Presentation on theme: "NCMA Training: Price Analysis for Non-Price Analysts"— Presentation transcript:
1 NCMA Training: Price Analysis for Non-Price Analysts Erin E. MansurMarch 2011
2 Agenda Why We Analyze Proposals Cost or Pricing Data Proposal Analysis TechniquesProposal Analysis StepsFinal ThoughtsIt should be noted that this briefing will focus on FAR 15 acquisitions.
3 Why We Analyze Proposals Per FAR : Contracting Officers Shall -- (A) Purchase Supplies and Services From Responsible Sources at Fair and Reasonable Prices.This Is the Basis for All Other Pricing Related Regulations and Policies.
4 Why We Analyze Proposals Cont. Objective of Proposal Analysis is to ensure that the final agreed-to price is fair and reasonableContracting Officer is responsible for evaluating the reasonableness of offered prices:Contracting Officer may request the assistance of other experts to assist with the evaluation
5 General Considerations Various techniques may be used singularly or in combination to analyze cost or pricing dataComplexity and circumstances of each acquisition determine the level of detail of the analysis required
6 Cost or Pricing DataAll 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.FactualVerifiable
7 Cost or Pricing Data Cont Truth in Negotiation Act (TINA) saysMUST obtain cost or pricing data (certified) over $700,000 UNLESSPrice Based on Adequate Price CompetitionPrice analysis, usually comparison of offersLaw or Regulation (mainly utilities)Commercial ItemPrice analysisModification of a commercial itemWaived by Head Of Contracting ActivityUse cost analysis for procurements over $700,000 where an exception/waiver does not apply
9 Proposal Analysis Steps 1. Examine Proposal for Compliance with FAR Table 15-2 and the RFP2. Review Contractor’s “Groundrules and Assumptions” and/or “Terms and Conditions”3. Request Field Pricing Support(DCAA Audit / DCMA Pricing & Tech Supt)4. Request Technical Evaluation from Program Office5. Build Pricing Model6. Begin Preparing a Preliminary Price Negotiation Memorandum (PPNM)7. Start Performing Price/Cost AnalysisIAW Policy Memo 10-C-14 signed by SAF/AQC, Roger Scott Correll, on 13 October 2010.The Air Force has a Proposal Adequacy Checklist that should be included with all RFPs for actions exceeding $700K
10 Proposal Analysis Steps Cont. 8. Review Technical Evaluation for adequacy9. Review results from DCAA/DCMA10. Incorporate Tech & DCAA/DCMA Results into Pricing Model11. Perform Weighted Guidelines Analysis (unless CPAF)12. Final Price Analysis13. Prepare Business Clearance Pricing Charts14. Complete PPNM15. Prepare Govt Offer Position for Negotiations
11 Step 1 Examine Proposal Data Does proposal contain Cost or Pricing Data in a format consistent with FAR Table 15-2 (FAR )?Does proposal comply with specific RFP instructions?If answer to either question is No, call contractor ASAP.
12 FAR Table 15-2 (Found under FAR 15.408(m)) FAR Table 15-2 requires:A Proposal Index of all Cost or Pricing DataCost Element Breakdowns for each CLIN consistent with contractor’s Cost Accounting SystemTotal Summaries by Cost ElementIdentification of Incurred Costs (Actuals)Submission of FPRA if negotiatedProposed use of Govt Furnished PropertyIf subject to Cost Accounting Standards (CAS), a statement on adequacy of Disclosure StatementIdentification of any CAS non-compliances
13 FAR Table Cont.Even though Cost or Pricing Data is factual not judgmental, per Table 15-2 I C, contractor must submit any information reasonably required to explain estimating process, including --The judgmental factors applied and the mathematical or other methods used in the estimateThe nature and amount of any contingencies included in the proposed price.
14 FAR Table 15-2 Cost Elements Material - Contractor must provide:Consolidated priced summary of individual material quantities (Bill of Material) identifying the item, source, quantity, and price.Cost/Price analysis of Subcontracts over $700K if no exception applies.Subcontractor cost or pricing data must be provided to the Gov’t if:>$12.5M; or10%+ of prime contractor’s price
15 FAR Table 15-2 Cost Elements, Cont. Labor - Contractor must provide:a time-phased (e.g., monthly, quarterly, etc.) breakdown of labor hours, rates, and cost by appropriate category, and furnish bases for estimatesNote: This where the contractor tells us “how and why” they bid the hours they did. It almost always includes judgmental factors
16 FAR Table 15-2 Cost Elements, Cont. Indirect Costs - Contractor must provide:How they computed and applied indirect costs, including cost breakdowns. Show trends and budgetary data to provide a basis for evaluating the reasonableness of proposed rates. Indicate the rates used and provide an appropriate explanation.Note: In proposals with major contractors, indirect cost data is often limited to a description and listing of the rates. The details behind the rates are contained in the contractor’s forward pricing rate proposal submitted to DCAA & DCMA. We rely on DCAA & DCMA to analyze that data.
17 Step 2 Review Groundrules & Assumptions/Ts & Cs Ensure that proposal are not based on assumptions that are not true or terms that are not acceptablee.g.Availability of Govt Furnished Property (GFP)Access to Govt FacilitiesSpecial Provisions that are unfavorable to Govt or unfairly limit Govt Rights (e.g. Data Rights)Identify issues early, contact contractor ASAP.Issues that affect the contract price have to be addressed soon – may require revised proposal
18 Step 3 Request Field Pricing Support DFARs PGI (a), Field Pricing Assistance, contains the following guidance:(i) The contracting officer should consider requesting field pricing assistance for—(A) Fixed-price proposals exceeding $700K;(B) Cost-type proposals exceeding $700k from offerorswith significant estimating system deficiencies.(C) Cost-type proposals exceeding $10 million fromofferors without significant estimating systemdeficiencies.
19 Step 3 Request Field Pricing Support Cont. DFARs PGI (c), Audit Assistance for prime contracts or subcontracts contains the following guidance:(i) The contracting officer should consider requesting audit assistance from DCAA for—(A) Fixed-price proposals exceeding $10M;(B) Cost-type proposals exceeding $100MThis is a recent change that occurred in Sep 2010
20 Step 4 Request Technical Evaluation Buyer/PCO will request tech evalTell them what needs to be evaluatedMaterial (Types & Quantities)Labor HoursODCsPerson doing pricing should communicate to Tech Eval team on how they need the Tech Eval summarized.e.g. Hours by Labor Category, by CLIN, by Year
21 Step 5 Build a Pricing Model Build a spreadsheet model to price the actionIncludes all cost elements & ProfitOriginal Model will validate accuracy of contractor’s proposed priceIf model doesn’t produce same result as proposal (except minor rounding errors), either your model is wrong or proposal is wrong (Hint: it is usually your model that is wrong)If Contractor’s proposal is wrong, contact contractor
23 Step 6 Begin Preparing Preliminary PNM A Preliminary PNM is not duplication of effort.It is essentially 2/3 of the final PNMIt can help avoid mistakes that may not be easily corrected after negotiationsKnowing what you need to address in the PPNM and the PNM will force you to address those things during proposal analysis & negotiationAt this point you can already prepare 1/3 of the PNM – Introductory info, Proposed amounts and Basis of Proposal sections of the Cost Element Summary portion of the PNMNote for contractors: the Pre-PNM is the document that the Gov’t prepares to show our objective negotiation position. The Final PNM shows the negotiated position.
24 Step 7 Price/Cost Analysis If we or someone else bought the same or similar item before:What was the price?How long ago? what quantity? delivery schedule?Same Ts & Cs, financing methods?Did we ask for actual cost data from prior buy? (if not, do it now!)This is “cost analysis” not price analysis, but make sure Technical Team is given access to this data for the Technical Evaluation
25 Price vs. Cost Analysis Price Analysis is… Cost Analysis is… Look at total priceReasonableness is based on a comparison of proposed prices to same or similar itemsProfit is imbedded in priceCost Analysis is…Look at detailed cost element breakoutReasonableness is based on a thorough analysis of each cost elementProfit is evaluated
26 Cost AnalysisPer Far (a)(3) Cost analysis shall be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data are required. Price analysis should be used to verify that the overall price offered is fair and reasonable
27 Other cost elements can be added when applicable Cost AnalysisAnalysis of each major cost elementLabor HoursLabor DollarsIndirect Costs (Fringes, Labor Overhead)MaterialsSubcontractsIntra-Company TransfersOther Direct CostsCost of MoneyGeneral and AdministrativeProfit/FeeOther cost elements can be added when applicable
28 Price AnalysisFAR (b)(2) includes the following examples of methods of price analysis:Compare Proposed PricesPrevious PricesParametricCatalog or published pricesGovernment estimatesMarket pricesPricing information provided by offerorFirst two are in BOLD because they are preferred.
29 Price AnalysisThe first two techniques are the preferred techniques ( (b)(3))If CO determines that information on competitive proposed prices or previous contract prices is insufficient to determine that the price is fair and reasonable, then the CO may use any of the remaining techniquesBut don’t ignore any pertinent information!Government estimateMarket researchHistorical pricesExplain what you concluded on any price informationCheck all available information/avenuesDocument in appropriate detail.Remember that someone else will need to know WHO, WHAT, WHERE , WHEN and HOW. Especially: How you arrived at your conclusion.If you really don’t know why a number is different, say so but don’t just ignore it. For examples if an old historical price is less than current prices and you can’t find any information on how it was developed say that.
30 Price AnalysisFAR (b)(2) includes the following examples of methods of price analysis:Compare Proposed Prices
31 Comparison of Proposed Prices Comparison of proposed prices received in response to a solicitation (competitive)Considered reasonable unless PCO has information to believe it is notEspecially if competition meets standard for Adequate Price Competition (APC) in FAR1st technique is Comparison of Proposed PricesBe careful of cost type contracts; usually requires cost realism analysis which should lead to cost reasonablenessNoted that the proposed prices may not meet the standard for adequate price competition but can still be compared. If the prices do meet the standard for adequate price competition, can generally assume they are reasonable.
32 Adequate Price Competition APC FAR reference (c)(1)Comparison to other proposed prices received is normally used as part of APC determinationWhat conditions need to exist for APC?Expected at least 2 offersCompete independentlyCan satisfy government requirementsBest value awardPrice offered is not unreasonablePrice is a substantial factor in source selection
33 Price Analysis Compared Proposed Prices Previous Prices FAR (b)(2) includes the following examples of methods of price analysis:Compared Proposed PricesPrevious Prices
34 Compare to Previous Prices Price Analysis includes:Validating basis of prior determination of fair and reasonableCompetitive, sole source, commercial?Prior award dateQuantityPriceContract TypePrice Analysis includes:Validate basis of prior determination of fair and reasonableCompetitionprior award datequantityPriceDocument and address adjustments to the current buy
35 Compare to Previous Prices Be Aware of:New item vs. overhaul with same National Stock NumberUrgent vs. normal delivery scheduleTechnology changeConfiguration changeTerms and conditionsManufacturing process changesMarket conditionsEtc.NSNs don’t distinguish between a new item and an overhaul or surplusJo41 shows surplus but not necessarily overhaul/new item. Some examples of titles for various Price Evaluation Codes are:adequate price competitionprice comparisons based upon previous adequate priceprice comparison based upon contract price historyother price comparison techniquecost analysis using certified cost or pricing dataprice based upon formula pricing agreementprice comparison on an independent government estimatesurplusvalue analysisaward based on other than price
36 Compare to Previous Prices Document details of analysisFor example:Escalation usedTime, rate, etc.Basis and currency of previous priceCompetition, cost analysis, etc.Similarity of itemsAny difference affecting priceExplain differences or adjustmentsQuantify price differences
37 Step 8 Review Tech Eval for Adequacy Does Technical Evaluation:Address types and quantity of labor?Provide sufficient rationale for all labor hour positions (Objective & Going-In)?If proposed numbers were accepted – why?If reductions are recommended – why?Are recommendations summarized correctly to allow Govt Pricing Positions to be developed?Have all hours been evaluated?Doubts about tech eval? - play “devil’s advocate” with technical team on key issues
38 Step 9 Review DCMA/DCAA Reports Were all costs reviewed?What did we request?Are the results of the audit “qualified” for any reason?Are there “unresolved” or “unsupported” costs? If so why?You may need to contact contractor to insist they provide support to DCMA/DCAABe aware of the “Report Release Restrictions”Do You understand Results?A Qualified is expressed when:1) there is a lack of sufficient competent evidential matter or there are restrictions in the scope of the examination that have led the auditor to conclude that he or she cannot express an unqualified opinion and the auditor has concluded not to disclaim an opinion, and/or2) the auditor believes, on the basis of the audit, that the subject matter under audit contains a departure from the established criteria, the effect of which is material, and the auditor has concluded not to express an adverse opinion.Unsupported: When the contractor does not furnish sufficient documentation to enable a definitive conclusion, may significantly impact the contracting officer’s development of a negotiation position. A subcontractor/IWA is considered unsupported regardless of whether or not an assist audit has been requested if the contractor has not completed its price/cost analysis.Unresolved: Failure to receive requested DCAA assist audit reports. Also, when there are significant incomplete subcontract/IWA pricing actions applicable to repricing proposals for incentive and fixed price redeterminable contracts.Report Release Restrictions : For example, an assist audit cannot be released to a prime contractor unless the subcontractor gives permission.Utilize ESC LiaisonsDCAA: Zelma CalderonDCMA: Izzie Mooney
39 Step 10 Incorporate Tech Eval, DCMA/DCAA Results into Pricing Model Double check your entriesMake sure you are not duplicating exceptions taken by Tech Eval & Audite.g.Tech Eval deletes Part # NGX105 valued at $100,500DCAA questions costs of $27,000 for Part # NGX105If Tech Eval position is adopted you delete $100,500 from Material (Don’t delete another $27,000)Does the total cost look right?e.g. how did a 12% reduction in hours result in a 20% reduction in total cost? (probably not right)
40 Step 11 Perform Weighted Guidelines Analysis DFARS mandates the use of the Weighted Guidelines tool to develop a profit or fee objectiveExcept for:Cost Plus Award Fee ContractsContracts with Federally Funded Research and Development Centers (FFRDCs)
41 Step 11 Perform Weighted Guidelines Analysis Key ElementsContractor Risk FactorsContract Type RiskWorking CapitalContractor Facilities Capital EmployedCost Efficiency Factor
43 Step 12 Complete Price Analysis This is the final cross check of the cost analysis.Does our Objective Price make sense when compared to the same or similar efforts all thing considered…QuantitiesScheduleEscalationTs & Cs
44 Step 13 Prepare Business Clearance Charts Using Data from your Pricing Model, prepare Business Clearance charts.Template for charts can be found on thePK Homepage– Local Process Guidance- Documents Library- Clearance
45 Step 14 Complete Preliminary PNM Everything but “Results of Negotiations” should be complete.
46 Must be a complete summary of the negotiation process What is a PNM?*** Price Negotiation Memorandum ***“ A PNM is a document that summarizes the process of negotiating a contract’s price; the outcome of that process; and, serves as a record of the decisions made in determining a price to be fair and reasonable.” Nash and CibinicMust be a complete summary of the negotiation process
47 Need for Documentation Why Document your pricing?FAR…the contracting officer must establish price reasonableness in accordance with , , or Subpart 15.4, as applicable…FAR (a)(2)If only one response is received, include a statement of price reasonableness in the contract fileFARCO…shall document in the contract file the principle elements of the negotiated agreementWhat is the Documentation used for?Providing information for future buyers/CO’sDefending the Air Force in claims or protestsSupporting Defective Pricing effortsProviding information for DoD IG, GAO, etc.
48 Step 15 Prepare Govt Offer Position Prepare Government Offer PositionBoth cost and profit/feeYou need to be able to tell the contractor why your offer is less than the proposal (details)Understand the key technical & audit issues and be able to talk to them in “layman’s” termsWe say prepare Gov’t offer, but for contractor’s this can be your offer to your subs.
49 Final Thoughts Proposal Analysis is a Team Effort Everybody’s part is importantUse Available ResourcesWhen we have done a good cost analysis - Negotiations can be fun, challenging and very rewarding.