Business Proposal Evaluation
FDA Business Management Team
Agenda
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Reasons for Business Analysis
Common Definitions
Common Business Proposal (SB) Issues
Price Analysis
– Exercise 1
 Cost Analysis
– Exercise 2
 Technique Determination & Other Considerations
– Possible scenarios
 Business Analysis Report Outline
 Pivot Table Demonstration
 Questions
Reasons for Business Analysis
WARNING! FAR Cites Ahead!
FAR 15.402(a) – Pricing Policy states
The contracting officer shall purchase supplies and services from
responsible sources at fair and reasonable prices.
FAR 15.304(c)(1) states
Price or cost shall be evaluated in every source selection.
Contracting Officers and Contract Specialists are business advisors
• Assist customers to make good business decisions.
• Be prudent but fair with contractors.
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Importance of Solicitation Language
Brain teaser – Which takes precedence, the FAR or the Solicitation?
The FAR States
Review Solicitation
Language Carefully
Separate and
Independent
• Analysis must be
performed in accordance
with the solicitation
language to avoid protest
FAR - 15.305(a).
• Shall evaluate competitive
proposals and then
assess their relative
qualities solely on the
factors and subfactors
specified in the solicitation
– FAR 15.305(a).
• Price each contract
separately and
independently - 15.402(b).
• Proposal instruction Section L
• Evaluation factor Section M
• Do not use proposed
price reductions under
other contracts as an
evaluation factor; or
consider losses or profits
realized or anticipated
under other contracts.
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Common Definitions
Underbidding,
usually in a
competitive
environment
Fair – Fair market value,
reasonable profit for
offeror.
Realism - whether the
estimated proposed cost
elements are realistic for
the work to be performed,
FAR 15.404-1(d)(1).
Overbidding,
Sole-source &
Competitive
environments
Reasonableness Does not exceed that
which would be incurred
by a prudent person in the
conduct of competitive
business, FAR 31.201-3.
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Common BA Issues - Small Businesses
FDA Specific
 SB Cost Proposal Considerations
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– Gov’t must verify that SB Offerors have an adequate accounting system
for any cost-type proposal (FFP exempt)
– Verification must be based on an independent Gov’t accounting system
audit
Absence of assumptions
– Can result in confusion / misunderstanding between Industry and the
Government
– Small Business vs. Large Business
Pricing
– At times small businesses do not provide a basis for their proposed
pricing
– Consequently this makes it difficult for the Gov’t to determine if prices are
fair, realistic, and reasonable.
Labor Rates (LRs)
– Small businesses have a greater tendency to propose LRs not aligned to
commercial rates (i.e. GSA Schedules)
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Common BA Issues - Small Businesses
General
 Mentor-Protégé program not widely understood
– Mentor may be treated as subcontractor with a misunderstood 50%
performance requirement though SBA has not expressly set a
performance requirement. This is supported by allowing the Mentor to
create a JV and perform as a Prime.
 FAR 19.1307 Price evaluation preference for HUBZone
– The contracting officer shall give offers from HUBZone small
business concerns a price evaluation preference by adding a
factor of 10 percent to all non-HUBZone offers.
 Responsibility Determination
– CO may defer to SBA for the “Certificate of Competency”.
However, Small Businesses can provide this in response to the
RFP => reduces overall processing time.
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Price Analysis
Price analysis shall be used when certified cost or pricing data are not
required - FAR 15.404-1(b)  note the different FAR cite!
Key of Price Analysis
• Differences of Price vs Cost
• Evaluated without reviewing
separate cost elements of a
proposal.
• Price analysis should be used
to verify that the overall price
offered is fair and reasonable.
• FAIR and Reasonable
normally established by
adequate price
competition.
• FAR 15.404-1(b)(2)(i)
Price Analysis Techniques
• Comparison of proposed prices with independent
Government cost estimate (IGCE).
• Comparison of the proposed prices to historical
prices paid.
• Use of parametric estimating methods/application of
rough yardsticks.
• Comparison with competitive published price lists.
• Comparison of proposed prices with prices obtained
through market research for the same or similar
items.
• Analysis of data other than certified cost or
pricing – can be very useful.
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Price Analysis Exercise (1)
A requisition is received for 1,000 first-aid kits for an emergency planning exercise.
The kits must be Occupational Safety & Health Administration (OSHA) compliant
and received within 21 days. Who would you award the delivery order to?
Offeror 1
Offeror 2
Offeror 3
Offeror 4
Offeror 5
Delivery Time
20 days
20 days
20 days
30 days
30 days
OSHA Compliance
Yes
Yes
No
Yes
No
Small Business
Yes
Yes
Yes
No
Yes
T/C Exception
None
None
None
None
None
Unit Price
$68
$70
$77
$79
$80
Volume Discount
4%
5%
7%
7%
6%
Extended Price
x 1,000 Units
Please Calculate
Please Calculate
Please Calculate
Please Calculate
Please Calculate
Payment Terms
1%/20 days,
Net 30 days
5%/15 days,
Net30 days
Net 30 days
3%/15 days,
Net 30 day
2%/10 days,
Net 30 days
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Price Analysis Exercise (2)
Offeror 1
Offeror 2
Offeror 3
Offeror 4
Offeror 5
Delivery Time
20 days
20 days
20 days
30 days
30 days
OSHA Compliance
Yes
Yes
No
Yes
No
Small Business
Yes
Yes
Yes
No
Yes
T/C Exception
None
None
None
None
None
Unit Price
$68
$70
$77
$79
$80
Volume Discount
4%
5%
7%
7%
6%
Extended Price
x 1,000 Units
$65,280
$66,500
$71,610
$73,470
$75,200
Payment Terms
1%/20 days,
Net 30 days
5%/15 days,
Net30 days
Net 30 days
3%/15 days,
Net 30 day
2%/10 days,
Net 30 days
After Payment Discount
$64,627
$63,175
$71,610
$71,266
$73,696
1. After payment discount Offeror 2 has the lowest proposed price, but what is
the risk for the Government?
2. Why do some vendors offer payment term discounts?
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Cost Realism Analysis
The process of independently reviewing and evaluating specific elements of each Offeror’s proposed cost
estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed FAR 15.404-1(d)(1)
Key of Cost Realism
Analysis
Cost Realism Analysis Techniques
• Must be performed on all cost
reimbursement contracts.
• Perform a technical analysis of the proposed types
and quantities of materials, labor, processes, etc..
• Process of evaluating the
methodology used by the
offeror (contractor) to estimate
proposed costs.
• Examine the types and quantities of labor and
material proposed.
• Use information other than cost
or pricing data to evaluate –
FAR 15.404-1(a)(4)
• Similar to a cost analysis, less
extensive and not as exact.
• Evaluate pricing related to similar or commercial
items requiring minor modifications to determine
magnitude of changes.
• Compare Government’s “probable” cost of
performance with each offeror’s proposed costs to
determine best value
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Cost Analysis
Review and evaluation of any separate cost elements and profit or fee in an Offeror's proposal, as needed to
determine a fair and reasonable price or to determine cost realism, and to determine how well the proposed
costs represent the contract - FAR 15.404-1(c)(1)
Cost Analysis Techniques
Key of Cost Analysis
• Must be performed on solesource contracts.
• Comparison of costs proposed by the offeror for
individual cost elements with:
• More laborious than price
analysis and cost realism
analysis.
• Actual costs previously incurred by the same offeror
• Similar to a cost realism
analysis, but more extensive
and more exact.
• IGCEs.
• Previous cost estimates from the offeror or from other
offerors for the same or similar items.
• Forecasts of planned expenditures.
• Other cost estimates received in response to the
Government’s request.
• Review to determine whether any additional cost data or
pricing data, necessary to make the Offeror's proposal
suitable for negotiation.
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Key Cost Elements – Direct Costs
Direct Labor
Labor hours that are direct support and within scope
of the contract.
• Proposed labor should be based on the
requirement
• Hours and rates clearly shown by specific
category.
• The annual hours that vendor used to define an
FTE should be reviewed
Travel
Travel costs, including airfare, per diem, etc.. may be
allowed in direct support of the contract.
• Details should be requested if travel cost is
expected to be a factor
• The contractor may not have to adhere to the JTR
if such language is not included in the contract
G&A may be assessed on travel costs.
ODC/Material
Costs used in direct support of the contract and
may include:
• Subcontractor costs
• Consultant costs
• Lease of equipment
• Computer Hardware
• Software licenses
Item descriptions, quantities and cost estimates can
be obtained using catalogs, price quotes, historical
data, etc..
• Emphasis in estimating ODCs is accuracy in type
and quantity
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Full-Time Equivalent Example
Productive Hours Calculation Example:
Starting Point
Less:
Holiday
Annual Leave
Sick Leave
Training, misc.
Productive Hours:
2,080 hours
80 hours
80 hours
40 hours
40 hours
240 hours
1,840 hours
*Sample calculation. Productive hours varies depending on individual vendor accounting systems.
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Key Cost Elements – Indirect Costs (1)
Fringe Benefits
An indirect rate for the purpose of allocating items
such as:
• Health insurance
• Payroll taxes
• Holiday and vacation time
• Pension & etc..
Fringe rate is applied to total direct labor
proposed. The rate may vary significantly from
vendor to vendor
Material Handling
An indirect rate that usually applies to ODC/Material
costs.
• Typically a rate significantly lower than the G&A
• For newer companies and/or small businesses,
sometimes the G&A rate is used. Verify through
proposal and billing consistency
• MH costs may include appropriate indirect costs
allocated to direct materials based on contractor
accounting procedures and must not include any
fee or profit
Material Handling rate is typically applied to all
ODC and Material costs.
Overhead
An indirect rate that pertains to a department or
cost center that benefits two or more
projects/contracts such as:
• Depreciation
• Indirect labor
• Telephone and computers etc..
• Usually structure related
OH rate is applied to total direct labor only or
total direct labor plus fringe benefits*
G&A
An indirect rate that pertains to activities such as:
• Salary for administrative assistants
• Human resource department
• Usually activities related and benefits the entire
company/cost center
G&A rate is applied to total direct labor plus
fringe benefits, overhead, material handling (if
applicable), and all direct costs.
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Key Cost Elements – Indirect Costs (2)
FCCM
Facilities Capital Cost of Money
• Facilities capital cost of money is an imputed
cost related to the cost of contractor capital
committed to facilities
• Calculated by multiplying the net book value of
the business-unit's facilities investment by a cost
of money rate based on the interest rates
specified semi-annually by the Secretary of the
Treasury under Public Law 92-41
• Usually not a significant cost and profit is not
allowed
Important Note!
Note: Each vendor may apply
their indirect rate differently
based on how their accounting
system is set up.
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Fully Burdened Rate Build-Up Example
Labor Category
Direct Labor Rate
IT Specialist 1
Rate
$26.83
A
$8.05
B
$12.21
C
G&A
$6.59
D
Profit
$3.76
E
$57.44
F
Fringe Benefits
Overhead
Fully Burdened Hourly Rate
30%
35%
14%
7%
Calculation
B= A x 30%
C= (A+B) x 35%
D= (A+B+C) x 14%
E = (A+B+C+D) x 7%
F = Sum of A, B, C, D, E
*All indirect rates used herein are fictitious and for demonstrative purposes only
For this example, the total burden to direct labor is approximately 114%
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Key Cost Elements - Fee
Question – What determines the level of fee rate/%?
FAR 15.404-4(c) – Profit states
CPFF fee is limited at 10% - FAR 15.404-4(c)(4)(i)(C)
CPFF fee is limited at 15% for R&D requirements- FAR 15.404-4(c)(4)(i)(A)
FAR does not provide specific guidance on fee for fixed-price and other cost
reimbursement contracts, but competition can help the determination.
HHSAR 315.404-4 provides detailed guidance on a structured approach for
establishing profit objective for negotiation.
Typically, the fee rate/% is dependent on the amount of risk, market factors,
and any other unique factors that may affect the operation or location of the
effort.
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Cost Realism Analysis Exercise (1)
OAGS is contracting for 1 year of computer server maintenance
services. A CPFF contract is intended. Assuming all Offerors are
technically equal and acceptable,
1) Who appears to be underbidding?
2) What adjustments need to be made for cost realism analysis?
3) Who offers the best value?
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Cost Realism Analysis Exercise (2)
Offerors’ Proposed Costs
Cost Element
Offeror 1
Offeror 2
Offeror 3
Direct Labor
IT Specialist I
$60,000
$55,000
$65,000
Program Analyst II
$75,000
$65,000
$70,000
Computer Engineer II
$90,000
$80,000
$85,000
Project Manager
$100,000
$90,000
$95,000
Subtotal
$325,000
$290,000
$315,000
Fringe Benefits
$130,000
40%
$101,500
35%
$129,150
41%
Overhead
$182,000
40%
$137,025
35%
$168,777
38%
Subtotal
$637,000
$528,525
$612,927
Material
$60,000
$57,500
$48,000
$4,000
$3,500
$5,000
$701,000
$589,525
$665,927
Travel
Total Cost Input
G&A
Total Cost
Profit
Total Price
Assumptions
$77,110
11%
$778,110
$54,468
$832,578
1. FTE based on 1880
hours
2. Material includes
warranty
$58,953
10%
$648,478
7%
$19,454
$667,932
1. FTE based on 1840
hours
2. Material includes
warranty
$79,911
12%
$745,838
3%
$89,501
$835,339
1. FTE based on 1920
hours
2. Material excludes
warranty
12%
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Cost Realism Analysis Exercise (3)
Labor Costs adjusted
based on 1 FTE =
1880 annual hours
Cost Element
Direct Labor
IT Specialist I
Program Analyst II
Computer Engineer II
Project Manager
Subtotal
Fringe Benefits
Overhead
Subtotal
Material
Travel
Subtotal Cost Input
G&A
Total Cost
Profit
Total Price
Assumptions:
Offeror 1
Governments’ Probable Costs
Offeror 2
$60,000
$56,196 1.022
$75,000
$66,413 1.022
$90,000
$81,739 1.022
$100,000
$91,957 1.022
$325,000
$296,304
$130,000 40%
$103,707
35%
$182,000 40%
$140,004
35%
$637,000
$540,015
$60,000
0%
$57,500
0%
$4,000
$3,500
$701,000
$601,015
$77,110 11%
$60,101
10%
$778,110
$661,116
$54,468
7%
$19,833
3%
$832,578
$680,950
1. FTE based on 1880 hours, offeror 1 not adjusted
2. Material warranty is estimated at 20% for Offeror 3
3. Profit adjusted to 10% for Offeror 3 as this is the max fee for CPFF
Offeror 3
$63,646
$68,542
$83,229
$93,021
$308,438
$126,459
$165,261
$600,158
$57,600
$5,000
$662,758
$79,531
$742,289
$74,229
$816,517
0.979
0.979
0.979
0.979
Material
Warranty
estimated
at 20% for
Offeror 3
41%
38%
20%
12%
10%
Fee
adjusted to
10% for
Offeror 3
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Key Cost Elements – Direct Costs
Most significant element that drives the overall cost in most cases
Direct Labor
Full-Time Equivalent
(FTE)
• Proposed labor should be based on the requirement.
• Hours and rates clearly shown by specific category.
• From vendor to vendor, review the hours for a FTE carefully.
• Caution - each vendor may define an FTE differently based on their
business practices and accounting system.
• A FTE is calculated from total available hours:
• 40 hours/week, 52 week in a year = 2,080 hours
• Use 2,080 hours as the base and deduction of the following:
vacation days, sick leave, holidays and training allowance etc.,
which defines the actual FTE for the vendor.
• Calculated “productive” hours can vary based on how each vendor
accounts for their indirect activities. i.e. Some vendors may observe
8 Federal holidays or does not allocate hours for training.
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Technique Determination
The analysis technique is generally determined based on contract type and can be
confirmed by the necessity of certified cost and pricing data. Note: BMT uses a
hybrid technique, which includes Price Analysis and Cost Realism.
Fixed-Price Contract Actions
• FFP / FPIF - cost realism & price analysis
• Sole-source – cost analysis
Contract Type
Cost Reimbursement Contract Actions
• Competitive - realism, (lower LCAT mix, fee
rate) vs. cost analysis for sole-source (higher
LCAT, fee)
Technique
Selection
Certified Cost or Pricing
Data - 15.404-1(a)(2)
Price analysis when not required – FAR
15.404-1(a)(2)
• Under SAT
• Adequate competition - 15.403-1(c),
• Price set by law or regulation (i.e. public
utility)
• Commercial items
• HCA Waivers
Cost analysis when required – FAR15.4041(a)(3)
Technique
Determination
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Scenarios and possible technique
Type of Contract Action
Possible Technique
Reason
GSA/FSS Schedule
Price Analysis
Competition,
Commercial Item
BPA
Cost Realism, Price
Analysis
CR for Base, PA
for calls
Competitive Solicitation,
including Set-Aside
Cost Realism, Price
Analysis
Depending on
Contract Type
IDIQ/Multiple award
Cost Realism, Price
Analysis
Depending on
Contract Type
GWAC/NIH NITACC
Price Analysis
Competition,
Commercial Item
Sole-Source over SAT
(including single source
directed 8(a))
Cost Analysis
No Competition,
Certified CP data
required (TINA
$700K)
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Other Important Considerations
Proposal
Assumptions
• Review each assumption in a proposal carefully as they may have
significant cost impact. i.e. “Assuming software licenses will be
provided by the government with annual renewal.”
Review Proposals in
Detail
• Ensure all required documents are submitted (adherence to Section L).
• Check for math errors and all other inconsistencies.
• Pricing information is included for all contract years.
Trust Your Instinct
• If you feel something is wrong, peel the onion!
• Why is a proposal particularly high or low?
• Put yourself in the shoes as the decision-maker. What would help you
make a decision?
Document!
Document!
Document!
• In reviewing the proposals, including the proposal assumptions,
document every finding that may impact the proposed price or cost.
• Incomplete submission or missing section
• Calculation errors
• Assumptions that may have price or cost impact
• Prepare a list of findings that can be used for clarification.
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Business Analysis Report – Sample
Structure
 Background (reference RFP)
 Evaluation Methodology (reference RFP & FAR)
 Competition Adequacy (reference RFP & FAR)
 Evaluation Findings (IDIQ / Task Order)
– Price Analysis
– Cost Realism Analysis (labor rates)
 Level of Effort (LOE) Analysis
– Hours and/or FTEs
 Issues and Clarifications
– Assumptions reviewed (reasonable / realistic)
 Summary
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PIVOT Table Demonstration
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Questions?!
 Contact Information:
Andrew D. McKenna
 Email: andrew.mckenna@fda.hhs.gov
 Phone: 240-402-7541