Presentation on theme: "NCMA Training: Price Analysis for Non-Price Analysts"— Presentation transcript:
1 NCMA Training: Price Analysis for Non-Price Analysts Jill L. MurphyESC/PKFSenior Cost/Price AnalystMarch 2010
2 Price Analysis: A Step By Step Approach Analyzing Proposals14 Steps of Pricing
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 General Considerations 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, Cont. Various analytical techniques may be used singly or in combinationComplexity and circumstances of each acquisition determine the level of detail of the analysis required
7 Proposal Analysis Steps Actions up to $10M - Buyer/PCO TasksActions > $10M1. Examine Proposal for Compliance with FAR Table 15-2 and the RFPPrice Analyst2. Review Contractor’s “Groundrules and Assumptions” and/or “Terms and Conditions”Buyer/PCO& Price Analyst3. Request Field Pricing Support(DCAA Audit / DCMA Pricing & Tech Supt if needed)4. Request Technical Evaluation from Program Office5. Build Pricing Model6. Begin Preparing a Preliminary PNM7. Start Performing Price/Cost Analysis
8 Proposal Analysis Steps Continued Actions up to $10M Buyer/PCO Tasks> $10M8. Review Technical Evaluation for adequacyBuyer/PCO& Price Analyst9. Review Audit results10. Incorporate Tech & Audit into Pricing ModelPrice Analyst11. Perform Weighted Guidelines Analysis (unless CPAF)12. Final Price Analysis13. Prepare Business Clearance Pricing Charts14. Complete PPNM15. Prepare Govt Offer Position for Negotiations
9 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.
10 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
11 FAR Table ContinuedEven 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.
12 FAR Table 15-2 Cost Elements Material - Contractor must provide:a consolidated priced summary of individual material quantities (Bill of Material) identifying the item, source, quantity, and price.Summary of cost analysis of Subcontracts over $650K if no exception applies and subcontract cost or pricing data if thresholds exceeded ($11.5M+ or 10%+ of total price)
13 FAR Table 15-2 Cost Elements - Continued 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
14 FAR Table 15-2 Cost Elements - Continued 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.
15 Step 2 Request Field Pricing Support DFARs contains the following guidance:(i) The contracting officer should consider requesting field pricing assistance for—(A) Fixed-price proposals exceeding $650K;(C) Cost-type proposals exceeding $10 million from offerors without significant estimating system deficiencies.
16 Step 2 Request Field Pricing Support Usually a full DCAA Audit but sometimes we tailor our request to specific elements of costWe rarely ask DCMA to perform a Technical EvaluationBut DCMA can be of assistance to our technical evaluators
17 Step 3 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
18 Step 4 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
20 Step 5 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 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 PNM
21 Step 6 Start Doing 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 tech eval
22 Price vs. Cost Analysis Price Analysis is… Look at total price Reasonableness is based on a comparison of proposed prices to same or similar itemsProfit is imbedded in priceCost Analysis is…Look at detailed cost breakoutReasonableness is based on a thorough analysis of each cost elementProfit is evaluated
23 Price vs. Cost Analysis Truth in Negotiation Act (TINA) says MUST obtain cost or pricing data (certified) over $650,000 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 $650,000 where an exception/waiver does not apply
24 Cost AnalysisPer Far (a)(3) Cost analysis shall be used to evaluate the reasonableness of individual cost elements when cost or pricing data are required. Price analysis should be used to verify that the overall price offered is fair and reasonable
25 Cost Analysis Analysis of each major cost element Labor HoursLabor DollarsIndirect Costs (Fringes, Labor Overhead)MaterialsSubcontractsIntra-Company TransfersOther Direct CostsCost of MoneyGeneral and AdministrativeProfit/FeeOther cost elements can be added when applicable
26 Cost Analysis (cont) Cost Analysis is a Team Effort Your job is coordinate efforts of the entire team to ensure a thorough analysis is performed.
27 FAR Price Analysis Methods FAR (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.
28 Price Analysis Methods in FAR The 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 reasonableMay use any of the remaining techniquesRoughly listed: Least Intrusive to Most IntrusiveBut 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.
29 FAR Price Analysis Methods FAR (b)(2) includes the following examples of methods of price analysis:COMPARE PROPOSED PRICES
30 Comparison of Proposed Prices Comparison of proposed prices received in response to solicitation (competitive)Considered reasonable unless PCO has information to believe it is notEspecially if competition meets standard for Adequate Price Competition 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.
31 Adequate Price Competition APC FAR reference (c)(1)Comparison to other proposed prices received is normally used as part of adequate price competition (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
32 FAR Price Analysis Methods FAR (b)(2) includes the following examples of methods of price analysis:COMPARE PROPOSED PRICESPREVIOUS PRICES
33 Compare to Previous Prices Price Analysis includes:Validating basis of prior determination of fair and reasonableCompetitive, sole source, commercial?Prior award dateQuantityPricePrice Analysis includes:Validate basis of prior determination of fair and reasonableCompetitionprior award datequantityPriceDocument and address adjustments to the current buy
34 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
35 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
36 Step 7 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
37 Step 8 Review Audit Report Did Audit review all costs?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 DCAAUtilize ESC Liaison Auditor (Zelma Calderon)What are the “Report Release Restrictions “Do You understand Audit Results?
38 Step 9 Incorporate Tech Eval and Audit 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)
39 Analyze the Govt Position Step 9 Incorporate Tech Eval and Audit Results into Pricing Model (Cont)Analyze the Govt PositionIs it consistent with Price Analysis?Top-Down look at hoursHow many equivalent full-time people are represented by the labor hours? Does it make sense?
40 Step 10 Perform Weighted Guidelines Analysis DFARS the use of the Weighted Guidelines tool to develop a pre-negotiation profit or fee objectiveExcept for:Cost Plus Award Fee ContractsContracts with Federally Funded Research and Development Centers (FFRDCs)
41 Step 10 Perform Weighted Guidelines Analysis Key ElementsContractor Risk FactorsContract Type RiskWorking CapitalContractor Facilities Capital EmployedCost Efficiency Factor
43 Step 11 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 12 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 13 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 What is a PNM?Every PNM should show the contractor’s proposed amounts, the Air Force Objective, and the negotiated amounts by cost element.
48 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.
49 Organize Your Thoughts Top-Level Pricing ImpactsCLIN OrganizationBy Debit/CreditBy Contract TypeFlows to the modification/contractSet up a matrixPicture of the pricing changesUseful for Clearance BriefingOutline for PNM writing
50 What Makes a Good PNM What Makes a Good PNM Documentation of analysis (crux of pricing and PNM)Discussion of issues and positionsNegotiated terms and conditionsLogical flow:Proposal to Tech EvalTech Eval to Price/Cost AnalysisPrice/Cost Analysis to PNM (& Negotiations)PNM to Modification/ContractAll numbers consistentUnderstand how to develop pricing numbersHave you convinced the reader that the Price is fair and reasonable?Achieved through complete and accurate price/cost analysis and full discussion
51 Step 14 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” terms
52 Clearance Review & Approval Reference: AFFARS ClearanceEnsures contract file and intended contract/modification comply with law, policies and regulation; and result in fair and reasonable business arrangementsApproval to begin negotiations with traditional pricingWe no longer use IPT Pricing! (Policy Memo 2009-PK-003)
53 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.