally, no additional info is needed, unless the price is unreasonable. If due to unusual circumstances additional info is needed to determine reasonableness, to the maximum extent practicable obtain it from sources other than the offeror. You may request information to determine the cost realism of competing offers or to evaluate competing approaches. 52

Situations Where Non-Certified Cost Information May be Needed

In general, you dont expect certified data will be required, but you need cost information to determine price reasonableness or cost realism. For example, you:
Expect adequate price competition on a source selection but dont expect to be able to rely on comparisons between offers to determine price reasonableness (e.g. offerors may use different technical approaches). Have determined the action is below the cost or pricing data threshold ($650,000), but you need cost information to determine price reasonableness.
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Instructions for Submission of Information Other than Certified Cost or Pricing Data FAR 15.403-5
In the solicitation, you should specify any information other than certified cost or pricing data that is required (Section L). It may be submitted in the offerors own format, unless the contracting officer decides use of a specific format is essential and the format is described in the solicitation. If you didnt specify the info in the solicitation, you can still request and obtain the needed information after initial proposals are submitted. 54

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

55

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

56

Things the Solicitation Must Specify on Cost or Pricing Data, or Info Other than Cost or Pricing Data (FAR 15.403-5) - P. 2 of 2

Standard Clauses are 52.215-20, and 52.215-21 (mods)

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

Section 5 Field Pricing Support

Field Pricing Services FAR 15.404-2(a)(2)

Technical, audit, and special reports associated with the cost elements of a proposal, including subcontracts. Information on related pricing practices and history. Information to help contracting officers determine commerciality and price reasonableness:
verify sales history to source documents identify special terms and conditions identify customarily granted or offered discounts for the item verify the item to an existing catalog or price list verify historic data for item to qualify as commercial identify general market conditions affecting determinations of commerciality and price reasonableness
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Information relative to the business, technical, production, or other capabilities and practices of an offeror.

Field Pricing Support FAR 15.404-2(a)(b)(c)

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

Defense Contract Management Agency (DCMA)

Pricing and/or Technical Personnel: production specialist, engineer, etc.
Provide technical analysis and/or pricing support
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Defense Contract Audit Agency (DCAA)

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

Incurred cost audits: on going

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

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Other DCAA/DCMA Reviews

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

Estimating system reviews

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

Compensation System Reviews (CSR) Contractor Purchasing System Review (CPSR)

Reference FAR 44.3 and DFARS 244.3 DCMA/ACO function with DCAA assistance
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Technical Analysis [FAR 15.404-1(e)]

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

Field Pricing Support & the Cost or Pricing Data Threshold

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

PCO should not request field pricing support for proposals less than $650K; exceptions:
lack of knowledge of particular contractor sensitive conditions/problem areas
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Points to Consider When Requesting Field Pricing Support

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

Consider cost risk!

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

The DCAA PLA or FA can help determine the type of field pricing support/audit services needed.

65

FSO is the POC for DCAA

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

Contract Audit Follow Up (CAFU) Program

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

Contract Audit Follow Up (CAFU) Program (1 of 2)

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

Recent revision: DCMA database now used Rules/procedures? Reviewed/updated:
March 31st September 30th

Overage Audit Review Board

Discuss unresolved DCAA audits over 6 months old with the Commander

Bottom Line: reportable audits must be resolved in a timely manner

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Section 6 - Cost Allowability

Factors Affecting Cost Allowability (FAR 31.201-2)

Reasonableness Allocability Accounting Principles & Standards Contract Terms
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Reasonableness - (FAR 31.201-3)

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

Allocability - (FAR 31.201-4)

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

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

Generally Accepted Accounting Principles (GAAP) Cost Accounting Standards (CAS) FAR Part 31 Contract Cost Principles and Procedures
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Accounting: Financial & Cost

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

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

The end products of the accounting cycle, the financial statements (balance sheet, income statement, etc.) are prepared in accordance with GAAP.
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Cost Accounting Standards (CAS) (1 of 2)

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

Currently, there are 19 standards. Cost Accounting Standards Board (CASB) administers CAS: five members, includes representatives from government, industry, and academia. CAS/CASB was originally established in August 1970 under the legislative branch. Ceased operations September 30, 1980 due to lack of funds. Re-established in November 1988 under the executive branch within Office of Federal Procurement Policy (OFPP) which is under Office of Management and Budget (OMB).
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Exemptions From CAS (1 of 2)

Eleven exemptions, with the most common (7) below:
Sealed bid contracts. Negotiated contracts/subcontracts less than $650,000. $650,000 Contracts & subcontracts with small businesses. businesses FFP & FFP with EPA contracts/subcontracts for the acquisition of commercial items. items FFP contracts & subcontracts awarded on the basis of adequate price competition without the submission of cost/price data.
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Exemptions From CAS (2 of 2)

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

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

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CAS - Disclosure Statement

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

The ACO and cognizant DCAA auditor are responsible for reviewing the contractors Disclosure Statement for adequacy, and for compliance with FAR Part 31 and CAS.

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GAAP vs. CAS

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

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

FAR Appendix B
Contains the actual CAS
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FAR 31.2 Cost Principles for Commercial Organizations

Applies to all contractors. Defines direct and indirect costs. Addresses specific kinds of costs as to whether allowable, unallowable, or allowable with restrictions. Examples of unallowable costs: interest expense, bad debts, entertainment costs, donations, attorney fees for claims.
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FAR Part 31: Examples of Unallowable Costs

31.205-3 -- Bad Debts 31.205-8 -- Contributions or Donations 31.205-14 -- Entertainment Costs 31.205-20 -- Interest and Other Financial Costs 31.205-51 -- Costs of Alcoholic Beverages
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FAR Part 31 Cost Principles for Other Organizations

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

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

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Management/Cost Accounting System

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

All major companies have such a system!

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Adequate Estimating System

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

A disapproved system is a red flag indicating that the firm's estimating system does not consistently provide adequate proposals.
Normally, proposals from a firm with a disapproved system should be subjected to closer scrutiny, particularly closer scrutiny by audit professionals.
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Adequate Accounting System

Primary goal of an acceptable accounting system:
Ensure that costs are appropriately, equitably, and consistently allocated to all final cost objectives (i.e., individual contracts, jobs, or products).

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

Specifically: Are there accounting controls in place?

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Cost Analysis Summary: Question Checklist

Understand the contractors proposal.
Review the proposal The proposal/contractor should provide answers to these questions!
What are the bases/rationale for the proposed costs? What assumptions were made and reflected in the estimate(s)? Support documentation provided for the proposed costs? Are the costs realistic? Are the costs and/or price reasonable? Are all the contractors expected costs included in his proposal? Have all the contract requirements been priced into the proposal?

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