NCMA Training:Price Analysis

forNon-Price Analysts

Erin E. MansurMarch 2011

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Agenda

• Why We Analyze Proposals• Cost or Pricing Data• Proposal Analysis Techniques• Proposal Analysis Steps• Final Thoughts

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Why We Analyze Proposals

Per FAR 15.402:

Contracting Officers Shall --(A) Purchase Supplies and Services From

Responsible Sources at Fair and Reasonable Prices.

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This Is the Basis for All Other Pricing Related Regulations and Policies.This Is the Basis for All Other Pricing Related Regulations and Policies.

Why We Analyze Proposals Cont.

• Objective of Proposal Analysis is to ensure that the final agreed-to price is fair and reasonable

• Contracting Officer is responsible for evaluating the reasonableness of offered prices:– Contracting Officer may request the assistance of

other experts to assist with the evaluation

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General Considerations

• Various techniques may be used singularly or in combination to analyze cost or pricing data

• Complexity and circumstances of each acquisition determine the level of detail of the analysis required

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Cost or Pricing Data

• 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.– Factual– Verifiable

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Cost or Pricing DataCont

• Truth in Negotiation Act (TINA) says

– MUST obtain cost or pricing data (certified) over $700,000 UNLESS• Price Based on Adequate Price Competition

– Price analysis, usually comparison of offers• Law or Regulation (mainly utilities)• Commercial Item

– Price analysis • Modification of a commercial item• Waived by Head Of Contracting Activity

– Use cost analysis for procurements over $700,000 where an exception/waiver does not apply

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Proposal Analysis Techniques

• Cost Analysis• Price Analysis• Cost Realism Analysis• Technical Analysis• Unit Prices • Unbalanced Pricing

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Proposal Analysis Steps1. Examine Proposal for Compliance with FAR Table 15-2 and the RFP

2. 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 Office

5. Build Pricing Model

6. Begin Preparing a Preliminary Price Negotiation Memorandum (PPNM)

7. Start Performing Price/Cost Analysis

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The Air Force has a Proposal Adequacy Checklist that should be included with all RFPs for actions exceeding $700K

The Air Force has a Proposal Adequacy Checklist that should be included with all RFPs for actions exceeding $700K

Proposal Analysis StepsCont.

8. Review Technical Evaluation for adequacy

9. Review results from DCAA/DCMA

10. Incorporate Tech & DCAA/DCMA Results into Pricing Model

11. Perform Weighted Guidelines Analysis (unless CPAF)

12. Final Price Analysis

13. Prepare Business Clearance Pricing Charts

14. Complete PPNM

15. Prepare Govt Offer Position for Negotiations

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Step 1 Examine Proposal Data

• Does proposal contain Cost or Pricing Data in a format consistent with FAR Table 15-2 (FAR 15.408)?

• Does proposal comply with specific RFP instructions?

• If answer to either question is No, call contractor ASAP.

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FAR Table 15-2 (Found under FAR 15.408(m))

• FAR Table 15-2 requires:– A Proposal Index of all Cost or Pricing Data – Cost Element Breakdowns for each CLIN consistent with

contractor’s Cost Accounting System– Total Summaries by Cost Element– Identification of Incurred Costs (Actuals)– Submission of FPRA if negotiated– Proposed use of Govt Furnished Property– If subject to Cost Accounting Standards (CAS), a

statement on adequacy of Disclosure Statement– Identification of any CAS non-compliances

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FAR Table 15-2 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 estimate

– The nature and amount of any contingencies included in the proposed price.

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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; or 10%+ of prime contractor’s price

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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 estimates

• Note: This where the contractor tells us “how and why” they bid the hours they did. It almost always includes judgmental factors

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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.

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Step 2 Review Groundrules & Assumptions/Ts & Cs

• Ensure that proposal are not based on assumptions that are not true or terms that are not acceptable – e.g.• Availability of Govt Furnished Property (GFP)• Access to Govt Facilities• Special 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

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Step 3 Request Field Pricing Support

• DFARs PGI 215.404-2(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

offerors with significant estimating system deficiencies.

(C) Cost-type proposals exceeding $10 million from offerors without significant estimating system deficiencies.

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Step 3 Request Field Pricing Support

Cont.

• DFARs PGI 215.404-2(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 $100M

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Step 4 Request Technical Evaluation

• Buyer/PCO will request tech eval– Tell them what needs to be evaluated• Material (Types & Quantities)• Labor Hours• ODCs

• Person 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

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Step 5 Build a Pricing Model

• Build a spreadsheet model to price the action– Includes all cost elements & Profit– Original Model will validate accuracy of

contractor’s proposed price• If 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

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Sample Pricing Model

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2011 2012Base Rate Total Base Rate Total Base Total

Direct MaterialMaterial 1 77,872 1.00000 77,872 - 1.00000 - 77,872$ Material 2 - 1.00000 - - 1.00000 - -$ Total Direct Material 77,872 77,872 - - 77,872$

Direct LaborLabor Category 1 251 43.16000 10,833 - 44.41000 - 251 10,833$ Labor Category 2 1,744 52.22000 91,072 - 53.74000 - 1,744 91,072$ Labor Category 3 - 63.20000 - - 65.04000 - - -$ Labor Category 4 79 63.20000 4,975 15 65.04000 945 93 5,920$ Total Direct Labor 2,074 106,880 15 945 2,088 107,825$

Fringe BenefitsFringe 106,880 0.63700 68,083 945 0.65300 617 68,700$ Total Fringe 68,083 617 68,700$

OverheadLabor Overhead 174,963 0.43400 75,934 1,562 0.43200 675 76,609$ Total Overhead 75,934 675 76,609$

ODCG1 6OTravel - - -$ Total ODC - - -$

Subtotal Cost 328,769 2,237 331,006$

G&AG&A 250,897 0.26500 66,488 2,237 0.26600 595 67,083$ Total G&A 66,488 595 67,083$

Total Estimated Cost 395,257 2,832 398,089$

FCCOMOverhead FCCOM 174,963 0.00574 1,004 1,562 0.00596 9 1,013$ G&A Fccom 250,897 0.00045 113 2,237 0.00043 1 114$ Total FCCOM 1,117 10 1,127$

Fee or ProfitProfit 395,257 0.10000 39,526 2,832 0.10000 283 39,809$

Total Price 435,900 3,125 439,025$

Step 6 Begin Preparing Preliminary PNM

• A Preliminary PNM is not duplication of effort. – It is essentially 2/3 of the final PNM

• It can help avoid mistakes that may not be easily corrected after negotiations– Knowing what you need to address in the PPNM and the PNM will

force you to address those things during proposal analysis & negotiation

• At 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

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Step 7Price/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

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Price vs. Cost Analysis• Price Analysis is…– Look at total price– Reasonableness is based on a comparison of

proposed prices to same or similar items– Profit is imbedded in price

• Cost Analysis is…– Look at detailed cost element breakout– Reasonableness is based on a thorough

analysis of each cost element– Profit is evaluated

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Cost Analysis

• Per Far 15.404-1 (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

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Cost Analysis• Analysis of each major cost element

– Labor Hours– Labor Dollars– Indirect Costs (Fringes, Labor Overhead)– Materials – Subcontracts– Intra-Company Transfers– Other Direct Costs– Cost of Money– General and Administrative– Profit/Fee

Other cost elements can be added when applicable27

Price Analysis

FAR 15.404-1(b)(2) includes the following examples of methods of price analysis:

• Compare Proposed Prices• Previous Prices• Parametric • Catalog or published prices• Government estimates• Market prices• Pricing information provided by offeror

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Price Analysis• The first two techniques are the preferred techniques (15.404-1(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 techniques

• But don’t ignore any pertinent information! – Government estimate– Market research– Historical prices– Explain what you concluded on any price information

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Price Analysis

FAR 15.404-1(b)(2) includes the following examples of methods of price analysis:

• Compare Proposed Prices

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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 not• Especially if competition meets standard for Adequate

Price Competition (APC) in FAR

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Adequate Price Competition

• APC FAR reference 15.403-1(c)(1)

• Comparison to other proposed prices received is normally used as part of APC determination

• What conditions need to exist for APC?– Expected at least 2 offers– Compete independently– Can satisfy government requirements– Best value award– Price offered is not unreasonable– Price is a substantial factor in source selection

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Price Analysis

FAR 15.404-1(b)(2) includes the following examples of methods of price analysis:

• Compared Proposed Prices• Previous Prices

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Compare to Previous Prices

Price Analysis includes:• Validating basis of prior determination of fair and

reasonable– Competitive, sole source, commercial?– Prior award date– Quantity – Price– Contract Type

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Compare to Previous Prices

• Be Aware of:– New item vs. overhaul with same National

Stock Number– Urgent vs. normal delivery schedule– Technology change– Configuration change– Terms and conditions– Manufacturing process changes– Market conditions– Etc.

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Compare to Previous Prices

• Document details of analysis• For example:– Escalation used

• Time, rate, etc.– Basis and currency of previous price

• Competition, cost analysis, etc.– Similarity of items

• Any difference affecting price– Explain differences or adjustments

• Quantify price differences

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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

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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/DCAA

• Be aware of the “Report Release Restrictions”• Do You understand Results?

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Step 10 Incorporate Tech Eval, DCMA/DCAA Results

into Pricing Model

• Double check your entries– Make sure you are not duplicating exceptions taken

by Tech Eval & Audit• e.g.

– Tech Eval deletes Part # NGX105 valued at $100,500– DCAA questions costs of $27,000 for Part # NGX105– If 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)

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Step 11 Perform Weighted Guidelines Analysis

• DFARS 215.404-4 mandates the use of the Weighted Guidelines tool to develop a profit or fee objective– Except for:• Cost Plus Award Fee Contracts• Contracts with Federally Funded Research and

Development Centers (FFRDCs)

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Step 11 Perform Weighted Guidelines Analysis

• Key Elements– Contractor Risk Factors– Contract Type Risk– Working Capital – Contractor Facilities Capital Employed– Cost Efficiency Factor

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Weighted Guidelines

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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…• Quantities• Schedule• Escalation• Ts & Cs

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Step 13 Prepare Business Clearance Charts

• Using Data from your Pricing Model, prepare Business Clearance charts. – Template for charts can be found on the

PK Homepage – Local Process Guidance

- Documents Library- Clearance

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Step 14 Complete Preliminary PNM

• Everything but “Results of Negotiations” should be complete.

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What is a PNM?

“ 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 Cibinic

“ 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 Cibinic

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*** Price Negotiation Memorandum ****** Price Negotiation Memorandum ***

Must be a complete summary of the negotiation process Must be a complete summary of the negotiation process

Need for Documentation• Why Document your pricing?– FAR 12.209

• …the contracting officer must establish price reasonableness in accordance with 13.106-3, 14.408-2, or Subpart 15.4, as applicable…

– FAR 13.106-3(a)(2)• If only one response is received, include a statement of price reasonableness in

the contract file

– FAR 15.406-3• CO…shall document in the contract file the principle elements of the negotiated

agreement

• What is the Documentation used for?– Providing information for future buyers/CO’s– Defending the Air Force in claims or protests– Supporting Defective Pricing efforts– Providing information for DoD IG, GAO, etc.47

Step 15 Prepare Govt Offer Position

• Prepare Government Offer Position– Both cost and profit/fee

• You 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

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Final Thoughts

• Proposal Analysis is a Team Effort– Everybody’s part is important– Use Available Resources

• When we have done a good cost analysis - Negotiations can be fun, challenging and very rewarding.

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Questions?